9. Debt

On July 21, 2014, the Company entered into a definitive Securities Purchase Agreement (the “Purchase Agreement”) with entities affiliated with institutional investors (the “Investors”) providing for the issuance of Senior Secured Convertible Debentures in the aggregate principal amount of $15,000, due, subject to the terms therein, in July 2019 (the “Debentures”), and warrants (the “July 2014 Series A Warrants”) to purchase up to an aggregate of 6,198,832 shares of common stock, $0.001 par value per share, at an exercise price of $2.45 per share expiring in July 2019. The Debentures bear interest at an annual rate of 4%, payable quarterly or upon conversion into shares of common stock. The Debentures are convertible at any time into an aggregate of 5,847,955 shares of common stock at an initial conversion price of $2.565 per share (which represents a price above the closing bid price of the common stock on July 18, 2014, the trading day immediately prior to the entry into the Purchase Agreement). The Company’s obligations under the Debentures are secured by a first priority lien on all of the Company’s intellectual property pursuant to the terms of a security agreement (“Security Agreement”) dated July 21, 2014 among the Company and the investors. In connection with the Purchase Agreement, the Company entered into a Registration Rights Agreement with the Investors pursuant to which the Company was obligated to file a registration statement to register for resale the shares of common stock issuable upon conversion of the Series B Preferred Stock and Debentures and upon exercise of the Warrants. Under the terms of the Registration Rights Agreement, the Company filed a registration statement on August 19, 2014, which was declared effective by the SEC on October 20, 2014 (File No. 333-198249). Proceeds from the Debentures are being used for general working capital purposes.

Additionally, in connection with the Purchase Agreement the Company exchanged with certain investors, 12,300 shares of Series A convertible preferred stock issued on February 5, 2014 for 12,300 shares of Series B convertible preferred stock, par value $0.10 and a stated value of $1,000 per share (the “Series B Preferred Stock”), and warrants (the “July 2014 Series B Warrants”) to purchase up to an aggregate of 4,795,321 shares of common stock at an exercise price of $2.45 per share expiring in January 2016. The offering closed on July 24, 2014.

For financial reporting purposes, the $15,000 gross proceeds of the Debentures, was allocated first to the fair value of the obligation to issue the warrants, which totaled $5,296, then to the intrinsic value of the beneficial conversion feature on the Debentures of $4,566.The balance was further reduced by the fair value of warrants issued to the placement agent for services rendered of $491, resulting in an initial carrying value of the Debentures of $4,647. The initial debt discount on the Debentures totaled $10,353 and will be amortized over the five year life of the Debentures. The Company used a Level 3 fair value measurement to determine fair value of the warrant obligations, which has significant unobservable inputs as defined in Accounting Standards Codification 820 “Fair Value Measures”. The fair value of the warrant obligation was determined using an option pricing model that used various assumptions including: a stock price of $2.44 per share, volatility of 93.46%, time to maturity of 5.0 years, exercise price of $2.45 per share and a risk free rate of return of 1.62%.

On October 22, 2014, $1,589 worth of Debentures was converted into 619,490 shares of common stock. The resulting debt discount and deferred financing cost adjustment resulted in accelerated interest expense of approximately $1,200.

On March 15, 2013, the Company executed loan documents with Hercules Technology Growth Capital Inc., a venture capital lender, whereby the Company borrowed $6,000 (“Loan”). The Loan accrued interest at a rate of 10.45%. The term of the Loan was 42 months with interest payments only during the first 12 months. On September 10, 2013, the Company elected to prepay the Loan and paid Hercules approximately $6,400, including the end of term fee of $425, to settle all obligations to Hercules. Hercules agreed to waive the prepayment penalty that was defined in the loan documents.

Upon executing the loan documents on March 15, 2013 the Company became obligated to issue to the Lender a warrant to purchase shares of the Company’s common stock upon approval by the Company’s stockholders of a proposal to increase the Company’s number of authorized shares of common stock at its 2013 Annual Meeting of Stockholders. The Company’s stockholders approved the increase in the number of authorized shares of common stock on April 25, 2013 and on April 26, 2013 the warrant was issued to the Lender. Accordingly, the Lender received a warrant to purchase 69,321 shares of common stock at an exercise price of approximately $11.18 per share. This warrant will expire on April 26, 2018.

For financial reporting purposes, the $6,000 funded by the Lender on March 15, 2013 was allocated first to the fair value the warrant that totaled approximately $563 and the balance was reduced further by the Lender’s costs and fees, resulting in an initial carrying value of the loan of approximately $5,300. The Company used a Level 3 fair value measurement to determine fair value of the warrant obligation, which has significant unobservable inputs as defined in Accounting Standards Codification 820 “Fair Value Measures”. During the period from the loan inception date until the warrant obligation was fulfilled and the warrant was issued, the warrant obligation was reflected as a long-term liability at fair value. Changes in the fair value (“mark-to-market adjustments”) of the warrant obligation of approximately $90 are included in operating results. The fair value of the warrant obligation was determined using the Monte Carlo pricing model that used various assumptions that included: stock prices ranging from $11.60 to $11.80 per share, volatility of 77%, time to maturity of 5 years, exercise prices ranging from $11.50 to $11.60 and a risk free interest rate of return of .84%. Under the Monte Carlo model, a 10% change in the underlying unobservable inputs would not have a significant impact on the fair value.

The value of the warrant obligation combined with the costs resulted in an initial loan discount of approximately $727. The terms of the Loan included a back-end fee of $425 payable at the maturity of the Loan . The loan discount and the fee were being amortized as additional interest expense over the life of the loan using the interest method. As discussed above, prior to the terms of the warrant being fixed on April 26, 2013, the warrant obligation fell within the scope of Accounting Standards Codification 815 “Derivatives and Hedging” (“ASC 815”) and therefore the warrant obligation was accounted for as a derivative reflected as a long-term liability until the warrant was issued on April 26, 2013. The terms of the warrant upon issuance no longer required derivative accounting under ASC 815 and therefore the fair value of the warrant at that date was classified within stockholders equity.

Upon repayment of the loan in September 2013, the Company recognized the balance of the unamortized loan discount, fee and deferred financing costs of approximately $983.