(9)	Assets and Liabilities Measured at Fair Value

Derivative Financial Instruments

As disclosed in Note 10, the Company allocated part of the proceeds of public offerings in 2012, 2013 and 2015 to the warrants issued in connection with those transactions. The warrants have been classified as liabilities and accounted for as a derivative instrument in accordance with ASC 815 due to certain provisions within the warrant agreements. The valuation of the warrants (“the Warrants”) is determined using option pricing models. These models use inputs such as the underlying price of the shares issued when the warrant is exercised, volatility, risk free interest rate and expected life of the instrument. The Company has determined that the warrant derivative liability should be classified within Level 3 of the fair-value hierarchy by evaluating each input for the option pricing models against the fair-value hierarchy criteria and using the lowest level of input as the basis for the fair-value classification as called for in ASC 820. There are six inputs: closing price of Delcath stock on the day of evaluation; the exercise price of the warrants; the remaining term of the warrants; the volatility of Delcath’s stock over that term; annual rate of dividends; and the risk free rate of return. Of those inputs, the exercise price of the warrants and the remaining term are readily observable in the warrant agreements. The annual rate of dividends is based on the Company’s historical practice of not granting dividends. The closing price of Delcath stock would fall under Level 1 of the fair-value hierarchy as it is a quoted price in an active market (ASC 820-10). The risk free rate of return is a Level 2 input as defined in ASC 820-10, while the historical volatility is a Level 3 input as defined in ASC 820. Since the lowest level input is a Level 3, Delcath determined the warrant derivative liability is most appropriately classified within Level 3 of the fair value hierarchy.

In July 2015, the Company completed the sale of 9.4 million Units consisting of 9.4 million shares of its common stock, Series A Warrants to purchase up to 7.0 million common shares (“July 2015 Series A Warrants”) and Series B Warrants to purchase Units consisting of up to 9.4 million common shares (“July 2015 Series B Warrants”) and 7.0 million July 2015 Series A Warrants pursuant to an underwriting agreement. The Company received proceeds of $7.0 million, with net cash proceeds after related expenses from this transaction of $6.0 million. Of those proceeds the Company allocated an estimated fair value of $3.4 million to the July 2015 Series A and Series B Warrants. The exercise price of both series of warrants is subject to appropriate adjustment in the event of stock dividends, stock splits, reorganizations or similar events affecting our common stock and is subject to anti-dilution adjustments for any issuance of common stock or rights to acquire common stock for consideration per share less than the exercise price of the warrants. At December 31, 2015, the July 2015 Series A Warrants were exercisable at $0.87 with approximately 7.0 million warrants outstanding and the July 2015 Series B Warrants were exercisable at $0.75 with approximately 9.4 million outstanding. The July 2015 Series A Warrants have a five-year term. July 2015 Series B Warrants expired January 29, 2016. There were no July 2015 Series A or Series B Warrants exercised during the year ended December 31, 2015.

In February 2015, the Company completed the sale of 2.5 million shares of its common stock and the issuance of warrants to purchase 1.1 million common shares (the “February 2015 Warrants”) pursuant to an underwriting agreement. The Company received proceeds of $2.6 million, with net cash proceeds after related expenses from this transaction of $2.5 million. Of those proceeds, the Company allocated an estimated fair value of $0.8 million to the February 2015 Warrants. The exercise price is subject to appropriate adjustment in the event of stock dividends, stock splits, reorganizations or similar events affecting our common stock. The exercise price of the warrants is subject to anti-dilution adjustments for any issuance of common stock or rights to acquire common stock for consideration per share less than the exercise price of the warrants. For purposes of these adjustments, dilutive issuances do not include securities issued under existing instruments, under board-approved equity incentive plans or in certain strategic transactions. At December 31, 2015, the February 2015 Warrants were exercisable at $0.74 per share with approximately 1.1 million warrants outstanding. The February 2015 Warrants have a five-year term. There were no February 2015 Warrants exercised during the year ended December 31, 2015.

