Convertible Debentures

In 2011, the Company issued convertible debenture securities with detachable warrants (see Note 9), and it identified embedded conversion features that were required to be bifurcated and accounted for as derivatives. The derivative financial instruments were recorded at fair value as of the issuance date of the convertible debentures, as a debt discount, and remeasured to fair value as of each subsequent balance sheet date until the IPO. The Company allocated the remaining proceeds to the convertible debentures and warrants on a relative fair value basis and recorded a beneficial conversion feature. The derivative financial instruments, warrants and beneficial conversion feature were recorded as a discount to the convertible debentures and were amortized to interest expense through the IPO date (see below).

The convertible debentures were general unsecured obligations of the Company. The convertible debentures had a stated interest rate of 8.0% per annum on the outstanding principal balance. The interest on the convertible debenture securities was payable in kind (“PIK”) and added to the unpaid principal in order to determine the number of shares of common stock to be issued upon conversion. The holder was only entitled to cash payment of such PIK interest from the Company upon (1) an event of default that would result in acceleration of all unpaid principal and accrued interest, or (2) the payment in full of the debt on the maturity date or prior as the result of the Company exercising its prepayment rights pursuant to the agreement.

Conversion of principal and accrued PIK interest into shares of common stock was at the election of the note holders at a conversion price of $15.00 per share and was also mandatory upon the closing of an initial public offering at a conversion price equal to the public offering price. The convertible debentures matured five years from the issue date.

On December 31, 2012, certain holders of the convertible debentures elected to convert their debentures to common stock. The outstanding principal and PIK interest for these holders at December 31, 2012 was $12,392, which converted into 826 shares of common stock. The unamortized debt discount for these debentures of $1,387 was recorded as interest expense on the conversion date.

On June 12, 2013, in connection with the completion of the IPO, the outstanding principal of the convertible debentures of $5,865 and PIK interest of $778 automatically converted into 443 shares of the Company's common stock, based upon the IPO price of $15.00 per share. The unamortized debt discount for these debentures of $863 was recorded as interest expense on the conversion date.

Convertible debenture activity for the three and nine months ended June 30, 2013 and 2012 is as follows:



	Three Months Ended June 30,						Nine Months Ended June 30,
	2013			2012			2013			2012
	(in thousands)						(in thousands)
Beginning balance:
Gross balance	$	6,487		$	17,721		$	18,328		$	2,493
Less: Discounts	(906		)	(2,631		)	(2,440		)	(529		)
	5,581			15,090			15,888			1,964
Proceeds:
To convertible debentures, before allocations	—			—			—			14,664
Allocated to detachable warrants	—			—			—			(1,660		)
Allocated to beneficial conversion feature	—			—			—			(140		)
Allocated to conversion option liability	—			—			—			(467		)
Interest expense:
PIK interest	156			301			707			865
Amortization of debt discount	43			93			190			258
Recognition of unamortized debt discount upon conversion	863			—			2,250			—
Conversion:
Issuance of common shares	(6,643		)	—			(19,035		)	—
Ending balance:
Gross balance	—			18,022			—			18,022
Less: Discounts	—			(2,538		)	—			(2,538		)
Ending balance	$	—		$	15,484		$	—		$	15,484

Total interest expense recognized related to the convertible debenture securities was $1,062 and $394, respectively, for the three months ended June 30, 2013 and 2012, and $3,147 and $1,123, respectively, for the nine months ended June 30, 2013 and 2012.