NOTE 8 : Long-Term Contingent Consideration Payable

Long-term contingent consideration payable and related activity are reported at fair value and consist of the following at December 31, 2015 and 2014:

			Activity During Year Ended December 31, 2015
					Changes in Fair Value of
					Contingent Consideration
					Operating		Interest
	Balance,		Payments to		Expense;		Expense;		Balance,
	December		Related		Acquisition-		Financing-		December 31,
	31, 2014		Parties		Related		Related		2015

Acquisition-related:
Warrants - Éclat Pharmaceuticals (a)	$	34,542	$	-	$	(13,925)	$	-	$	20,617
Earn-out payments - Éclat Pharmaceuticals (b)		70,112		(24,526)		44,882		-		90,468
Financing-related:
Royalty agreement - Deerfield (c)		6,837		(2,282)		-		3,307		7,862
Royalty agreement - Broadfin (d)		3,259		(1,089)		-		1,576		3,746
Total contingent consideration	$	114,750	$	(27,897)	$	30,957	$	4,883	$	122,693
Less: Current portion		(39,892)								(28,614)
Total long-term contingent consideration payable	$	74,858							$	94,079

Each of the above items is associated with related parties as further described in Footnote 18 – Related Parties.

(a)

As part of the consideration for the Company’s acquisition of Éclat Pharmaceuticals, LLC on March 13, 2012, the Company issued two warrants with a six-year term which allow for the purchase of a combined total of 3,300 ordinary shares of Flamel. One warrant is exercisable for 2,200 shares at an exercise price of $7.44 per share, and the other warrant is exercisable for 1,100 shares at an exercise price of $11.00 per share.

The fair value of the warrants is estimated on a quarterly basis using a Black-Scholes option pricing model with the following assumptions as of December 31, 2015 and 2014:

	2015			2014
Weighted average exercise price per share	$	8.63		$	8.63
Expected term (years)		2.63			3.63
Expected volatility		64.54	%		54.80	%
Risk-free interest rate		0.93	%		1.25	%
Expected dividend yield		-			-

These Black-Scholes fair value measurements are based on significant inputs not observable in the market and thus represent a level 3 measurement as defined in ASC 820. The fair value of the warrant consideration is most sensitive to movement in the Company’s share price and expected volatility at the balance sheet date.

Expected term: The expected term of the options or warrants represents the period of time between the grant date and the time the options or warrants are either exercised or forfeited, including an estimate of future forfeitures for outstanding options or warrants. Given the limited historical data and the grant of stock options and warrants to a limited population, the simplified method has been used to calculate the expected life.

Expected volatility: The expected volatility is calculated based on an average of the historical volatility of the Company's stock price for a period approximating the expected term.

Risk-free interest rate: The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant and a maturity that approximates the expected term.

Expected dividend yield: The expected dividend yield is based on the Company's authorized periodic dividend and the Company's expectation for dividend yields over the expected term. The Company has not distributed any dividends since its inception, and has no plan to distribute dividends in the foreseeable future.

At the closing date of the 2012 Éclat acquisition, it was uncertain as to whether the Company would ultimately fulfill its obligation under these warrants using Company shares and therefore would be required to settle these warrants by transferring cash. Accordingly, pursuant to the guidance of ASC 480, the Company determined that these warrants should be classified as a long-term liability. This classification as a long-term liability was further supported by the Company’s determination, pursuant to the guidance of ASC 815-40-15-7(i), that these warrants could also not be considered as being indexed to the Company’s own stock, on the basis that the exercise price for the warrants is determined in U.S. dollars, although the functional currency of the Company at the closing date of the Éclat acquisition was the Euro.

(b)	As part of the consideration for the Company’s acquisition of Éclat Pharmaceuticals, LLC in March 2012, the Company committed to provide quarterly earn-out payments equal to 20% of any gross profit generated by certain Éclat Pharmaceuticals products. These payments will continue in perpetuity.

(c)	As part of a February 2013 debt financing transaction conducted with Deerfield Management, a related party and current shareholder, the Company received cash of $2,600 in exchange for entering into a royalty agreement whereby the Company shall pay quarterly a 1.75% royalty on the net sales of certain Éclat Pharmaceuticals products until December 31, 2024.

(d)	As part of a December 2013 debt financing transaction conducted with Broadfin Healthcare Master Fund, a related party and current shareholder, the Company received cash of $2,200 in exchange for entering into a royalty agreement whereby the Company shall pay quarterly a 0.834% royalty on the net sales of certain Éclat Pharmaceuticals products until December 31, 2024.

The fair value of each contingent consideration item in (b), (c) and (d) above was estimated separately on a quarterly basis by using a discounted cash flow model based on probability-adjusted annual net sales or gross profit, as appropriate, of each of the specified Éclat Pharmaceuticals products at an appropriate discount rate. These fair value measurements are based on significant inputs not observable in the market and thus represent a level 3 measurement as defined in ASC 820. Subsequent changes in the fair value of the acquisition-related and financing-related contingent consideration payable, resulting primarily from management’s revision of key assumptions, will be recorded in the changes in fair value of related party acquisition-related contingent consideration and interest expense – changes in fair value of related party financing-related contingent consideration lines, respectively, within the Company’s Consolidated Statements of Income.