11. Warrants and Derivative Liabilities

Senior Convertible Note Warrant

On April 4, 2012, the Company entered into the Purchase Agreement for the Initial Note and on December 20, 2012, the Company entered into the First Amendment pursuant to which it exchanged the Initial Note for the Exchanged Note (See Note 10, “Debt” for further discussion). The Initial Note included a warrant to purchase 3,094,060 shares of the Company’s common stock. The warrant is exercisable at any time on or after the date that is six months after the issuance of the warrant and entitles CVI to purchase shares of the Company’s common stock for a period of five years from the initial date the warrant becomes exercisable at a price equal to $5.45 per share, subject to certain price-based and other anti-dilution adjustments. On October 9, 2013, the Company entered into the Second Amendment with CVI. Pursuant to the Second Amendment, the Company exchanged the Original Warrant for the Exchanged Warrant, with a reduced exercise price of $2.61 per share of common stock. Other than the reduced exercise price, the Exchanged Warrant has the same terms and conditions as the Original Warrant. The Company recorded a charge of approximately $1.0 million for the increase in fair value of the Exchanged Warrant resulting from the Second Amendment on the warrant liability during the three months ending December 31, 2013. As a result of the sales of common stock under the ATM (See Note 12, “Stockholders’ Equity”, for further discussion of the ATM) during the three months ended December 31, 2013, the exercise price of the Exchanged Warrant was reduced to $2.59 per share. The Exchanged Warrant may not be exercised if, after giving effect to the conversion, CVI together with its affiliates would beneficially own in excess of 4.99% of the Company’s common stock. This percentage may be raised to any other percentage not in excess of 9.99% at the option of CVI, upon at least 61-days prior notice to the Company, or lowered to any other percentage, at the option of CVI, at any time.

The Company calculated the fair value of the derivative liabilities, (See Note 10, “Debt” for further discussion), and warrants utilizing an integrated lattice model. The lattice model is an option pricing model that involves the construction of a binomial tree to show the different paths that the underlying asset may take over the option’s life. A lattice model can take into account expected changes in various parameters such as volatility over the life of the options, providing more accurate estimates of option prices than the Black-Scholes model.

The Company accounts for the warrant as a liability due to certain adjustment provisions within the warrant, which requires that it be recorded at fair value. The warrant is subject to revaluation at each balance sheet date and any change in fair value will be recorded as a change in fair value in other income (expense) until the earlier of expiration or its exercise at which time the warrant liability will be reclassified to equity.

Following is a summary of the key assumptions used to calculate the fair value of the warrant:

				Post-modification			Pre-modification
	December 31,			October 9,			October 9,			September 30,			June 30,
Fiscal Year 13	2013			2013			2013			2013			2013
Risk-free interest rate		1.17	%		1.05	%		1.05	%		1.02	%		1.13	%
Expected annual dividend yield		—	%		—	%		—	%		—	%		—	%
Expected volatility		75.6	%		71.5	%		71.5	%		72.0	%		71.9	%
Term (years)		3.76			3.99			3.99			4.01			4.27
Fair value	$	2.2 million		$	3.2 million		$	2.2 million		$	2.5 million		$	3.0 million

	March 31,			December 31,			September 30,			June 30,			April 4,
Fiscal Year 12	2013			2012			2012			2012			2012
Risk-free interest rate		0.67	%		0.75	%		0.63	%		0.77	%		1.19	%
Expected annual dividend yield		—	%		—	%		—	%		—	%		—	%
Expected volatility		71.7	%		80.6	%		80.9	%		80.8	%		80.0	%
Term (years)		4.51			4.76			5.01			5.28			5.50
Fair value	$	3.4 million		$	4.4 million		$	7.1 million		$	8.6 million		$	7.0 million

The Company recorded a net gain, resulting from the decrease in the fair value of the Exchanged Warrant, including the impact of the modification, of $0.3 million and $1.2 million to change in fair value of derivatives and warrants in the three and nine months ended December 31, 2013, respectively. The Company recorded net gains of $2.7 million and $2.6 million in the three and nine months ended December 31, 2012, respectively.

