Loan and Security Agreement

6 Months Ended

Jun. 30, 2012

Loan and Security Agreement [Abstract]

Loan and Security Agreement

10. Loan and Security Agreement

In December 2011, the Company entered into a Second Amended and Restated Loan and Security Agreement (the “Second Amended Agreement”) with Oxford Finance LLC (“Oxford”), Silicon Valley Bank (“SVB”) and General Electric Capital Corporation (“GECC”) (collectively, the “Lenders”). The Second Amended Agreement amends and restates the Company’s previous Amended and Restated Loan and Security Agreement (the “Restated Agreement”) entered in June 2010 with the Lenders, and provided the Company with $3,434,000 of additional net capital after deducting a $954,000 term loan final payment paid under the Restated Agreement and customary closing fees and expenses of $63,000 paid in connection with the closing of the Second Amended Agreement. The interest rate under the Second Amended Agreement is 10.99% and the Company will be required to make a final payment of 6% of the total advance at the termination of the loan.

Pursuant to the terms of the Second Amended Agreement, the Company will make interest only payments through December 2012, and in January 2013, will begin to make equal monthly payments of principal and interest to fully amortize the balance over the remaining 30-month term. The Company issued warrants to purchase 158,311 shares of the Company’s common stock to the Lenders in connection with the Second Amended Agreement at an exercise price $3.79 per share. The warrants were immediately exercisable, and excluding certain mergers or acquisitions, will expire on the seven-year anniversary of the date of issuance. The Company determined the relative fair value of these warrants, as detailed below, and has classified the warrants as equity, recognizing the cost as a discount on the loan issuance. The credit facility contains customary default and acceleration provisions and is secured by the Company’s assets, excluding intellectual property. The Company was required to make a negative pledge of its intellectual property, which generally prohibits the Company from granting liens on its intellectual property. Under the terms of the Second Amended Agreement, the Company may be precluded from entering into certain financing and other transactions, including disposing of certain assets and paying dividends, and is subject to certain non-financial covenants and prepayment penalties. Upon the occurrence of an event of default, including a Material Adverse Change (as defined in the Second Amended Agreement), the Lenders may declare all outstanding amounts due and payable under the Second Amended Agreement. As of June 30, 2012, the Company believed it was in compliance will all covenants under the Second Amended Agreement.

The Company determined that the terms of Second Amended Agreement were not substantially different than the Restated Agreement and hence has accounted for the transaction as a loan modification. As such, the fair value of the warrants issued in connection with the Second Amended Agreement and the carrying value of the issuance costs and discount related to the Restated Agreement were aggregated and are being amortized to interest expense throughout the life of the Second Amended Agreement using an effective interest rate of 15.31%.

In connection with the establishment of the $30,000,000 credit facility in June 2010 under the Restated Agreement, the outstanding balance of the Company’s previous $15,000,000 credit facility established in 2007 was paid in full, including accrued interest, and a $375,000 term loan final payment. The transaction was accounted for as a loan extinguishment and upon the repayment of the $15,000,000 facility, the Company recorded a charge of approximately $145,000 in the second quarter of 2010 to (1) fully amortize the balance of the loan discount and related issuance costs and (2) fully accrue the term loan final payment. The warrants issued and the upfront fees paid in connection with the Restated Agreement were recognized as a discount on the loan issuance and the legal and related expenses were recognized as debt issuance costs on the Company’s balance sheets. The carrying value of these costs at the time of the loan modification in December 2011 were aggregated with the relative fair value of the warrants issued in connection with the Second Amended Agreement and are being amortized throughout the life of the Second Amended Agreement as noted above.

Warrants

In connection with the establishment of the Company’s $15,000,000 credit facility with the Lenders in 2007, the Company issued six fully exercisable warrants to the Lenders to purchase an aggregate of 50,331 shares of the Company’s common stock at an exercise price of $12.67 per share, expiring November 30, 2014. The Company determined the fair value of these warrants to be $474,000 under the Black-Scholes valuation model using the following assumptions: risk-free interest rate of 3.64%; dividend yield of 0.0%; expected volatility of 70.0%; and a contractual term of seven years. As of June 30, 2012, all of these warrants were outstanding.

In connection with the Restated Agreement, the Company issued three fully exercisable warrants to the Lenders in June 2010 to purchase an aggregate of 254,793 shares of the Company’s common stock at an exercise price of $7.0645 per share, expiring June 18, 2017. The Company classified the warrants as equity and determined their relative fair value to be $1,237,000, using the Black-Scholes valuation model. The value of the warrants was recorded as a discount to the loan and is currently being amortized to interest expense over the term of the Second Amended Agreement pursuant to the loan modification. The warrants were valued using the following assumptions: risk-free interest rate of 2.7%; dividend yield of 0.0%; expected volatility of 76.5%; and a contractual term of seven years. As of June 30, 2012, all warrants related to the Restated Agreement were outstanding.

In connection with the Second Amended Agreement, the Company issued four exercisable warrants to the Lenders in December 2011 to purchase an aggregate of 158,311 shares of the Company’s common stock at an exercise price of $3.79 per share, expiring December 22, 2018. The Company classified the warrants as equity and determined their relative fair value to be $390,000, using the Black-Scholes valuation model. The value of the warrants was recorded as a discount to the note payable, and will be amortized to interest expense over the expected term of the Second Amended Agreement. The warrants were valued using the following assumptions: risk-free interest rate of 1.4%; dividend yield of 0.0%; expected volatility of 72.4%; and a contractual term of seven years. As of June 30, 2012, all warrants related to the Second Amended Agreement were outstanding.