DERIVATIVE FINANCIAL INSTRUMENTS

Since 2013, the Company has issued 5 tranches of common stock purchase warrants to secure financing, remediate covenant violations related to the Credit Facility (See Note. 10) and provide consideration for Credit Facility amendments.

The Company accounts for derivative financial instruments in accordance with ASC 815-40, “Derivative and Hedging – Contracts in Entity’s Own Equity” (“ASC 815-40”), instruments which do not have fixed settlement provisions are deemed to be derivative instruments. The Company’s warrants are classified as liability instruments due to an anti-dilution provision that provides for a reduction to the exercise price of the warrants if the Company issues additional equity or equity linked instruments in the future at an effective price per share less than the exercise price then in effect.

Issuances

2015

On January 12, 2015, the Company entered into Amendment No. 3 to the Credit Facility discussed in Note 8, in which the Company obtained a commitment letter from Athyrium Capital Management, LLC and Perceptive Credit Opportunities Fund, LP (collectively, the “ Lenders”), the Company’s existing lenders, providing a commitment for a senior secured incremental term loan under the Company’s existing term loan facility in an aggregate principal amount of $30 million, which could have been drawn down at the Company’s option to finance the acquisition of the assets of Asklepion Pharmaceuticals, LLC.

As consideration for the commitment letter for the Incremental Loan, the Company made a cash payment to the Lenders and issued the Lenders warrants initially exercisable to purchase up to an aggregate of 125,000 shares of the Company’s common stock. The Company recorded $1.05 million of interest expense related to the warrants upon issuance.

The Company calculated the fair value of the warrants using the Monte Carlo Simulation utilizing the following assumptions as of the grant date of the warrants:



Risk free rate	1.39		%
Expected volatility	85		%
Expected life (in years), represents the weighted average period until next liquidity event	0.3
Expected dividend yield	—
Exercise Price	$	13.25

2014

In connection with the execution of the Credit Facility, the Company issued warrants to the lenders under the Credit Facility, initially exercisable to purchase up to an aggregate of 337,500 shares of common stock of the Company. The Warrants will be exercisable in whole or in part, at an initial exercise price per share of $12.76 per share, which is subject to weighted-average anti-dilution protections. The Warrants may be exercised at any time upon the election of the holder, beginning on the date of issuance and ending on the fifth anniversary of the date of issuance.

The total grant date fair value of the Warrants was $2.5 million, was recorded as a derivative liability, and is included in the debt discount to the Note Payable in the consolidated balance sheets.

The Company calculated the fair value of the warrants using the Binomial Lattice pricing model using the following assumptions as of the grant date of the Warrants:



Risk free rate	1.62		%
Expected volatility	85		%
Expected life (in years), represents the weighted average period until next liquidity event	0.36
Expected dividend yield	—
Exercise Price	$	12.76

On November 13, 2014, the Company entered into Amendment No. 2 to the Credit Facility which allowed the Company to be in compliance with certain covenants as of September 30, 2014. In addition certain covenants related to the 4^th quarter of fiscal 2014 and 2015 were amended. As compensation for Amendment No. 2, the Company agreed to issue additional warrants to the lenders, initially exercisable to purchase an aggregate of 300,000 shares of common stock of the Company which were valued at $2.2 million as of November 13, 2014, with an exercise price of $9.96 per share, and was recorded in change in fair value of derivative instruments in the 2014 consolidated statements of operations.

Re-measurement

The warrants are re-measured at each balance sheet date based on estimated fair value. Changes in estimated fair value are recorded as non-cash valuation adjustments within other income (expenses) in the Company’s accompanying consolidated statements of operations. The Company recorded a loss on a change in the estimated fair value of warrants of $33.3 million, $23.8 million, and $10.1 million during the years ended December 31, 2015, 2014 and 2013, respectively.

The Company calculated the fair value of the warrants using the Monte Carlo Simulation as of December 31, 2015 and the Binomial Lattice options pricing model as of December 31, 2014, using the following assumptions:



	As of
	December 31, 2015			December 31, 2014
Fair value of common stock	$	19.29		$	12.24
Expected life (in years), represents the weighted average period until next liquidity event	n/a**			0.33 years
Remaining Life (in years) of the Warrants	2.1 – 4.0 years			3.1 – 4.9 years
Risk-free interest rate	1.11 – 1.59%			1.13 – 1.69%
Expected volatility	75 – 85%			85		%
Dividend yield	—		%	—		%

**There are no liquidity events expected within the life of the outstanding warrants.

Expected volatility is based on analysis of the Company’s volatility, as well as the volatilities of guideline companies. The risk free interest rate is based on the U.S. Treasury security rates for the remaining term of the warrants at the measurement date.

The following tables presents the Company’s derivative warrant issuances and balances outstanding during the years ended December 31, 2015 and 2014:



		Weighted Average
	Warrants	Exercise Price		Grant Date Fair Value
Outstanding at December 31, 2013	4,782,249	$	5.04	$	3.13
Issued	637,500	11.44		6.49
Canceled	—	—		—
Exercised	1,998,394	4.70		3.05
Outstanding at December 31, 2014	3,421,355	$	6.43	$	3.79
Issued	125,000	13.25		8.40
Canceled	—	—		—
Exercised	880,807	5.35		3.23
Outstanding at December 31, 2015	2,665,548	$	7.05	$	4.20

The following information applies to derivative warrants outstanding at December 31, 2015:



Exercise Price		Number of Warrants	Weighted Average Remaining Contractual Life (years)	Number Exercisable
$	3.60	660,036	2.12	660,036
$	6.00	1,243,012	2.62	1,243,012
$	12.76	337,500	3.5	337,500
$	9.96	300,000	3.87	300,000
$	13.25	125,000	4.03	125,000

The total intrinsic value of derivative warrants outstanding and exercisable as of December 31, 2015 is $32.6 million. The Company’s closing stock price was $19.29 on December 31, 2015.