Debt

9 Months Ended

Sep. 30, 2011

Debt

Debt

7. Debt

In November 2010, the Company entered into an insider bridge loan facility with two of the four venture capital firms whose representatives are members of the Board. In connection with this transaction, the Company entered into a Note Purchase Agreement (the “Subordinated Secured Note Purchase Agreement”) with investment funds affiliated with Atlas Venture and Flagship Ventures (the “Purchasers”), pursuant to which the Company agreed to sell to the Purchasers, and the Purchasers have agreed to purchase, up to an aggregate of $4,000,000 of convertible promissory notes (the “Notes”), a portion of which is committed and a portion of which is optional (the “Bridge Debt Financing”). As of December 31, 2010 and September 30, 2011, the Purchasers have purchased Notes having an aggregate principal amount of $666,667. Subject to the Company’s continued compliance with the terms of the Subordinated Secured Note Purchase Agreement, including that there not be an event of default thereunder, upon notice from the Company the Purchasers are committed to purchase an aggregate of an additional $333,333 of Notes in each of four subsequent closings, for a total aggregate committed amount of $2,000,000. The Purchasers also have the right, but not the obligation, upon the Company’s request to purchase up to an additional $2,000,000 of Notes on or before December 31, 2012. As of December 31, 2010 and September 30, 2011, the Company’s outstanding indebtedness under the Notes was $674,000 and $725,000, respectively, including accrued interest.

As an inducement for the Purchasers to purchase the Notes, the Company entered into a Risk Premium Payment Agreement in November 2010 with the Purchasers (the “Risk Premium Agreement”) simultaneous with the execution of, and as required by, the Subordinated Secured Note Purchase Agreement. Under the terms of the Risk Premium Agreement, the Company agreed to pay the Purchasers the following portions of the consideration it receives (the “Payment Consideration”) in Liquidity Transactions, as defined below: (i) until the aggregate Payment Consideration equals $10 million, 60% of the Payment Consideration; (ii) for aggregate Payment Consideration from $10 million to $20 million, 50% of the Payment Consideration; (iii) for aggregate Payment Consideration from $20 million to $30 million, 40% of the Payment Consideration; (iv) for aggregate Payment Consideration from $30 million to $40 million, 30% of the Payment Consideration; and (v) for aggregate Payment Consideration in excess of $40 million, 10% of the Payment Consideration (any such payments, “Risk Premium Payments”). For purposes of determining amounts payable under the Risk Premium Agreement, the Payment Consideration will not include amounts the Company uses to first satisfy specified existing obligations, including obligations under the Loan Agreement, under professional contingency arrangements and obligations that may arise under existing technology license agreements (the “Existing IP Licensing Agreements”) between the Company and each of Arizona Technology Enterprises, Roche Diagnostics GMBH and Roche Diagnostics Corporation, and California Institute of Technology. For purposes of the Risk Premium Agreement and subject to various provisions therein, the following shall constitute Liquidity Transactions: (A) the receipt by the Company of any payments from third parties relating to its intellectual property portfolio of the Company, including payments received as a license or other settlement in patent infringement litigation brought by the Company (“IP Licensing Events”); (B) a merger of the Company in which there is a change of control; and (C) the sale or exclusive license by the Company of all or substantially all of its assets or intellectual property.

In connection with the Bridge Debt Financing in November 2010, the Company amended the existing Loan and Security Agreement (the “Senior Debt”) between the Company and certain lenders, including General Electric Capital Corporation (the “Lenders”), pursuant to the fourth amendment thereto (the “Fourth Amendment”). Pursuant to the Fourth Amendment, the Lenders waived various existing events of default and consented to the Company’s incurrence of additional indebtedness and the grant of a junior security interest to the Purchasers under the Subordinated Secured Note Purchase Agreement. The Company amended warrants previously issued to the Lenders to re-price the warrants from $4.80 to $0.01 and the Lenders agreed to defer a $200,000 payment originally due January 31, 2011 to the January 1, 2012 term loan maturity date. In addition, subject to the Company’s continued compliance with the terms of the Senior Debt, including that there not be an event of default thereunder, the Lenders agreed to defer up to five additional principal monthly payments with respect to the term loan. Also pursuant to the Fourth Amendment, the Company agreed to grant the Lenders a first priority security interest in all of its intellectual property and to pay the Lenders an additional $50,000 to $200,000 (depending upon how many principal payments are deferred) upon the full repayment of all outstanding amounts due with respect to the term loans. Under the terms of the Senior Debt prior to its amendment by the Fourth Amendment, the scope of the Lenders’ first priority security interest included all of its assets other than intellectual property. As of the date of this filing, the additional five monthly principal payments referenced above have been deferred and monthly principal payments of approximately $0.25 million resumed as of May 1, 2011. As of December 31, 2010 and September 30, 2011, the outstanding balance of the Senior Debt was $2.8 million and $1.8 million, respectively.

As of September 30, 2011, loan payments are due as follows (in thousands):

	Senior Debt			Notes			Total
Twelve months ending September 30, 2012	$	1,851		$	—		$	1,851
Twelve months ending September 30, 2013	—			743			743
Thereafter	—			—			—
Total future minimum payments	1,851			743			2,594
Less: amount representing interest	(24		)	(77		)	(101		)
Less: debt discount	(800		)	—			(800		)
Add: interest accrued	—			59			59
Add: amortization of debt discount	740			—			740
Carrying value of debt	1,767			725			2,492
Less: current portion	(1,767		)	—			(1,767		)
Long-term obligations	$	—		$	725		$	725

The above table does not reflect any Risk Premium Payments potentially due to the Note holders pursuant to the Risk Premium Agreement. Such payments are not probable or estimable at September 30, 2011 without specific eligible transactions to assess the financial consideration and amount of the resulting Risk Premium Payment.