Annual report pursuant to Section 13 and 15(d)

Warrants

Warrants

12 Months Ended

Dec. 31, 2017

8. Warrants

The following is a summary of activity in the number of warrants outstanding to purchase the Company’s common stock for the years ended December 31, 2017, 2016 and 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 2015 warrants			Total

Outstanding, January 1, 2015		22			15			62			33			333			7			234			183			889
Warrants exercised		-			-			(12	)		-			(333	)		(7	)		(208	)		(50	)		(610	)
Outstanding, December 31, 2015		22			15			50			33			-			-			26			133			279
Warrants expired		(22	)		(15	)					(30	)														(67	)
Warrants exercised		-			-			-			(3	)		-			-			-			-			(3	)
Outstanding, December 31, 2016		-			-			50			-			-			-			26			133			209
Warrants expired		-			-			-			-			-			-			-			-			-
Warrants exercised		-			-			-			-			-			-			-			-			-
Outstanding, December 31, 2017		-			-			50			-			-			-			26			133			209
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 with the potential to be settled 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, 2017, 159,000 warrants are accounted for as liabilities and 50,000 warrants are accounted for as equity. Warrants accounted for as liabilities have the potential to be settled in cash or are not indexed to the Company’s own stock.

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 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, 2017:

	October 2013 warrants			January 2015 warrants

Strike price	$	15.00		$	15.00

Expected term (years)		5.8			6.0
Cumulative volatility %		86.7	%		87.7	%
Risk-free rate %		2.30	%		2.31	%

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, 2016:

	October 2013 warrants			January 2015 warrants

Strike price	$	15.00		$	15.00

Expected term (years)		6.8			7.0
Cumulative volatility %		99.7	%		100	%
Risk-free rate %		2.24	%		2.25	%

The Company estimates volatility using a blend of its own historical stock price volatility as well as that of market comparable entities since the Company’s common stock has limited trading history and limited observable volatility of its own. 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.