FAIR VALUE OF FINANCIAL INSTRUMENTS

3 Months Ended

Mar. 31, 2015

12. FAIR VALUE OF FINANCIAL INSTRUMENTS

At December 31, 2014 and March 31, 2015, the carrying values of financial instruments such as cash and cash equivalents, trade receivables and payables, other receivables and accrued liabilities and the current portion of long-term debt approximated their market values, based on the short-term maturities of these instruments.

The company calculates fair values for its marketable securities based on quoted market prices for identical assets and liabilities which represents Level 1 of ASC 820-10 fair value hierarchy.

At December 31, 2014 and March 31, 2015 the fair values of long-term debt and long-term receivables were comparable with their respective carrying values.

The following table presents information about the Company securities based on quoted market prices for identical assets and liabilities for March 31, 2015 and indicates the fair value hierarchy of the valuation technics utilized to determine such fair value.

						Three months ended Mar, 31 2015			Three months ended March,31 2014
	Net Carrying					Operational	Financial Gain		Operational	Financial Gain
	Value as of	Net Carrying				Gain (losses)	(losses)		Gain (losses)	(losses)
	December 31,	Value as of	Fair Value Measured and Recorded Using			recognized in	recognized in		recognized in	recognized in
(in thousands of US Dollars)	2014	Mar 31, 2015	Level 1	Level 2	Level 3	earnings	earnings	Total	earnings	earnings	Total
Assets
Cash and cash equivalent	39,760	38,536	38,536	-	-	-	-	-	-	-	-
Marketable securities	53,074	74,637	74,637	-	-	-	531	531	-	-	-
Liabilities
Acquisition liability contingent consideration (a)	70,112	72,169	-	-	72,169	(2,380)	-	(2,380)	(849)		(849)
Acquisition liability note (b)	-	-	-	-	-			-	(3,013)		(3,013)
Acquisition liability warrant consideration (c)	34,542	37,417	-	-	37,417	(2,875)	-	(2,875)	(13,777)	-	(13,777)
Deerfield Royalty Agreement (d)	6,837	6,973			6,973		(176)	(176)		(105)	(105)
Broadfin Royalty Agreement (d)	3,259	3,323			3,323		(83)	(83)	-	(52)	(52)
Total						(5,254)	(259)	(5,513)	(17,639)	(157)	(17,796)

The fair values of the financial instruments in connection with the acquisition of Éclat (see note 10 Long-Term Debt) are estimated as follows:

(a) Acquisition liability contingent consideration: the fair value is estimated using a discounted cash flow model based on probability adjusted projected annual gross profit of each of the products which formed the project portfolio at the time of acquisition of Éclat Pharmaceuticals (Note 10 Long Term Debt).

The fair value of the contingent consideration will change over time in accordance with the changes in market conditions and thus business plan projections as the relate to market size, market share, product pricing, competitive landscape, and gross profit margins expected for each of the products.

(b) Acquisition liability Note: the Company uses a probability-weighted discounted cash flow model (see note 10 Long Term Debt). The note was repaid on March 24, 2014.

(c) Acquisition liability warrant consideration: the Company uses a Black-Scholes option pricing model. The fair value of the warrant consideration will change over time depending on the volatility and share price at balance sheet date (see note 10 Long Term Debt).

(d) Broadfin and Deerfield Royalty Agreement: the fair value is estimated using a discounted cash flow model based on probability adjusted projected annual net sales of each of the products which may be approved and sold by Éclat Pharmaceuticals (Note 10 Long Term Debt). The discount rate is 20%.

The following tables provide a reconciliation of fair value for which the Company used Level 3 inputs:

	Acquisition
(in thousands of US Dollars)	Liabilities
Liability recorded upon acquisition	$	(50,927)
Operational gain (loss) recognized in earnings for fiscal year 2012	$	18,993
Operational gain (loss) recognized in earnings for fiscal year 2013	$	(28,135)
Payment deferred consideration (Hycet)	$	841
Payment interest on acquisition liability note	$	335
Operational gain (loss) recognized in earnings for fiscal year 2014	$	(60,503)
Reimbursment of acquisition liability note	$	12,000
Payment of interest on acquisition liability note	$	1,389
Payment of deferred consideration	$	1,354

Net carrying value at January 1, 2015	$	(104,653)
Operational gain (loss) recognized in earnings for three months to Mar 31, 2015	$	(5,255)
Payment of interest on acquisition liability note	$	-
Reimbursment of acquisition liability note	$	-
Payment of deferred consideration	$	323
Net carrying value at Mar 31, 2015	$	(109,586)

	Deerfield		Broadfin
	Royalty		Royalty
(in thousands of US Dollars)	Agreement		Agreement
Liability recorded upon execution of Agreeement	$	(2,600)	$	(2,187)
Interest expense recognized in earnings for 2013	$	(1,990)
Interest expense recognized in earnings for 2014	$	(2,386)	$	(1,139)
Payment of Royalty	$	140	$	67
Net carrying value at Jan 1, 2015	$	(6,837)	$	(3,259)
Interest expense recognized in earnings for 3 months to March 31, 2015	$	(176)	$	(83)
Payment of Royalty	$	39	$	19
Net carrying value at Mar 31, 2015	$	(6,974)	$	(3,323)

The acquisition liabilities, consisting of the warrants and deferred consideration, and Royalty agreement all of which are classified as long-term debt, are measured at fair value and the income or expense may change significantly as assumptions regarding the valuations and probability of successful development and approval of products in development vary.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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