10. Derivative Instruments

Derivative instruments consist of the following:


	March 31, 2015		December 31, 2014
	(unaudited)
	(in thousands)
Convertible Notes	$	37,243	$	21,501
Reimbursement Notes		1,264		705
Bridge Notes		3,434		1,926
Amended and Restated August 2009 Warrants		2,253		930
Amended and Restated June 2010 MHR Warrants		581		282
Amended and Restated August 2010 Warrants		1,585		654
August 2010 Investor Warrants		314		29
Amended and Restated August 2010 MHR Waiver Warrants		589		243
Amended and Restated July 2011 Warrants		1,819		750
July 2011 Investor Warrants		778		210
Amended and Restated July 2011 MHR Waiver Warrants		480		198
May 2013 MHR Modification Warrants		6,042		2,492

	$	56,382		29,920

Some of the Company’s outstanding derivative instruments have an exercise price reset feature. The estimated fair value of warrants and embedded conversion features that have an exercise price reset feature is estimated using the Monte Carlo valuation model. The estimated fair value of warrants that do not contain an exercise price reset feature is measured using the Black-Scholes valuation model. Inherent in both of these models are assumptions related to expected volatility, remaining life, risk-free rate and expected dividend yield. For the Monte Carlo model, we estimate the probability and timing of potential future financing and fundamental transactions as applicable.

Embedded Conversion Feature of MHR Notes. The Convertible Notes, the Reimbursement Notes, and the Bridge Notes (collectively, the “MHR Notes”) contain a provision whereby the conversion price is adjustable upon the occurrence of certain events, including the issuance by Emisphere of common stock or common stock equivalents at a price which is lower than the current conversion price of each of the MHR Notes and lower than the then-current market price. Under FASB ASC 815-40-15-5, the embedded conversion feature of the MHR Notes is not considered indexed to the Company’s own stock and, therefore, does not meet the scope exception in FASB ASC 815-10-15 and thus needs to be accounted for as a derivative liability. The liabilities associated with the MHR Notes has been presented as a non-current liability as of March 31, 2015 and December 31, 2014, to correspond to their host contracts.

Convertible Notes. In addition to the foregoing, the adjustment provision of the Convertible Notes does not become effective unless and until the Company were to raise $10 million through the issuance of common stock or common stock equivalents during any consecutive 24 month period. The fair value of the embedded conversion feature of the Convertible Notes is estimated at the end of each quarterly reporting period using the Monte Carlo model. The assumptions used in computing the fair values as March 31, 2015 and December 31, 2014, are as follows:


	March 31, 2015			December 31, 2014
Closing stock price	$	0.66		$	0.28
Conversion price	$	1.25		$	1.25
Expected volatility		145	%		140	%
Remaining term (years)		7.00			7.25
Risk-free rate		1.73	%		1.97	%
Expected dividend yield		0	%		0	%

The fair value of the embedded conversion feature of the Convertible Notes increased $15.7 million and $0.2 million for the three months ended March 31, 2015 and 2014, respectively, which amounts have been recognized in the accompanying statements of operations.

Reimbursement Notes. The fair value of the embedded conversion feature of the Reimbursement Notes is estimated at the end of each quarterly reporting period using the Monte Carlo model. The assumptions used in computing the fair value as of March 31, 2015 and December 31, 2014 are as follows:


	March 31, 2015			December 31, 2014
Closing stock price	$	0.66		$	0.28
Conversion price	$	0.50		$	0.50
Expected volatility		145	%		140	%
Remaining term (years)		7.00			7.25
Risk-free rate		1.73	%		1.97	%
Expected dividend yield		0	%		0	%

The fair value of the embedded conversion of the Reimbursement Notes increased $0.6 million for the three months ended March 31, 2015 and decreased $6 thousand for the three months ended March 31, 2014, which has been recognized in the accompanying statements of operations.

Bridge Notes. The fair value of the embedded conversion feature of the Bridge Notes is estimated at the end of each quarterly reporting period using the Monte Carlo model. The assumptions used in computing the fair value as of March 31, 2015 and December 31, 2014 are as follows:


	March 31, 2015			December 31, 2014
Closing stock price	$	0.66		$	0.28
Conversion price	$	0.50		$	0.50
Expected volatility		145	%		140	%
Remaining term (years)		7.00			7.25
Risk-free rate		1.73	%		1.97	%
Expected dividend yield		0	%		0	%

The fair value of the embedded conversion feature of the Bridge Notes increased $1.5 million and $0.1 million for the three months ended March 31, 2015 and 2014, respectively, which has been recognized in the accompanying statements of operations.

