Debt

Maturities of long-term debt as of December 31, 2014, are as follows (in thousands):



2015	$	—
2016	6,667
2017	6,667
2018	6,666
2019	—
Thereafter	7,000
Principal balance outstanding	27,000
Less unamortized discounts	(5,297		)
Net carrying value of long-term debt	21,703
Less current portion	—
Long-term portion	$	21,703

Interest expense related to long-term debt for the years ended December 31, 2014, 2013 and 2012 was $2,750,000, $5,672,000 and $6,708,000, respectively.

Healthcare Royalty Financing Agreement

On July 18, 2011, the Company closed the Healthcare Royalty Financing Agreement with Healthcare Royalty. Under the terms of the Healthcare Royalty Financing Agreement, the Company borrowed $30,000,000 from Healthcare Royalty (the Borrowed Amount) and the Company agreed to repay such Borrowed Amount together with a return to Healthcare Royalty, as described below, out of the Company’s direct product sales, co-promotion revenues and out-license revenues (collectively, Revenue Interest) that the Company may record or receive as a result of worldwide commercialization of the Company’s products including Sumavel DosePro, Zohydro ER and other future products. The Healthcare Royalty Financing Agreement was originally scheduled to terminate on March 31, 2018, but Healthcare Royalty exercised its right to early terminate the Healthcare Royalty Financing Agreement on May 16, 2014, as discussed below.

Upon the closing of and in connection with the Healthcare Royalty Financing Agreement, the Company issued and sold to Healthcare Royalty $1,500,000 of the Company’s common stock, or 388,601 shares, at a price of $3.86 per share. The Company also issued to Healthcare Royalty a warrant exercisable for up to 225,000 shares of the Company’s common stock. The warrant is exercisable at $9.00 per share and has a term of 10 years. As the warrant contains covenants where compliance with such covenants may be outside the control of the Company, the warrant was recorded as a current liability and marked to market at each reporting date using the Black-Scholes option pricing valuation model (see Note 2).

Under the Healthcare Royalty Financing Agreement, the Company was obligated to pay to Healthcare Royalty:


•	5% to 5.75% of the first $75,000,000 of Revenue Interest recorded (in the case of net product sales) or received (in the case of co-promotion revenues and license fees) by the Company in a calendar year (initially 5% and then 5.75% after the Astellas Co-Promotion Agreement terminated on March 31, 2012);


•	2.5% of the next $75,000,000 of Revenue Interest recorded (in the case of net product sales) or received (in the case of co-promotion revenues and license fees) by the Company in a calendar year; and


•	0.5% of Revenue Interest over and above $150,000,000 recorded (in the case of net product sales) or received (in the case of co-promotion revenues and license fees) by the Company in a calendar year.

Net sales of Sumavel DosePro outside the United States were only included in the Revenue Interest if such net sales exceed $10,000,000. The Company was also obligated to make three fixed payments of $10,000,000 on (or before at the option of the Company) each of January 31, 2015, January 31, 2016 and January 31, 2017.

As security for the payment of the Company's obligations under the Healthcare Royalty Financing Agreement, the Company also entered into a security agreement whereby the Company granted to Healthcare Royalty a security interest in all assets of the Company, including intellectual property and other rights of the Company to the extent necessary or used to commercialize the Company products. Healthcare Royalty’s security interest was extinguished upon early termination of the Healthcare Royalty Financing Agreement on May 16, 2014.

The Company had the option to terminate the Healthcare Royalty Financing Agreement at the Company's election in connection with a change of control of the Company, upon the payment of a base amount of $52,500,000, or, if higher, an amount that generates a 19% internal rate of return on the Borrowed Amount as of the date of prepayment, in each case reduced by the Revenue Interest and principal payments received by Healthcare Royalty up to the date of prepayment.

Healthcare Royalty had the option to terminate the Healthcare Royalty Financing Agreement at its election in connection with a change of control of the Company (which includes the sale, transfer, assignment or licensing of the Company's rights in the United States to either Sumavel DosePro or Zohydro ER), or an event of default (which includes the occurrence of a bankruptcy event or other material adverse change in the Company's business), as defined in the Healthcare Royalty Financing Agreement. Healthcare Royalty exercised its option to terminate the Healthcare Royalty Financing Agreement in connection with the Company's sale of the Sumavel DosePro business to Endo on May 16, 2014. Upon termination of the Healthcare Royalty Financing Agreement, the Company was obligated to make a final payment of $40,041,000 to Healthcare Royalty, which generated a 17% internal rate of return on the Borrowed Amount as of the date of prepayment, reduced by the Revenue Interest and principal payments received by Healthcare Royalty up to the date of final payment. The Company no longer has any further payment obligations under the Financing Agreement after the final payment was made.

