Summary of Significant Accounting Policies (Tables)

6 Months Ended

Jun. 30, 2015

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Assets and liabilities measured at fair value on a recurring basis at June 30, 2015 and December 31, 2014 are as follows (in thousands):



	Fair Value Measurements at Reporting Date Using
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)	Significant Unobservable Inputs (Level 3)	Total
At June 30, 2015
Assets
Cash equivalents⁽¹⁾	$	69,208	—	—	$	69,208
Short-term investments⁽²⁾	$	—	—	9,062	$	9,062
Liabilities
Common stock warrant liabilities⁽³⁾	$	—	—	5,657	$	5,657
Contingent purchase consideration ⁽⁴⁾	$	—	—	51,400	$	51,400
At December 31, 2014
Assets
Cash equivalents⁽¹⁾	$	8,021	—	—	$	8,021
Liabilities
Common stock warrant liabilities⁽³⁾	$	—	—	5,093	$	5,093
Contingent purchase consideration ⁽⁴⁾	$	—	—	53,000	$	53,000


(1)	Cash equivalents are comprised of money market fund shares and are included as a component of cash and cash equivalents on the consolidated balance sheets.

(2)

Short-term investments consist of Pernix Therapeutics common stock which was acquired in conjunction with the sale of the Zohydro ER business in April 2015. The Company ascertains fair value of short-term investments by using quoted prices for Pernix Therapeutics' common stock on a publicly traded market (a Level 1 input) less a lack of marketability discount on the fair value of the investments because there are restrictions on when the Company can trade the securities. The Company considers the inputs used to calculate the lack of marketability discount Level 3 inputs and, as a result, categorized the short-term investments as Level 3. The lack of marketability discount was determined by using an "Average-Strike Put Option Model of the Marketability Discount" to value a hypothetical put option to approximate the reduction in value of the stock until the restriction ends. Inputs used to derive the discount included an estimation of the amount of time that the stock will be held subject to trading restrictions based on contracted lock-up period, expected volatility of the stock over the term of the remaining trading restrictions, and assumed lack of dividends during the restriction period. An increase in any of these inputs would increase the discount for lack of marketability and thereby reduce the overall fair value of the short-term investments. As of June 30, 2015, the gross fair value of short-term investments was $10,000,000, and the lack of marketability discount was $900,000. During the three months ended June 30, 2015, other comprehensive income included unrealized losses of $1,600,000.

(3)

Common stock warrant liabilities are associated with warrants issued in connection with the Company's July 2012 public offering of common stock and warrants (see Note 8) and warrants issued in connection with the financing agreement entered into with Healthcare Royalty Partners (Healthcare Royalty), dated June 30, 2011, (the Healthcare Royalty financing agreement), which are measured at fair value using the Black-Scholes option pricing valuation model. The assumptions used in the Black-Scholes option pricing valuation model for both common stock warrant liabilities were: (a) a risk-free interest rate based on the rates for U.S. Treasury zero-coupon bonds with maturities similar to those of the remaining contractual term of the warrants; (b) an assumed dividend yield of zero based on the Company’s expectation that it will not pay dividends in the foreseeable future; (c) an expected term based on the remaining contractual term of the warrants; and (d) given the Company’s lack of relevant historical data due to the Company’s limited historical experience, an expected volatility based upon the Company's historical volatility, supplemented with historical volatility of comparable companies whose share prices have been publicly available for a sufficient period of time. The significant unobservable input used in measuring the fair value of the common stock warrant liabilities associated with the Healthcare Royalty financing agreement is the expected volatility. Significant increases in volatility would result in a higher fair value measurement. The following additional assumptions were used in the Black-Scholes option pricing valuation model to measure the fair value of the warrants sold in the July 2012 public offering: (a) management's projections regarding the probability of the occurrence of an extraordinary event and the timing of such event; and for the valuation scenario in which an extraordinary event occurs that is not an all cash transaction or an event whereby a public acquirer would assume the warrants, and (b) an expected volatility rate using the Company's historical volatility, supplemented with historical volatility of comparable companies, through the projected date of public announcement of an extraordinary transaction, blended with a rate equal to the lesser of 40% and the 180-day volatility rate obtained from the HVT function on Bloomberg as of the trading day immediately following the public announcement of an extraordinary transaction. The significant unobservable inputs used in measuring the fair value of the common stock warrant liabilities associated with the July 2012 public offering are the expected volatility and the probability of the occurrence of an extraordinary event. Significant increases in volatility would result in a higher fair value measurement and significant increases in the probability of an extraordinary event occurring would result in a significantly lower fair value measurement. The change in the fair value of the common stock warrant liabilities as of June 30, 2015 was primarily driven by the increase in the market price of the Company's common shares at June 30, 2015 as compared against December 31, 2014 measurement dates.