Senior Convertible Note Derivative Liability

The Company determined certain embedded derivatives issued with the Initial Note required accounting as a liability, which requires they be accounted for as a standalone liability subject to revaluation at each balance sheet date with changes in fair value recorded as change in fair value of derivatives and warrants until the earlier of exercise or expiration.

The terms of the December 2012 debt modification with CVI reduced the conversion price of the Initial Note from $4.85 per share to $3.19 per share in the Exchanged Note. As a result the Company revalued these derivatives pre- and post-modification and recorded the difference of $0.5 million as a debt discount and a derivative liability. (See Note 10, “Debt,” for further discussion.) As a result of the sales of common stock under the ATM (See Note 12, “Stockholders’ Equity”, for further discussion of the ATM) during the three months ended December 31, 2013, the conversion price of the Exchanged Note was reduced to $3.15 per share.

Following is a summary of the key assumptions used to value the convertible notes derivative features:

	December 31,			September 30,			June 30,
Fiscal Year 13	2013			2013			2013
Principal outstanding (000's)	$	10,411		$	10,411		$	14,389
Stock price	$	1.64		$	2.34		$	2.64
Percentage volume condition met		87.2	%		80.2	%		87.5	%
Expected volatility		68.6	%		66.3	%		65.8	%
Risk free rate		0.12	%		0.10	%		0.21	%
Bond yield		16.5	%		15.5	%		16.7	%
Recovery rate		35.0	%		35.0	%		37.0	%
Redeemable	yes			yes			yes
Total time (years)		0.75			1.00			1.26
Dilution effect	yes			yes			yes
Fair value	$ —			$ 0.2 million			$ 0.5 million
Fair value as a percent of par		0.02	%		0.7	%		3.3	%

							Post- modification			Pre- modification
	March 31,			December 31,			December 20,			December 20,			September 30,			June 30,			April 4,
Fiscal Year 12	2013			2012			2012			2012			2012			2012			2012
Principal outstanding (000's)	$	15,380		$	20,944		$	20,944		$	24,074		$	24,074		$	25,000		$	25,000
Stock price	$	2.67		$	2.62		$	2.95		$	2.95		$	4.15		$	4.68		$	3.97
Percentage volume condition met		80.5	%		94.5	%		94.9	%		28.6	%		51.0	%		75.2	%		85.9	%
Expected volatility		66.9	%		73.5	%		72.5	%		72.5	%		70.0	%		71.0	%		75.0	%
Risk free rate		0.20	%		0.23	%		0.25	%		0.25	%		0.23	%		0.33	%		0.44	%
Bond yield		16.5	%		16.5	%		16.5	%		16.5	%		15.0	%		16.0	%		15.0	%
Recovery rate		30.0	%		30.0	%		30.0	%		30.0	%		30.0	%		30.0	%		30.0	%
Redeemable		yes			yes			yes			yes			yes			yes			yes
Total time (years)		1.51			1.76			1.79			1.79			2.01			2.28			2.50
Dilution effect		yes			yes			yes			yes			yes			yes			yes
Fair value		$ 0.5 million			$ 1.0 million			$ 1.5 million			$ 0.9 million			$ 2.8 million			$ 4.5 million			$ 3.8 million
Fair value as a percent of par		3.4	%		4.9	%		7.1	%		3.9	%		11.4	%		17.9	%		15.1	%

Based on historical VWAP of the Company’s common stock as well as the historic average dollar trading volume of the Company’s common stock, the percentage volume condition is the probability that the Company will convert monthly installment payments into the Company’s common stock. The expected volatility rate was estimated based on an equal weighting of the historical volatility of the Company’s common stock and the implied volatility of the Company’s traded options. To determine the risk-free interest rate, an interpolated rate was used based on the one, two and three-year United States Treasury rates. The bond yield was estimated using comparable corporate debt and yield information. The recovery rate of the Exchanged Note was estimated by reviewing historical corporate debt that went into default. The bond is redeemable by the Company at any point after the one-year anniversary of the grant date provided certain provisions within the note. The total time is based on the actual 30-month contractual terms. It was determined that there is a dilution effect based on the Company’s ability to make payments in shares of common stock.

