Annual report pursuant to Section 13 and 15(d)

Warrants

Warrants

12 Months Ended

Dec. 31, 2015

10. Warrants

The following is a summary of activity in the number of warrants outstanding to purchase the Company’s common stock for the year ended December 31, 2015 (in thousands):

	Warrants accounted for as:							Warrants accounted for as:
	Equity							Liabilities
	January 2012 warrants		March 2013 warrants		April 2013 warrants			February 2012 warrants		August 2013 warrants			October 2013 warrants			October 2013 Series A warrants			January 2014 warrants			Total

Outstanding, January 1, 2014		-		-		-			-		-			-			-			-			-
Warrants acquired in merger with Biozone		650		455		1,864			1,000		10,000			200			7,000			-			21,169
Warrants issued		-		-		-			-		-			-			-			5,500			5,500
Outstanding, December 31, 2014		650		455		1,864			1,000		10,000			200			7,000			5,500			26,169

Warrants exercised		-		-		(364	)		-		(10,000	)		(200	)		(6,325	)		(1,500	)		(18,389	)
Outstanding, December 31, 2015		650		455		1,500			1,000		-			-			675			4,000			8,280

Expiration date	January 11, 2016		March 1, 2016		April 25, 2018			February 28, 2016		August 26, 2023			October 18, 2018			October 24, 2023			January 16, 2024

Warrants consist of warrants potentially settleable in cash, which are liability-classified warrants, and equity-classified warrants.

Warrants classified as liabilities

Liability-classified warrants consist of warrants issued by Biozone in connection with equity financings in February 2012, August 2013, October 2013 and January 2014, which were assumed by the Company in connection with its merger with Biozone in January 2014. As of December 31, 2015, 5,765,000 warrants are accounted for as liabilities and 2,605,000 warrants are accounted for as equity. Warrants accounted for as liabilities are either potentially settleable in cash or not indexed to the Company’s own stock because they contain contingencies under which the Company could be forced to settle them for cash or because they contain potential adjustments to their exercise price. As such, they are therefore accounted for as liabilities.

The estimated fair value of outstanding warrants accounted for as liabilities is determined at each balance sheet date. Any decrease or increase in the estimated fair value of the warrant liability since the most recent balance sheet date is recorded in the consolidated statement of operations and comprehensive income (loss) as changes in fair value of derivative liabilities. The fair value of the warrants classified as liabilities is estimated using the Black-Scholes option-pricing model with the following inputs as of December 31, 2015:

	February 2012 warrants			August 2013 warrants			October 2013 warrants			October 2013 warrants			January 2014 warrants

Strike price	$	0.60		$	0.40		$	0.50		$	0.50		$	0.50

Expected term (years)		0.2			7.7			2.8			7.8			8.0
Cumulative volatility %		81	%		101	%		78	%		101	%		100	%
Risk-free rate %		0.49	%		2.18	%		1.26	%		2.14	%		2.15	%

The Company’s expected volatility is based on a combination of implied volatilities of similar publicly traded entities given that the Company has limited history of its own observable stock price. The expected life assumption is based on the remaining contractual terms of the warrants. The risk-free rate is based on the zero coupon rates in effect at the balance sheet date. The dividend yield used in the pricing model is zero, because the Company has no present intention to pay cash dividends.