11. Borrowings

Future minimum payments under indebtedness agreements outstanding as of December 31, 2013 are as follows:


Years Ending December 31: (in thousands)	4.50% Convertible Senior Notes			Loan Agreement
2014	$	5,594		$	12,353
2015		5,625			18,130
2016		5,625			17,916
2017		5,625			—
2018 and thereafter		141,875			—

	$	164,344		$	48,399
Less interest		(39,344	)		(7,199	)
Less unamortized discount		(52,422	)		(2,103	)
Less current portion		—			(8,248	)

Loans payable, net of current portion	$	72,578		$	30,849

4.50% Convertible Senior Notes

In July 2013, the Company issued $125.0 million aggregate principal amount of Notes in an underwritten public offering. The Company issued the Notes under an indenture, dated as of July 17, 2013 (the “Base Indenture”) between the Company and Wells Fargo Bank, National Association, as trustee (the “Trustee”), as supplemented by the supplemental indenture, dated as of July 17, 2013, between the Company and the Trustee (together with the Base Indenture, the “Indenture”). As a result of the Notes offering, the Company received net proceeds of approximately $120.6 million, after deducting underwriting discounts and commissions and offering expenses payable by the Company.

The Notes bear interest at a rate of 4.50% per year, payable semiannually in arrears on January 15 and July 15 of each year, beginning on January 15, 2014. The Notes are general unsecured senior obligations of the Company and rank (i) senior in right of payment to any of the Company’s indebtedness that is expressly subordinated in right of payment to the Notes, (ii) equal in right of payment to any of the Company’s unsecured indebtedness that is not so subordinated, (iii) effectively junior in right of payment to any of the Company’s secured indebtedness to the extent of the value of the assets securing such indebtedness, and (iv) structurally junior to all indebtedness and other liabilities (including trade payables) of the Company’s subsidiaries.

The Notes will mature on July 15, 2020 (the “Maturity Date”), unless earlier repurchased by the Company or converted at the option of holders. Holders may convert their Notes at their option at any time prior to the close of business on the business day immediately preceding April 15, 2020 only under the following circumstances:

•

during any calendar quarter commencing after September 30, 2013 (and only during such calendar quarter), if the last reported sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day;

•

during the five business day period after any five consecutive trading day period (the “measurement period”) in which the trading price (as defined in the Notes) per $1,000 principal amount of Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate on each such trading day; or

•

upon the occurrence of specified corporate events set forth in the Indenture.

On or after April 15, 2020 until the close of business on the business day immediately preceding the Maturity Date, holders may convert their Notes at any time, regardless of the foregoing circumstances. Upon any conversion of Notes that occurs while the Company’s indebtedness to Hercules under the Loan Agreement remains outstanding, the Notes will be settled in shares of the Company’s common stock. Following the repayment and satisfaction in full of the Company’s obligations to Hercules under the Loan Agreement, upon any conversion of the Notes, the Notes may be settled, at the Company’s election, in cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock.

The initial conversion rate of the Notes is 160 shares of the Company’s common stock per $1,000 principal amount of Notes, which is equivalent to an initial conversion price of $6.25 per share of common stock. The initial conversion price represents a premium of 25% over the public offering price per share of $5.00 in the Company’s concurrent underwritten public offering of common stock, as described in Note 13, “Common Stock.” The conversion rate will be subject to adjustment in some events, but will not be adjusted for any accrued and unpaid interest. In addition, following certain corporate events that occur prior to the Maturity Date, the Company will increase the conversion rate for a holder who elects to convert its Notes in connection with such a corporate event in certain circumstances.

Upon the occurrence of a fundamental change (as defined in the Indenture) involving the Company, holders of the Notes may require the Company to repurchase all or a portion of their Notes for cash at a price equal to 100% of the principal amount of the Notes to be purchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.

The Indenture contains customary terms and covenants and events of default with respect to the Notes. If an event of default (as defined in the Indenture) occurs and is continuing, the Trustee by written notice to the Company, or the holders of at least 25% in aggregate principal amount of the Notes then outstanding by written notice to the Company and the Trustee, may, and the Trustee at the request of such holders shall, declare 100% of the principal of and accrued and unpaid interest on the Notes to be due and payable. In the case of an event of default arising out of certain events of bankruptcy, insolvency or reorganization involving the Company or a significant subsidiary (as set forth in the Indenture), 100% of the principal of and accrued and unpaid interest on the Notes will automatically become due and payable.

The Company has separately accounted for the liability and equity components of the Notes by bifurcating gross proceeds between the indebtedness, or liability component, and the embedded conversion option, or equity component. This bifurcation was done by estimating an effective interest rate as of the date of issuance for similar notes which do not contain an embedded conversion option. This effective interest rate was estimated to be 15% and was used to compute the initial fair value of the indebtedness of $71.2 million. The gross proceeds received from the issuance of the Notes less the initial amount allocated to the indebtedness resulted in a $53.8 million allocation to the embedded conversion option. The embedded conversion option was recorded in stockholders’ deficit and as debt discount, to be subsequently amortized as interest expense over the term of the Notes. Underwriting discounts and commissions and offering expenses totaled $4.4 million and were allocated to the indebtedness and the embedded conversion option based on their relative values. As a result, $2.5 million attributable to the indebtedness was recorded as debt discount, to be subsequently amortized as interest expense over the term of the Notes, and $1.9 million attributable to the embedded conversion option was netted with the embedded conversion option in stockholders’ deficit.