The Company recorded the decrease in the fair value of the derivative liabilities of $0.2 million and $0.5 million as a gain to changes in fair value of derivatives and warrants in the three and nine months ended December 31, 2013, and similarly, gains of $2.3 million and $3.3 million in the three and nine months ended December 31, 2012, respectively.

Senior Secured Term Loan – First Warrant

On June 5, 2012, the Company entered into the Loan and Security Agreement with Hercules. (See Note 10, “Debt,” for additional information regarding the Loan and Security Agreement.) In conjunction with this agreement, the Company issued the First Warrant to purchase 139,276 shares of the Company’s common stock. The First Warrant is exercisable at any time after its issuance and expires on December 5, 2017, at a price equal to $3.59 per share subject to certain price-based and other anti-dilution adjustments. The exercise price was reduced to $1.95 per share in conjunction with entering into the New Term Loan.

The Company accounts for the First Warrant as a liability due to certain provisions within the warrant, which requires that it be recorded at fair value. The First Warrant is subject to revaluation at each balance sheet date and any change in fair value will be recorded as changes in fair value of derivatives and warrants until the earlier of expiration or its exercise at which time the warrant liability will be reclassified to equity.

Following is a summary of the key assumptions used to calculate the fair value of the First Warrant:

				Post-modification			Pre-modification
	December 31,			November 15,			November 15,			September 30,			June 30,
Fiscal Year 13	2013			2013			2013			2013			2013
Risk-free interest rate		1.24	%		1.00	%		1.00	%		1.09	%		1.20	%
Expected annual dividend yield	—		%	—		%	—		%	—		%	—		%
Expected volatility		74.79	%		72.64	%		72.64	%		72.10	%		72.30	%
Term (years)		3.93			4.05			4.05			4.18			4.43
Fair value	$ 0.1 million			$ 0.1 million			$ 0.1 million			$ 0.2 million			$ 0.2 million

	March 31,			December 31,			September 30,			June 30,			June 5,
Fiscal Year 12	2013			2012			2012			2012			2012
Risk-free interest rate		0.70	%		0.75	%		0.64	%		0.80	%		0.77	%
Expected annual dividend yield	—		%	—		%	—		%	—		%	—		%
Expected volatility		72.01	%		80.14	%		81.18	%		80.32	%		79.99	%
Term (years)		4.68			4.93			5.18			5.44			5.50
Fair value	$ 0.2 million			$ 0.2 million			$ 0.4 million			$ 0.5 million			$ 0.4 million

The Company recorded a decrease in the fair value of the First Warrant resulting in a gain of less than $0.1 million during the three and nine months ended December 31, 2013. The Company recorded a decrease in the fair value of $0.2 million as a gain to change in fair value of derivatives and warrants during the three and nine months ended December 31, 2012.

Senior Secured Term Loan – Second Warrant

On November 15, 2013, the Company amended the Loan and Security Agreement with Hercules and entered into the New Term Loan. (See Note 10, “Debt,” for additional information regarding the New Term Loan.) In conjunction with this agreement, the Company issued the Second Warrant to purchase 256,410 shares of the Company’s common stock. The Second Warrant is exercisable at any time after its issuance and expires on May 15, 2019, at a price equal to $1.95 per share subject to certain price-based and other anti-dilution adjustments.

The Company accounts for the Second Warrant as a liability due to certain provisions within the warrant, which requires that it be recorded at fair value. The Second Warrant is subject to revaluation at each balance sheet date and any change in fair value will be recorded as changes in fair value of derivatives and warrants until the earlier of expiration or its exercise at which time the warrant liability will be reclassified to equity.

Following is a summary of the key assumptions used to calculate the fair value of the Second Warrant:

				New Issuance
	December 31,			November 15,
Fiscal Year 13	2013			2013
Risk-free interest rate		1.89	%		1.55	%
Expected annual dividend yield	—		%	—		%
Expected volatility		80.37	%		76.97	%
Term (years)		5.37			5.49
Fair value	$ 0.3 million			$ 0.3 million

The Company recorded a decrease in the fair value of the Second Warrant resulting in a gain of less than $0.1 million during the three months ended December 31, 2013.

The Company prepared its estimates for the assumptions used to determine the fair value of the warrants issued in conjunction with both the Exchanged Note and Term Loans utilizing the respective terms of the warrants with similar inputs, as described above.