NOTE 7 : Long-Term Contingent Consideration Payable

Long-term contingent consideration payable and related activity are reported at fair value and consist of the following at March 31, 2016 and December 31, 2015:

			Activity During Quarter Ended March 31, 2016
							Changes in Fair Value of Contingent Consideration
	Balance,						Operating Expense;		Interest Expense;		Balance,
	December 31, 2015		Additions		Payments to Related Parties		Acquisition- Related		Financing- Related		March 31, 2016

Acquisition-related:
Warrants - Éclat Pharmaceuticals (a)	$	20,617	$	-	$	-	$	(3,535)	$	-	$	17,082
Earn-out payments - Éclat Pharmaceuticals (b)		90,468		-		(8,014)		11,451		-		93,905
Financing-related:
Royalty agreement - Deerfield (c)		7,862		-		(739)		-		1,038		8,161
Royalty agreement - Broadfin (d)		3,746		-		(353)		-		496		3,889
Royalty agreement - FSC (e)		-		7,695		-		-		327		8,022
Total contingent consideration	$	122,693	$	7,695	$	(9,106)	$	7,916	$	1,861	$	131,059
Less: Current portion		(28,614)										(28,403)
Total long-term contingent consideration payable	$	94,079									$	102,656

(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 March 31,:

	2016			2015
Weighted average exercise price per share	$	8.63		$	8.63
Expected term (years)		2.00			3.00
Expected volatility		70.50	%		61.80	%
Risk-free interest rate		0.73	%		0.89	%
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 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 and at March 31, 2016, it was uncertain as to whether the Company would ultimately fulfill its obligation under these warrants using Company shares or 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, to the extent revenues of the related product also 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.

(e)

As part of the consideration for the Company’s acquisition of FSC Holdings, LLC in February 2016, the Company entered into a royalty agreement whereby the Company shall pay quarterly a 15% royalty on the net sales of certain FSC products, up to $12,500 for a period not exceeding ten years.

At March 31, 2016, the fair value of each contingent consideration item in (b) through (e) above was estimated using a discounted cash flow model based on probability-adjusted annual net revenues or gross profit, as appropriate, of each of the specified Éclat Pharmaceuticals and FSC 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.