In October 2013, the Company completed the sale of 1.3 million shares of its common stock and the issuance of warrants to purchase approximately 0.6 million common shares (the “2013 Warrants”) pursuant to a placement agency agreement. The Company received proceeds of $7.5 million, with net cash proceeds after related expenses from this transaction of approximately $6.9 million. Of those proceeds, the Company allocated an estimated fair value of $1.9 million to the 2013 Warrants. The exercise price is subject to appropriate adjustment in the event of stock dividends, stock splits, reorganizations or similar events affecting our common stock. At December 31, 2015, the 2013 Warrants were exercisable at $7.04 per share with approximately 0.6 million warrants outstanding. The 2013 Warrants have a five-year term. There were no 2013 Warrants exercised during the year ended December 31, 2015.

In May 2012, the Company completed the sale of 1.0 million shares of its common stock and the issuance of warrants to purchase 0.3 million common shares (the “2012 Warrants”) pursuant to an underwriting agreement. The Company received proceeds of $21.5 million, with net cash proceeds after related expenses from this transaction of approximately $21.1 million. Of those proceeds, the Company allocated an estimated fair value of $3.4 million to the 2012 Warrants. The exercise price was subject to appropriate adjustment in the event of stock dividends, stock splits, reorganizations or similar events affecting our common stock. The exercise price of the warrants was subject to anti-dilution adjustments for any issuance of common stock or rights to acquire common stock for consideration per share less than the exercise price of the warrants. For purposes of these adjustments, dilutive issuances do not include securities issued under existing instruments, under board-approved equity incentive plans or in certain strategic transactions. As required by the 2012 Warrant agreement, the exercise price of the warrants was adjusted following the Company’s February 2015 sale of common stock and warrants. During the year ended December 31, 2015, 0.2 million 2012 Warrants were exercised for net proceeds of approximately $0.2 million. The 2012 Warrants had a three-year term which expired on May 31, 2015. The remaining liability was credited to Derivative instrument income.

For the year ended December 31, 2015, the Company recorded pre-tax derivative instrument income of $0.6 million. The resulting derivative instrument liabilities totaled $3.8 million at December 31, 2015. Management expects that the Warrants will either be exercised or expire worthless. The fair value of the Warrants at December 31, 2015 was determined by using option pricing models assuming the following:

	Series A 2015 Warrants		Series B 2015 Warrants		February 2015 Warrants		October 2013 Warrants
Expected volatility		92.13%		94.03%		92.91%		97.76%
Risk free interest rates		1.65%		0.14%		1.54%		1.25%
Expected life (in years)		4.56		0.08		4.13		2.83

Money Market Funds

The Company has determined that the inputs associated with the fair value determination are based on quoted prices (unadjusted) and as a result the investments are classified within Level 1 of the fair value hierarchy.

The table below presents the Company’s assets and liabilities measured at fair value on a recurring basis as of December 31, 2015 and 2014, aggregated by the level in the fair value hierarchy within which those measurements fall.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

	Assets and Liabilities Measured at Fair Value on a Recurring Basis
	Level 1				Level 2				Level 3				Balance at December 31
(in thousands)	2015		2014		2015		2014		2015		2014		2015		2014
Assets
Money market funds (included in Cash and Cash Equivalents)	$	1,943	$	1,943	$	—	$	—	$	—	$	—	$	1,943	$	1,943
Liabilities
Derivative instrument liabilities	$	—	$	—	$	—	$	—	$	3,785	$	225	$	3,785	$	225

Fair Value Measurements Using Significant Unobservable

Inputs (Level 3)

(in thousands)	Warrant Liability
Balance at January 1, 2013	$	3,427
Total change in the liability included in earnings		(2,756	)
Fair value of warrants issued		1,857
Fair value of warrants exercised		(218	)
Balance at December 31, 2013		2,310
Total change in the liability included in earnings		(1,942	)
Fair value of warrants exercised		(143	)
Balance at December 31, 2014		225
Total change in the liability included in earnings		(564	)
Fair value of warrants issued		4,247
Fair value of warrants exercised		(123	)
Balance at December 31, 2015	$	3,785