Note 6 – Long-term Debt

Loan Facility with Deerfield

On February 13, 2013, we entered into a secured loan facility with affiliates of Deerfield Management Company, L.P. (Deerfield) for up to $30 million in financing in 2013 (Deerfield Facility). Deerfield advanced to us $10 million upon execution of the agreement and agreed to advance an additional $20 million, subject to certain conditions, on or about the date of the first commercial sale of SURFAXIN drug product (Milestone Date), provided that the first commercial sale occurs on or before December 31, 2013. The loan may be prepaid in whole or in part without penalty at any time. In addition, the principal amount of the loan may be reduced to the extent that a holder of the notes elects to apply a portion of the principal amount outstanding to satisfy the exercise price of related Warrants (see below) upon exercise of all or a portion of the Warrants.

The principal amount of the loan is payable in equal annual installments on the fourth, fifth and sixth anniversaries of the facility agreement, provided that the amount payable on the fourth anniversary shall be deferred for one year if either (i) our "Net Sales" (defined below) for the immediately preceding 12-month period are at least $20 million, or (ii) our "Equity Value" (defined below) is at least $200 million; and provided further, that the amount payable on the fifth anniversary (together with any amount deferred on the fourth anniversary) shall be deferred until the sixth anniversary if either (x) our "Net Sales" for the immediately preceding 12 month period are at least $30 million, or (ii) our "Equity Value" is at least $250 million. For the purposes of the foregoing deferrals of principal, "Net Sales" means, without duplication, the gross amount invoiced by us or on our behalf, any of our subsidiaries or any direct or indirect assignee or licensee for products, sold globally in bona fide, arm's length transactions, less customary deductions determined without duplication in accordance with generally accepted accounting principles; and "Equity Value" means, with respect to each measurement date, the product of (x) the number of issued and outstanding shares of our common stock on such measurement date multiplied by (y) the per share closing price of our common stock on such measurement date. Accordingly, if the milestones are achieved in each year, payment of the principal amount could be deferred until the sixth anniversary date of the loan on February 13, 2019.

Any amounts received under the Deerfield Facility will accrue interest at a rate of 8.75%, payable quarterly in cash. The facility agreement contains customary terms and conditions but does not require us to meet minimum financial and revenue performance covenants. In connection with each advance, Deerfield has received and may receive a transaction fee equal to 1.5% of any amount disbursed. The facility agreement also contains various representations and warranties and affirmative and negative covenants customary for financings of this type, including restrictions on our ability to incur additional indebtedness and grant additional liens on its assets. In addition, all amounts outstanding under the Deerfield Facility may become immediately due and payable upon (i) an "Event of Default," as defined in the facility agreement, in which case Deerfield would have the right to require us to repay the outstanding principal amount of the loan, plus any accrued and unpaid interest thereon, or (ii) the occurrence of certain events as defined in the facility agreement, including, among other things, the consummation of a change of control transaction or the sale of more than 50% of the Company's assets (a Major Transaction).

In connection with the execution of the Deerfield Facility and receipt of the initial disbursement of $10 million, we issued to Deerfield warrants to purchase an aggregate of 2,340,000 shares of our common stock at an exercise price of $2.81 per share of common stock, representing a 24% premium to the closing price of our common stock on the Nasdaq Capital Market on the immediately preceding trading day. If the Milestone Date, as defined in the facility agreement, occurs, upon disbursement of the additional $20 million loan under the facility agreement, we will issue warrants to purchase an additional 4,660,000 shares of our common stock at an exercise price of $2.81 per share of common stock (together with the warrants in the preceding sentence, the "Warrants"). There can be no assurance that the Milestone Date will occur. The number of shares of common stock into which a Warrant is exercisable and the exercise price of any Warrant will be adjusted to reflect any stock splits, recapitalizations or similar adjustments in the number of outstanding shares of common stock.

Each Warrant issued under the Deerfield Facility will expire on the sixth anniversary of the facility agreement and contains certain limitations that generally prevent the holder from acquiring shares upon exercise of a Warrant that would result in the number of shares beneficially owned by it to exceed 9.985% of the total number of shares of common stock then issued and outstanding. The holder of a Warrant may exercise all or a portion of the Warrant either for cash or on a cashless basis. In connection with a Major Transaction, as defined in the Warrants, to the extent of consideration payable to stockholders in cash in connection with such Major Transaction, the holder may have the option to redeem the Warrant or that portion of the Warrant for cash in an amount equal to the Black-Scholes value (as defined in the Warrant) of the Warrant or that portion of the Warrant redeemed. In addition, in connection with a Major Transaction, to the extent of any consideration payable to stockholders in securities, or in the event of an Event of Default, the holder may have the option to exercise the Warrant and receive therefor that number of shares of Common Stock that equals the Black-Scholes value of the Warrant or that portion of the Warrant exercised. Prior to the holder exercising the Warrant for shares in such transactions, the Company may elect to terminate the Warrant or that portion of the Warrant and pay the holder cash in an amount equal to the Black-Scholes value of the Warrant.

We have recorded the loan as long-term debt at its face value of $10.0 million less debt discounts and issuance costs consisting of (i) $3.8 million fair value of the 2,340,000 Warrants issued upon the advance of the $10 million initial disbursement; and (ii) a $150,000 transaction fee. The discount is being accreted to the $10 million loan over its term using the effective interest method. The Warrants are derivatives that qualify for an exemption from liability accounting as provided for in Accounting Standards Codification (ASC) Topic 815 "Derivatives and Hedging – Contracts in Entity's Own Equity" (ASC 815) and have been classified as equity.

The fair value of the 2,340,000 Warrants was calculated using the Black-Scholes option-pricing model. The significant Level 3 unobservable inputs used in valuing the Warrants are the historical volatility of our common stock market price, expected term of the warrants, and the risk-free interest rate based on the U.S. Treasury yield curve in effect at the measurement date. Any significant increases or decreases in the unobservable inputs, with the exception of the risk-free interest rate, would have resulted in a significantly higher or lower fair value measurement.

Significant Unobservable Input Assumptions of Level 3 Valuations

Historical Volatility	101	%
Expected Term (in years)	6.0
Risk-free interest rate	0.12	%

Long-term debt as of March 31, 2013 consists solely of amounts due under the Deerfield Facility as follows:

Note Payable	$	10,000
Unamortized discount		(3,917	)

Long-term debt, net of discount	$	$ 6,083

The following amounts comprise interest expense under the Deerfield Facility for the three months ended March 31, 2013:

Cash interest expense	$	113
Non-cash amortization of debt discount		57
Amortization of debt costs		5

Total interest expense	$	175

Cash interest expense represents interest of 8.75% on the principal amount outstanding under the Deerfield Facility for the period that is to be paid in cash. Non-cash amortization of debt discount represents the amortization of the fair value of the warrants issued in connection with the Deerfield Facility. The amortization of debt costs represents the transaction fee and legal costs incurred in connection with the Deerfield Facility.