7. Borrowings

Future minimum payments under indebtedness agreements outstanding as of September 30, 2014 are as follows:


(in thousands) As of September 30, 2014:	4.50% Convertible Senior Notes			Loan Agreement
Remainder of 2014	$	—		$	4,548
2015		5,625			18,135
2016		5,625			23,804
2017		5,625			—
2018 and thereafter		141,875			—


		158,750			46,487
Less interest		(33,750	)		(5,287	)
Less unamortized discount		(46,409	)		(1,748	)
Less current portion		—			(14,615	)


Loans payable, net of current portion	$	78,591		$	24,837

4.50% Convertible Senior Notes

In July 2013, the Company issued $125.0 million aggregate principal amount of Notes in an underwritten public offering. 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.

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 certain 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 conversion rate will be subject to adjustment in some events. 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.

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. 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.

For the three and nine months ended September 30, 2014, interest expense related to the outstanding principal balance of the Notes was $3.4 million and $10.3 million, respectively. For both the three and nine months ended September 30, 2013, interest expense related to the outstanding principal balance of the Notes was $2.8 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. The Company, as permitted under the Loan Agreement, had previously extended the interest-only payment period with the aggregate principal balance of the loans to be repaid in monthly installments starting on June 1, 2014 and continuing through November 1, 2016. On June 25, 2014, the Company entered into an amendment to the Loan Agreement, whereby the Company and Hercules agreed to extend until October 1, 2014 the period during which the Company makes interest-only payments. On November 6, 2014, the Company entered into a further amendment to the Loan Agreement, whereby the Company and Hercules agreed to extend by four additional months the period during which the Company makes interest-only payments. As a result, the Company will repay the aggregate outstanding principal balance of the loan in equal monthly installments of principal and interest (based on a 30 month amortization schedule) beginning on February 1, 2015. The remaining principal balance and interest will be due and payable on November 1, 2016. This amendment was treated as a debt modification for accounting purposes.

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 Company’s condensed 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 three and nine months ended September 30, 2014, interest expense related to Hercules loans payable was $1.2 million and $3.6 million, respectively. For the three and nine months ended September 30, 2013, interest expense related to Hercules loans payable was also $1.2 million and $3.7 million, respectively.

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.

Convertible Notes - Silver Creek

Between April and September 2014, the Company’s majority owned subsidiary, Silver Creek, issued an aggregate of $0.7 million in convertible notes to multiple legal entities pursuant to a Note Purchase Agreement. The notes bear interest at 6% and mature and convert, along with accrued interest, into Silver Creek Series A preferred stock on December 31, 2014. If 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 will 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 deemed to be immaterial upon issuance and as of September 30, 2014 using a probability-weighted model, and was recorded as a derivative liability within other current liabilities on the consolidated balance sheets. As of September 30, 2014, Silver Creek had outstanding borrowings of $0.6 million, net of immaterial debt discounts. For the three and nine months ended September 30, 2014, interest expense related to the outstanding principal balance under the Note Purchase Agreement was immaterial.