13. Fair Value Measurements

Information about the liabilities measured at fair value on a recurring basis as of September 30, 2015 and December 31, 2014, and the input categories associated with those liabilities, is as follows:


	September 30, 2015
	Fair Value Measurements Using
	Level 1		Level 2		Level 3		Total
Liabilities:
Embedded compound derivative	$	—	$	—	$	11	$	11


	December 31, 2014
	Fair Value Measurements Using
	Level 1		Level 2		Level 3		Total
Liabilities:
Preferred stock warrants	$	—	$	—	$	1,309	$	1,309

Preferred Stock Warrants

The fair values of the preferred stock warrants were determined using the Hybrid Model which consists of the guideline public company (“GPC”) analysis, a market-based approach to estimate the enterprise value of the Company, and the Option Pricing Model (“OPM”) to allocate the enterprise value to each security.

The GPC analysis is based upon the premise that indications of value for a given entity can be estimated based upon the observed valuation multiples of comparable public companies, the equity of which is freely-traded by investors in the public securities markets.

Under the OPM, shares are valued by creating a series of call options with exercise prices based on the liquidation preferences and conversion terms of each equity class and use inputs such as equity value, time to liquidity, volatility, risk-free rate, dividend yield and strike price. The warrants and underlying convertible redeemable preferred stock were subsequently valued using a back-solve method within the OPM framework to arrive at a concluded fair value of the common stock of the Company. The back-solve method is used when a recent financing has taken place which establishes a reference value for one or more classes of stockholders.

The issuance and sale of the Notes, which took place during 2014, was used as the basis for the valuation during the year ended December 31, 2014. The equity value was allocated to the various share classes based upon their respective claims on a series of call options with strike prices at various value levels depending upon the rights and preferences of each class. The exercise price and number of shares underlying the warrants were determined and the value calculated within the allocation model. The allocation factor was applied to the fair value of the warrants to determine their fair value at December 31, 2014. As described more fully in Note 7, on March 13, 2015, the Company entered into a Note Conversion and Warrant Termination Agreement with the holders of the outstanding warrants, under the terms of which all of the Company’s outstanding warrants to purchase shares of preferred stock were terminated on June, 15, 2015, the Effective Time of the Merger. As of September 30, 2015, there were no outstanding warrants to purchase preferred stock.

The following table provides quantitative information about the fair value measurements, including the range of assumptions for the significant unobservable inputs used in the hybrid method valuations of the warrant liability and “with and without” method used for the embedded compound derivative:


		At December 31, 2014
Time to liquidity event		0.50 years
Risk-free interest rate		0.12%
Volatility		60%
Minority discount		10%
Discount for lack of marketability		23%

Embedded Compound Derivatives
— 2015 Bridge Notes

The 2015 Bridge Notes contained an embedded interest rate reset upon an event of default, automatic conversion of the convertible promissory notes upon a Merger or combination with Ruthigen and a put option upon an event of default or the failure to execute a Merger or combination with Ruthigen, each of which represented an embedded derivative instrument requiring bifurcation from the 2015 Bridge Notes. The embedded derivatives were bundled and valued as a single compound derivative. The fair value of the derivative upon issuance of $1,547 was recognized as a derivative liability and adjusted to fair value at each reporting date.

As described in Note 8, on June 15, 2015, immediately after the Effective Time, the embedded compound derivative was extinguished in connection with the exchange of the 2015 Bridge Notes, including accrued and unpaid interest, into shares of Company Common Stock. Immediately prior to the exchange, the Company remeasured the fair value of the derivatives. Management determined that the derivatives tied to the probability of events of default had no value, as the probability of defaulting on the 2015 Bridge Notes immediately prior to their exchange was zero. At the same time, management determined the probability of exchange of the 2015 Bridge Notes at 100%, thereby resulting in an increase in the fair value of the contingent automatic exchange feature. The Company recorded a loss of $2,692 for the increase in the estimated fair value of the contingent automatic exchange feature immediately prior to the exchange of the 2015 Bridge Notes. The Company recorded a loss upon the exchange of the 2015 Bridge Notes, including the extinguishment of the embedded compound derivative, of $0 and $1,170 during the three and nine months ended September 30, 2015, respectively.

Embedded Compound Derivatives — LSA with Hercules

As described in Note 8, the LSA contains an interest rate reset upon an event of default and a put option upon an event of default or qualified change of control. Each of these features represents an embedded derivative instrument requiring bifurcation from the Term Loan. The embedded derivatives were bundled and valued as one compound derivative in accordance with the applicable accounting guidance for derivatives and hedging. The proceeds from the issuance of the Term Loan were allocated first to the warrant and compound derivative at their respective fair values, with the residual going to the carrying amount of the loan resulting in a discount to the face value of the debt. The fair value of the compound derivative upon issuance of $11 was recognized as a derivative liability and will be adjusted to fair value at each reporting date. The fair value of the derivative instruments is based on significant inputs not observable in the market, which represents a Level 3 measurement within the fair value hierarchy. The Company used an income approach to estimate the fair value of the derivative liability and estimated the probability of an event of default occurring at various dates and then estimates the present value of the amount the holders would receive upon an event of default.

The significant assumption used in the model is the probability of the following scenarios occurring:


	At Issuance Date	At September 30, 2015
Probability of an event of default	10%	*
Prepayment penalties	1.0% -3.0%	*
End of term payment	$245,000	*
Risk-free interest rate	1.01%	*

*	Management determined that there were no changes in the assumptions underlying the value of the derivative instrument between the date of issuance, June 16, 2015, and September 30, 2015.

A rollforward of the preferred stock warrant liability and derivative liability categorized with Level 3 inputs is as follows:


	Preferred Stock Warrants			Derivative Instruments
Balance — December 31, 2014	$	1,309		$	—
Fair value at issuance date		—			1,558
Change in fair value		(1,309	)		2,291
Extinguishment on conversion of convertible notes		—			(3,838	)

Balance — September 30, 2015	$	—		$	11

Gains and/or losses arising from changes in the estimated fair value of the warrants and embedded compound derivatives were recorded within other income, net, on the condensed consolidated statement of operations.