Fair Value of Financial Instruments

9 Months Ended

Sep. 30, 2016

4.	Fair Value of Financial Instruments

The Company’s financial instruments that are carried at fair value mainly consist of Level 1 assets and Level 3 liabilities. Level 1 assets include highly liquid bank deposits and money market funds, which were not material at September 30, 2016 and December 31, 2015. Level 3 liabilities that are measured on a recurring basis consist of the convertible preferred stock warrant liability and the 2016 Placement Warrants liability. The convertible preferred stock warrant liability and 2016 Placement Warrants liabilities were valued using the Black-Scholes option-pricing model. Generally, increases (decreases) in the fair value of the underlying stock and estimated term would result in a directionally similar impact to the fair value of the warrants (see Note 9).

The gains and losses from re-measurement of Level 3 financial liabilities are recorded as part of other income (expense), net in the condensed consolidated statements of operations. The Company recorded a loss of $6 thousand and a gain of $45 thousand related to the change in fair value of convertible preferred stock warrants for the three and nine months ended September 30, 2015. The convertible preferred stock warrants were converted into warrants to purchase the Company’s common stock upon the consummation of the Merger in July 2015. The aggregate fair value of these convertible preferred stock warrants upon the consummation of the Merger was $93 thousand which was reclassified from liabilities to additional paid-in-capital, and the Company no longer recorded change in fair value adjustments thereafter. The Company recorded a loss of $1.6 million related to the change in fair value of the 2016 Placement Warrants for the three and nine months ended September 30, 2016.

The following table sets forth the fair value of the Company’s financial liabilities by level within the fair value hierarchy (in thousands):

	At September 30, 2016
	Level 1		Level 2		Level 3		Total
			(Unaudited)
2016 Placement Warrants	$	—	$	—	$	4,372	$	4,372

The following table sets forth a summary of the changes in fair value of the Company’s Level 3 financial liabilities (in thousands):

	Nine Months Ended September 30, 2016
	(Unaudited)
Fair value, beginning of period	$	—
Issuance of 2016 Placement Warrants		2,726
Change in fair value of Level 3 financial liabilities		1,646
Fair value, end of period	$	4,372

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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