(4)

Contingent purchase consideration was measured at fair value using the income approach based on significant unobservable inputs including management's estimates of the probabilities of achieving specific net sales levels and development milestones and appropriate risk adjusted discount rates. Significant changes of either unobservable input could have a significant effect on the calculation of fair value of the contingent purchase consideration liability.

Reconciliation of Liabilities Measured at Fair Value Using Significant Observable Inputs (Level 3)

The following table provides a reconciliation of assets and liabilities measured at fair value using significant unobservable inputs (Level 3) for the six months ended June 30, 2015 (in thousands):



	Short-term Investments			Contingent Purchase Consideration			Common Stock Warrant Liabilities
Balance at December 31, 2014	$	—		$	53,000		$	5,093
Additions	10,614			—			—
Changes in fair value	(1,552		)	(1,600		)	564
Balance at June 30, 2015	$	9,062		$	51,400		$	5,657

Basic and Diluted Net Loss Per Share

The following table presents the computation of basic and diluted net income (loss) per share for continuing and discontinued operations (in thousands, except per share amounts):



	Three Months Ended June 30,
	2015					2014
	Continuing operations			Discontinued operations		Continuing operations		Discontinued operations
Numerator
Net income (loss), basic	$	(6,696	)	$	79,160	$	77,536	$	(14,672	)
Effect of dilutive securities:
Common stock warrants	—			—		—		—
Equity awards	—			—		—		—
	—			—		—		—
Net income (loss), diluted	$	(6,696	)	$	79,160	$	77,536	$	(14,672	)

Denominator
Weighted average common shares outstanding, basic	19,176			19,176		17,498		17,498
Effect of dilutive securities:
Common stock warrants	—			—		—		—
Equity awards	—			—		—		—
Dilutive potential shares of common stock	—			—		—		—
Weighted average common shares outstanding, diluted	19,176			19,176		17,498		17,498

Basic net income (loss) per share	$	(0.35	)	$	4.13	$	4.43	$	(0.84	)
Diluted net income (loss) per share	$	(0.35	)	$	4.13	$	4.43	$	(0.84	)



	Six Months Ended June 30,
	2015					2014
	Continuing operations			Discontinued operations		Continuing operations			Discontinued operations
Numerator
Net income (loss), basic	$	(16,862	)	$	66,464	$	72,584		$	(30,651	)
Effect of dilutive securities:
Common stock warrants	—			—		(18,470		)	—
Equity awards	—			—		—			—
	—			—		(18,470		)	—
Net income (loss), diluted	$	(16,862	)	$	66,464	$	54,114		$	(30,651	)

Denominator
Weighted average common shares outstanding, basic	19,173			19,173		17,454			17,454
Effect of dilutive securities:
Common stock warrants	—			—		392			392
Equity awards	—			—		—			—
Dilutive potential shares of common stock	—			—		392			392
Weighted average common shares outstanding, diluted	19,173			19,173		17,846			17,846

Basic net income (loss) per share	$	(0.88	)	$	3.47	$	4.16		$	(1.76	)
Diluted net income (loss) per share	$	(0.88	)	$	3.47	$	3.03		$	(1.72	)

Schedule of Calculation of Diluted Net Loss Per Share

There were 521,000 and 297,000 dilutive securities (in common stock equivalent shares), from common stock options excluded from the calculation of diluted net income (loss) during the three and six months ended June 30, 2015, respectively, because to include them would be anti-dilutive. There were 1,157,000 and 1,586,000 dilutive securities (in common stock equivalent shares), from common stock options and restricted stock units excluded from the calculation of diluted net income (loss) during the three and six months ended June 30, 2014, respectively, because to include them would be anti-dilutive. All common stock warrants were excluded from the calculation of diluted net income (loss) during the three and six months ended June 30, 2015 and the three months ended June 30, 2014 as the exercise price of the warrants was greater than the Company's average stock price during these periods.