Note 2 — Recent Financing and Other Capital Transactions

In 2014, we raised capital by issuing various debt, equity and equity-linked securities, and have modified, redeemed, extinguished or converted several previously outstanding securities.

December 2013 Convertible Bridge Note – 2^nd Tranche

In January 2014, we closed on the second tranche of our December 2013 convertible bridge notes, issuing convertible debt for $750,000 of gross proceeds. As a result of certain non-standard anti-dilution provisions, we classified the conversion option embedded in the convertible notes as a derivative liability, initially at its estimated fair value of approximately $0.6 million and re-measured the conversion option to fair value at each balance sheet date. As a result, we recognized a discount on the convertible notes of $0.6 million; we amortized the discount on the notes over the term of the notes using the effective interest method. On March 31, 2014 the holders of the December 2013 convertible bridge notes (except for one holder) agreed to convert their outstanding notes pursuant to its terms, converting into 5,981,859 shares of common stock. The Company repaid, in its entirety, the portion of the debt excluded from the conversion (including interest and prepayment penalties) pursuant to its terms, for a total cash payment of approximately $339,000. The unamortized balance of the related debt discount, deferred fees, and derivative liability for the embedded conversion feature, were reclassified to additional paid-in capital.

2014 Convertible Debt Financing

On March 31, 2014, we executed an agreement (“Facility Agreement”) with Deerfield Management Company (“Deerfield”) for the issuance of a five-year senior convertible credit facility. The facility provided for an initial draw of $9 million of 5.75% senior secured convertible notes, initially convertible into a fixed number of shares of our common stock at $0.52 per share, and matures on March 31, 2019. In connection with the convertible debt, we also issued to Deerfield seven-year detachable stock purchase warrants to acquire 25,115,384 shares of our common stock at an initial exercise price of $0.52 per share.

As a result of certain non-standard anti-dilution provisions and cash settlement features, we classified the detachable stock purchase warrants and the conversion option embedded in the convertible notes as derivative liabilities, initially at their estimated relative fair value of approximately $6.0 million and $3.0 million, respectively. As a result, we recognized a discount on the convertible notes of $9.0 million which we are amortizing over the term of the notes using the effective interest method. We re-measure the warrants and the conversion option to fair value at each balance sheet date.

The convertible credit facility also provided for a second tranche of $26.0 million contingent upon shareholder approval of the authorization of a sufficient number of common shares available for conversion. On June 25, 2014, following satisfaction of closing conditions, the Company completed the second draw under the Facility Agreement in the aggregate amount of $26.0 million (the “Second Draw”). Further, pursuant to the terms of the Facility Agreement and at the time of the Second Draw, the Company issued to Deerfield 67,500,000 warrants to purchase shares of the Company’s common stock at the exercise price of $0.52 per share, subject to adjustments. These warrants are substantially identical to the warrants issued to Deerfield in the connection with the First Draw and as a result of certain non-standard anti-dilution provisions and cash settlement features, we classified the detachable stock purchase warrants and the conversion option embedded in the convertible notes as derivative liabilities, initially at their estimated relative fair value of approximately $20.5 million and $5.3 million, respectively. As a result, we recognized a discount on the convertible notes of $25.8 million, which we are also amortizing over the term of the notes using the effective interest method. We also re-measure the warrants and the conversion option associated with the Second Draw to fair value at each balance sheet date. Accrued interest on the 2014 convertible credit facility is included in long-term-liabilities- Other liabilities on the Condensed Consolidated Balance Sheets.

March 2014 Equity Offering

On March 31, 2014 we raised $2.0 million from the private placement of 3,846,154 shares of common stock (at a price of $0.52 per share) and five-year stock purchase warrants to purchase 2,884,615 shares of common stock at $0.52 per shares. As a result of certain non-standard anti-dilution provisions and cash settlement features contained in the warrants, we classified the detachable stock purchase warrants as derivative liabilities, initially at their estimated relative fair value of approximately $1.1 million. We re-measure the warrants to fair value at each balance sheet date. Issuance costs, in the form of warrants and fees, were valued at approximately $136,000 and were recorded to additional paid-in-capital.

March 2014 Amendment to Existing Note

To facilitate the Deerfield financing discussed above, we modified our existing $2.1 million note with JP Nevada Trust to subordinate the note to the new convertible notes. In exchange for the subordination, we issued to JP Nevada Trust five-year stock purchase warrants to acquire 750,000 shares of our common stock at $0.52 per share. As a result of certain exercise contingencies, non-standard anti-dilution provisions and cash settlement features contained in the warrants, we initially classified the detachable stock purchase warrants as derivative liabilities at their estimated relative fair value of approximately $14,000. The $2.1 million note with JP Nevada Trust was retired in conjunction with the Second Draw under the Facility Agreement in June 2014 and the warrants expired pursuant to their terms upon repayment of the debt.

2014 Placement Agent Costs

In connection with the March 2014 Deerfield financing and equity offering discussed above, we paid the placement agent cash fees of $880,000 and issued to them five-year stock purchase warrants to purchase 1,474,615 shares of common stock at $0.52 per share. The total fees were allocated to the debt and equity components (as deferred financing fees and additional paid in capital, respectively) on a relative fair value basis. As a result of certain non-standard anti-dilution provisions and cash settlement features contained in the warrants, we initially classified the detachable stock purchase warrants as derivative liabilities at their estimated relative fair value of approximately $0.5 million. We re-measure the warrants to fair value at each balance sheet date.

In connection with the closing of the second draw on the Deerfield facility, the Company paid the placement agent an additional $1.71 million cash commission and issued to them additional five-year stock purchase warrant to acquire 3,525,000 shares of the Company’s common stock on the terms and provisions substantially similar to first draw. The total fees associated with the debt were recorded as deferred financing fees. As a result of certain non-standard anti-dilution provisions and cash settlement features contained in the warrants, we classified the detachable stock purchase warrants as derivative liabilities, initially at their estimated relative fair value of approximately $0.90 million. We re-measure the warrants to fair value at each balance sheet date.

Mid-Cap Term Loan pay-off

We paid off in its entirety the Mid-Cap Financial term loan for a total cash payment of $3,811,767 on March 31, 2014, including principal of $3,450,000 and accrued interest of approximately $31,717. In connection with this transaction, we incurred and expensed prepayment penalties of $330,050 which are classified as interest expense in the accompanying condensed consolidated statements of operations.

(See Note 7 – Debt and Note 8 — Equity and Equity-Linked Securities for additional details regarding our debt and equity transactions.)