Derivative Warrant Liabilities

6 Months Ended

Jun. 30, 2017

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Warrant Liabilities

NOTE 4 -

DERIVATIVE WARRANT LIABILITIES

As part of StemCell’s obligations under the Merger Agreement, in August 2016, StemCells negotiated with certain institutional holders of its 2016 Series A and Series B Warrants, issued prior to the Merger, to have such holders surrender their 2016 Series B Warrants in exchange for a reduced exercise price of $0.30 per share on their existing 2016 Series A Warrants and the elimination of the anti-dilution price protection in the 2016 Series A Warrants. As a result, the exercise price for all outstanding 2011 Series A Warrants and 2016 Series A and Series B Warrants was reset to $0.30 per share. Upon exercise of these warrants, StemCells issued 531,814 shares of its common stock prior to the Merger. The $0.30 per share exercise price was later adjusted to $2.70 as a result of the Company’s Reverse Stock Split.

The remaining outstanding warrants as of June 30, 2017 are as follows:

Issuance Date	Outstanding as of December 31, 2016		Outstanding as of June 30, 2017		Exercise Price		Exercisable as of June 30, 2017		Exercisable Through
Series A (2011)		64,230		-	$	151.20		-	December 2016
Series A (2013)		57,814		57,814	$	194.40		57,814	October 2018
Series A (2013)		2,718		2,718	$	183.60		2,718	April 2023
Series A (2015)		10,139		10,139	$	91.80		10,139	April 2020
Series A (2016) (a)(b)		10,047		9,279	$	2.70		9,279	March 2018
Series B (2016) (a)		41,116		41,116	$	2.70		41,116	March 2022

(a)	These warrants contain a full ratchet anti-dilution price protection so that, in most situations upon the issuance of any Common Stock or securities convertible into Common Stock at a price below the then-existing exercise price of the outstanding warrants, the warrant exercise price will be reset to the lower Common Stock sales price.
(b)	In March 2017, an institutional holder executed a cashless exercise of 768 warrants and 359 shares of Common Stock were issued in connection therewith.

As such anti-dilution price protection, does not meet the specific conditions for equity classification, the Company is required to classify the fair value of these warrants as a liability, with changes in fair value to be recorded as income (loss) due to change in fair value of warrant liability. The estimated fair value of the Company’s warrant liability at June 30, 2017 and December 31, 2016, was approximately $38 and $313, respectively.

As quoted prices in active markets for identical or similar warrants are not available, the Company uses directly observable inputs in the valuation of its derivative warrant liabilities (level 2 measurement).

The Company uses the Black-Scholes valuation model to estimate fair value of these warrants. In using this model, the Company makes certain assumptions about risk-free interest rates, dividend yields, volatility, expected term of the warrants and other assumptions. Risk-free interest rates are derived from the yield on U.S. Treasury debt securities. Dividend yields are based on the Company’s historical dividend payments, which have been zero to date. Volatility is estimated from the historical volatility of the Common Stock as traded on NASDAQ. The expected term of the warrants is based on the time to expiration of the warrants from the date of measurement.

The following table summarizes the observable inputs used in the valuation of the derivative warrant liabilities as of December 31, 2016 and June 30, 2017:

	As of June 30, 2017						As of December 31, 2016
	Series A (2016)			Series B (2016)			Series A (2016)			Series B (2016)
Share price	$	1.42		$	1.42		$	6.10		$	6.10
Exercise price	$	2.70		$	2.70		$	2.70		$	2.70
Expected volatility		95	%		96	%		380	%		380	%
Risk-free interest		1.24	%		1.89	%		0.85	%		1.93	%
Dividend yield		—			—			—			—
Expected life of up to (years)		0.75			4.75			1.2			5.2

Activity in such liabilities measured on a recurring basis is as follows:

	Derivative warrant liabilities
As of December 31, 2016	$313
Revaluation of warrants		(275	)
Exercise warrants (see note 7(b))		(*)
As of June 30, 2017	$	38

In accordance with ASC-820-10-50-2(g), the Company has performed a sensitivity analysis of the derivative warrant liabilities of the Company which are classified as level 3 financial instruments. The Company recalculated the value of warrants by applying a +/- 5% changes to the input variables in the Black-Scholes model that vary over time, namely, the volatility and the risk-free rate. A 5.0% decrease or increase in volatility would not cause a material change in the value of the warrants. A 5.0% decrease or increase in the risk-free rate would not have materially changed the value of the warrants; the value of the warrants is not strongly correlated with small changes in interest rates.