Amended and Restated June 2010 Warrants. In June 2010, the Company granted MHR warrants to purchase 865,000 shares of its common stock (the “June 2010 Warrants”). In connection with the Restructuring, on May 7, 2013, the Company amended and restated the Original Warrants such that the expiration date of the Original Warrant was extended to July 8, 2019, and the exercise price was reduced to $0.50 per share (as amended and restated, the “Amended and Restated August 2010 Warrants”, The exercise price of the Amended and Restated June 2010 Warrants is adjustable upon the occurrence of certain events, including the issuance by Emisphere of common stock or common stock equivalents at a price which is lower than the current exercise price of these warrants and lower than the current market price. However, the adjustment provision does not become effective unless the Company were to raise $10 million through the issuance of common stock or common stock equivalents at a price which is lower than the current conversion price of these warrants and lower than the current market price during any consecutive 24 month period. The fair value of the Amended and Restated June 2010 Warrants is estimated at the end of each quarterly reporting period using the Monte Carlo model. The assumptions used in computing the fair value of the Amended and Restated June 2010 Warrants as of March 31, 2015 and December 31, 2014, are as follows:


	March 31, 2015			December 31, 2014
Closing stock price	$	0.66		$	0.28
Conversion price	$	0.50		$	0.50
Expected volatility		160	%		160	%
Remaining term (years)		4.27			4.52
Risk-free rate		1.22	%		1.51	%
Expected dividend yield		0	%		0	%

The fair value of the Amended and Restated June 2010 MHR Warrants increased $0.3 million and $11 thousand for the three months ended March 31, 2015 and 2014, which has been recognized in the accompanying statements of operations.

Amended and Restated Warrants. Prior to the Restructuring, the Company issued to MHR warrants to purchase varying amounts of its common stocks at various times from 2009 through 2011, as described more fully below (the August 2009 Warrants, August 2010 Warrants, August 2010 MHR Waiver Warrants, July 2011 Warrants, July 2011 MHR Waiver Warrants, and collectively, the “Original Warrants”). In connection with the Restructuring, on May 7, 2013, the Company amended and restated each of the Original Warrants such that the expiration date of each Original Warrant was extended to July 8, 2019, and the exercise price was reduced to $0.50 per share (as amended and restated, the “Amended and Restated August 2009 Warrants”, “Amended and Restated August 2010 Warrants”, “Amended and Restated August 2010 MHR Waiver Warrants”, “Amended and Restated July 2011 Warrants”, “Amended and Restated July 2011 MHR Waiver Warrants”, and collectively, the “Amended and Restated Warrants”) . Under the terms of each of the Amended and Restated Warrants, as well as the August 2010 Investor Warrants, July 2011 Investor Warrants and 2013 Restructuring Warrants (collectively, the Investor Warrants, and together with the Original Warrants, the “Warrants”), the Company has an obligation to make a cash payment to the holders of each of the Warrants for any gain that could have been realized if such holder exercised the warrants and we subsequently failed to deliver a certificate representing the shares to be issued upon such exercise by the third trading day after the Warrants were exercised. Accordingly, the Warrants have been accounted for as a liability. The fair value of each of the Warrants is estimated, at the end of each quarterly reporting period, using the Black-Scholes model. The assumptions used in computing the fair value of the Original Warrants as of March 31, 2015 and December 31, 2014, are as follows:


	March 31, 2015			December 31, 2014
Closing stock price	$	0.66		$	.28
Conversion price	$	0.50		$	0.50
Expected volatility		159	%		161	%
Remaining term (years)		4.27			4.52
Risk-free rate		1.37	%		1.65	%
Expected dividend yield		0	%		0	%

The fair value of the Original Warrants increased $7.5 million and $0.9 million for the three months ended March 31, 2015 and 2014, which has been recognized in the accompanying statements of operations.

The assumptions used in computing the fair value of the Investor Warrants, as well as the fair value of each of the Warrants and any other relevant terms, are described below.

August 2010 Investor Warrants. In connection with the August 2010 Financing, Emisphere sold warrants to purchase 2.6 million shares of common stock to unrelated investors (the “August 2010 Warrants”). On January 12, 2011, one of the unrelated investors notified the Company of its intention to exercise 0.2 million warrants. The assumptions used in computing the fair value of the remaining August 2010 Warrants as of March 31, 2015 and December 31, 2014, are as follows:


	March 31, 2015			December 31, 2014
Closing stock price	$	0.66		$	0.28
Conversion price	$	1.26		$	1.26
Expected volatility		155	%		116	%
Remaining term (years)		0.41			.65
Risk-free rate		.03	%		.12	%
Expected dividend yield		0	%		0	%

The fair value of the August 2010 Investor Warrants increased $0.3 million for three months ended March 31, 2015 and decreased $23 thousand for the three months ended March 31, 2014, which has been recognized in the accompanying statements of operations.

July 2011 Investor Warrants. In connection with the July 2011 Financing, Emisphere sold warrants to purchase 3.01 million shares of common stock to unrelated investors (the “July 2011 Warrants”). The July 2011 Warrants are exercisable at $1.09 per share and have an expiration date of July 6, 2016. The assumptions used in computing the fair value of the July 2011 Warrants as of March 31, 2015 and December 31, 2014, are as follows:


	March 31, 2015			December 31, 2014
Closing stock price	$	0.66		$	0.28
Conversion price	$	1.09		$	1.09
Expected volatility		124	%		122	%
Remaining term (years)		1.26			1.51
Risk-free rate		.67	%		.67	%
Expected dividend yield		0	%		0	%

The fair value of the July 2011 Warrants increased $0.6 million and $8 thousand for three months ended March 31, 2015 and 2014, respectively, which has been recognized in the accompanying statements of operations.