Warrant Liability

In connection with the 2016 Registered Direct Offering, the Company issued warrants to purchase up to 2,941,176 shares of the Company’s common stock to certain healthcare focused institutional investors, as well as warrants to purchase up to 250,000 shares of the Company’s common stock to H.C. Wainwright & Co., LLC and its designees as compensation for its services as the placement agent (collectively, the “2016 Warrants”). The 2016 Warrants contain a provision for net cash settlement in the event of certain fundamental transactions involving the Company (defined in the 2016 Warrants to include, among other things, the Company’s approval and consummation of a merger with another entity, the Company’s approval and consummation of the sale of all or substantially all of the Company’s assets or the occurrence of certain other change of control transactions).

Due to this provision and in accordance with ASC 480-10 (FASB Statement 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity), the 2016 Warrants were classified as a liability and recorded at fair value using the Binomial Lattice Model. The estimated fair value of the Warrant Liability for the 2016 Warrants on the closing date, July 5, 2016, was $4.6 million. As of September 30, 2016, the fair value of the Warrant Liability was $3.2 million. The net change in fair value of $1.4 million during the quarter is shown as other income on the Company’s Consolidated Statements of Operations. The Company will continue to measure the fair value of the 2016 Warrants each quarter until they are exercised or expire and any change will be adjusted accordingly on the Company’s financial statements.