(8) Convertible Notes

Commencing in June 2011 and concluding in January 2013, the Company issued a total of $73.4 million of Convertible Notes. Net proceeds from the Convertible Notes were used to fund the completion of the Company’s second production line at the East Providence facility, to begin the construction of a third production line at the East Providence facility, and to fund the Company’s operating cash requirements.

In conjunction with the execution of the March 2013 NPA (see note 7) on March 28, 2013, the holders of all but approximately $0.3 million of original principal amount of the Convertible Notes agreed to extend the original maturity date of their notes by two years. Given that the term of the Convertible Notes, as amended, differed substantially from the original term, the amendment was accounted for as an extinguishment of debt. On March 28, 2013, the Company recognized a gain on extinguishment totaling $8.9 million.

The Company elected to record the Convertible Notes at fair value upon issuance. The aggregate fair value of the notes was $91.9 million at December 31, 2013.

Upon the closing of the Company’s IPO discussed in note 1, the outstanding principal and accrued interest on the Convertible Notes were marked to an aggregate fair value of $129.0 million and automatically converted into 11,727,430 shares of common stock.

Fair Value Measurements

The change in the fair values of the Convertible Notes during the year ended December 31, 2013 was determined by utilizing probability weighted discounted cash flow analyses, which took into consideration market and general economic events, as well as the Company’s financial results and other data available. These analyses determined the amount to be paid on the Convertible Notes in either cash or shares at the occurrence of certain events in which the Convertible Notes would be converted into shares of the Company’s common stock or would be repaid in cash. The probability weighted discounted cash flow analyses utilized assumptions related to the probability of the occurrence of each of the various events and a weighted average implied discount rate of 40% for each of the scenarios.

These assumptions as of December 31, 2013 were as follows:


	December 31, 2013
Potential exit scenario event	Estimated exit date of future event		Estimated probability of future event
IPO scenario 1		06/30/14		45	%
IPO scenario 2		03/31/15		5	%
Sale scenario 1		06/30/14		15	%
Sale scenario 2		03/31/15		15	%
Dissolution		09/30/14		5	%
Private company		At maturity		15	%

Given that the valuation of the Convertible Notes utilized several unobservable inputs, the Company determined that the valuation of the Convertible Notes was a Level 3 valuation.

The following table presents a roll-forward of the fair value of Level 3 (significant unobservable inputs) Convertible Notes for the years ended December 31, 2014 and 2013:


	Total Convertible Notes
	(In thousands)
Balance at December 31, 2012	$	95,088
Issuances of convertible notes		3,530
Fair value of notes exchanged for senior convertible notes		(7,253	)
Gain on extinguishment of convertible notes		(8,898	)
Change in fair value included in interest expense		9,407

Balance at December 31, 2013		91,874
Change in fair value included in interest expense		37,128
Conversion of Convertible Notes		(129,002	)

Balance at December 31, 2014	$	—

The charge recognized as a result of the change in the fair value of the Company’s Convertible Notes was $37.1 million and $9.4 million for the years ended December 31, 2014 and 2013, respectively (see note 10).

The final payment amount of the Convertible Notes upon the closing of the Company’s IPO was determined to be $129.0 million.