5.	Fair Value of Financial Instruments

Assets and liabilities recorded at fair value on a recurring basis in the balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair values. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value which are the following:

Level 1—Quoted prices in active markets for identical assets or liabilities.

Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The assets’ or liabilities’ fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.

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 December 31, 2017 or 2016. Level 3 liabilities that are measured on a recurring basis consists of convertible preferred stock warrants and common stock warrants. Preferred stock warrant and common stock warrant liabilities are valued using the Black-Scholes option-pricing model. Generally, increases (decreases) in the fair value of the underlying stock, estimated term and volatility would result in a directionally similar impact to the fair value of the warrant (see Note 13).

The convertible preferred stock warrants were issued in December 2013 and were converted into warrants to purchase common stock upon the Merger of the Company and ViewRay Technologies, Inc. The aggregate fair value of these warrants upon the closing of the Merger is $93 thousand which was reclassified from liabilities to additional paid-in-capital, and the Company no longer recorded change in fair value adjustments in relation to convertible preferred stock warrants.

The Company’s common stock warrants liabilities consist of the 2017 and 2016 Placement Warrants, as described in Note 13. The 2016 Placement Warrants were issued in August and September 2016, and the 2017 Placement Warrants were issued in January 2017. In December 2017, 25,014 shares of 2016 Placement Warrants and 9,389 shares of 2017 Placement Warrants were exercised and the aggregate fair value of these warrants upon exercise of $274 thousand was reclassified from liabilities to additional paid-in-capital. At December 31, 2017, 1,355,641 shares of 2016 Placement Warrants and 1,711,123 shares of 2017 Placement Warrants were outstanding.

The gains and losses from re-measurement of Level 3 financial liabilities are recorded as part of other income (expense), net in the consolidated statements of operations and comprehensive loss. During the year ended December 31, 2017 and 2016, the Company recorded a loss of $16.6 million and a gain of $3 thousand, respectively, related to the change in fair value of the 2016 and 2017 Placement Warrants. There have been no transfers between Level 1, Level 2 and Level 3 in any periods presented.

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

	At December 31, 2017
	Level 1		Level 2		Level 3		Total
2017 Placement Warrants Liability	$	—	$	—	$	12,487	$	12,487
2016 Placement Warrants Liability		—		—		9,933		9,933
Total Warrant Liability	$	—	$	—	$	22,420	$	22,420

	At December 31, 2016
	Level 1		Level 2		Level 3		Total
2016 Placement Warrants Liability	$	—	$	—	$	2,723	$	2,723

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

	Year Ended December 31,
	2017			2016			2015
Fair value, beginning of period	$	2,723		$	—		$	138
Issuance of 2017 Placement Warrants		3,373			—			—
Issuance of 2016 Placement Warrants		—			2,726			—
Change in fair value of Level 3 financial liabilities		16,598			(3	)		(45	)
Conversion of convertible preferred stock warrants to common stock warrants		—			—			(93	)
Fair value of 2017 Placement Warrants at exercise		(74	)		—			—
Fair value of 2016 Placement Warrants at exercise		(200	)		—			—
Fair value, end of period	$	22,420		$	2,723		$	—