For the year ended December 31, 2013, interest expense related to the outstanding principal balance of the Notes was $6.2 million.

Loan Agreement

In November 2012, the Company entered into the Loan Agreement with Hercules pursuant to which the Company received loans in the aggregate principal amount of $40.0 million in 2012. In July 2013, in connection with the Notes offering, the Company and Hercules entered into an amendment, consent and waiver to the Loan Agreement that permitted the Notes offering and the issuance of the Notes. The term loans bear interest at an annual rate equal to the greater of 10.55% and 10.55% plus the prime rate of interest minus 5.25%, but may not exceed 12.55%. Net proceeds from both advances received during the fourth quarter of 2012 were $39.6 million.

The Loan Agreement provides for interest-only payments for twelve months and repayment of the aggregate outstanding principal balance of the loans in monthly installments starting on December 1, 2013 and continuing through May 1, 2016. In the event the Company receives aggregate gross proceeds of at least $75.0 million in one or more transactions prior to December 1, 2013, the Company has the option to elect to extend the interest-only period by six months so that the aggregate outstanding principal balance of the loans issued pursuant to the Loan Agreement would be repaid in monthly installments starting on June 1, 2014 and continuing through November 1, 2016. At the Company’s option, the Company may elect to prepay all or any part of the outstanding term loans without penalty. As described above and in Note 13, “Common Stock,” in July 2013, the Company sold an aggregate of 5,750,000 shares of its common stock to the public at a price to the public of $5.00 per share and issued $125.0 million aggregate principal amount of Notes in concurrent underwritten public offerings, and as a result of these offerings, the Company received aggregate net proceeds in excess of $75.0 million. On October 27, 2013, the Company notified Hercules of its election to extend the interest-only period as permitted under the Loan Agreement.

In connection with the Loan Agreement, the Company granted Hercules a security interest in all of the Company’s personal property now owned or hereafter acquired, excluding intellectual property but including the proceeds from the sale, if any, of intellectual property, and a negative pledge on intellectual property. The Loan Agreement also contains certain representations, warranties and non-financial covenants of the Company. In addition, the Loan Agreement grants Hercules an option to purchase up to an aggregate of $1.0 million of the Company’s equity securities sold to institutional accredited investors in a private financing within one year after the closing of the Loan Agreement upon the same terms and conditions afforded to such investors.

The Loan Agreement defines events of default to include the occurrence of an event that results in a material adverse effect upon the Company’s business, operations, properties, assets or condition (financial or otherwise); the Company’s ability to perform its obligations when due in accordance with the terms of the Loan Agreement, or upon the ability of Hercules to enforce any of its rights or remedies with respect to such obligations; or the collateral under the Loan Agreement or Hercules’ liens on such collateral or the priority of such liens. As of December 31, 2013, there have been no events of default under the Loan Agreement.

Upon full repayment or maturity of the loans, the Company is required to pay Hercules a fee of $1.2 million, which has been recorded as a discount to the loans and as a long-term liability on the consolidated balance sheets. Additionally, the Company reimbursed Hercules for costs incurred related to the loans, which has been reflected as a discount to the carrying value of the loans. The Company is amortizing these loan discounts totaling $1.6 million to interest expense over the term of the loans using the effective interest method. For the years ended December 31, 2013 and 2012, interest expense related to the Hercules loans payable were $4.9 million and $0.5 million, respectively.

Convertible Notes—Silver Creek

In December 2012, as described in Note 2, “Summary of Significant Accounting Policies–Derivative Liability,” the Company’s majority owned subsidiary, Silver Creek, entered into a Note Purchase Agreement pursuant to which it issued convertible notes to various lenders in aggregate principal amounts of $1.6 million in December 2012, $0.3 million in February 2013 and $0.6 million in December 2013. The notes issued pursuant to the Note Purchase Agreement bore interest at 6% per annum. Upon issuance, these convertible notes contained a feature wherein at any time prior to maturity Silver Creek enters into a qualifying equity financing, defined as a sale or series of related sales of equity securities prior to the maturity date and resulting in at least $4.0 million of gross proceeds, the notes would automatically convert into the next qualifying equity financing at a 25% discount. The Company determined that this convertible feature met the definition of a derivative and required separate accounting treatment. The derivative was estimated to be valued at $0.2 million for the year ended December 31, 2012 using a probability-weighted model as described in Note 6, “Fair Value of Financial Instruments—Recurring Fair Value Measurement,” and was recorded as derivative liability on the consolidated balance sheets. For the year ended December 31, 2013, the derivative was remeasured upon conversion with the gain in remeasurement recognized in other income. The notes matured and converted, along with accrued interest of $0.1 million, into shares of Silver Creek Series A preferred stock on December 31, 2013. Upon conversion, the Company’s ownership percentage of Silver Creek outstanding preferred stock decreased from 74% to 64%, and a $0.8 million increase to non-controlling interest was recognized.