The rights of the Company and Healthcare Royalty to terminate the Healthcare Royalty Financing Agreement early, as well the change in the Revenue Interest rate from 5% to 5.75% in connection with the early termination of the Astellas co-promotion agreement, met the definition of an embedded derivative. As a result, the Company carved out these embedded derivatives from the Healthcare Royalty Financing Agreement and determined the fair value of each derivative using various discounted cash flow valuation models taking into account the probability of these events occurring and various scenarios surrounding the potential Revenue Interest payments that would be made if these events occurred (see Note 2). The aggregate fair value of the embedded derivatives as of December 31, 2013 was $233,000 and is included in other long-term liabilities. The fair value of the embedded derivatives of $247,000 was derecognized upon termination of the Healthcare Royalty Financing Agreement on May 16, 2014 and is included in the loss on early extinguishment of debt in the statement of operations and comprehensive income (loss) for the year ended December 31, 2014.

The Company received aggregate net proceeds of $29,485,000 from the Healthcare Royalty Financing Agreement (including the purchase of common stock). The discounts, which were being amortized using the effective interest method over the term of the arrangement within interest expense, include the fair value of the common stock warrants issued to Healthcare Royalty of $790,000 upon the closing of the Healthcare Royalty Financing Agreement, fees payable to Healthcare Royalty in connection with the execution of the arrangement of $476,000 and the fair value of embedded derivatives of $605,000 upon the closing of the Healthcare Royalty Financing Agreement. The Company has recognized other income (expense) in relation to the change in the fair value of the Healthcare Royalty common stock warrant of $378,000 and $(307,000) for the years ended December 31, 2014 and 2013, respectively, in the statement of operations and comprehensive income (loss). The Company has recognized other income (expense) in relation to the change in the fair value of the embedded derivatives of $(14,000) and $759,000 for the years ended December 31, 2014 and 2013, respectively, in the statements of operations and comprehensive income (loss).

Upon early termination of the Healthcare Royalty Financing Agreement on May 16, 2014, and the Company's final payment to Healthcare Royalty, the Company determined that the early termination resulted in an extinguishment of the outstanding debt and recognized a loss on early extinguishment of debt of $1,254,000 which was recorded as non-operating expenses in the statement of operations and comprehensive income (loss). The loss on early extinguishment of debt is related to the write-off of the unamortized balances of the debt discounts (which includes derecognition of the embedded derivative liabilities, as discussed above), debt acquisition costs, and accrued interest expenses related to the Healthcare Royalty Financing Agreement.

Term Debt and Revolving Line of Credit

In December 2014, the Company entered into a loan and security agreement with Oxford Finance LLC (Oxford) and Silicon Valley Bank (SVB) consisting of term loans totaling $20,000,000, and a revolving credit facility of up to $4,000,000. Total outstanding advances under the revolving credit facility are limited to the lesser of $4,000,000 or 85% of eligible accounts receivable as defined in the Loan and Security Agreement. The term loan bears interest at an annual rate equal to the greater of (i) 8.75% and (ii) the sum of (a) the “prime rate” rate reported in the Wall Street Journal on the date occurring on the last business day of the month that immediately precedes the month in which the interest will accrue, plus (b) 5.25%. Each revolving advance under the credit facility bears interest at an annual rate equal to the sum of (a) the “prime rate” rate reported in the Wall Street Journal on the date occurring on the last business day of the month that immediately precedes the month in which the interest will accrue, plus (b) 4.75%.

The Company is required to make interest-only payments on the term loan through (i) January 1, 2016 or (ii) if the Company achieves trailing 12 month consolidated revenues of at least $50,000,000, July 1, 2016. The term loan will begin amortizing at the end of the applicable interest-only period, with equal monthly payments of principal plus interest in consecutive monthly installments following such interest-only period until the credit facility matures on December 1, 2018. The Company may prepay the outstanding principal balance of the term loan subject to graded prepayment fees. The credit facility also includes events of default, as defined in the Loan and Security Agreement, which could cause interest to be charged at the rate that is otherwise applicable plus 5.0% and would provide Oxford, as collateral agent, with the right to exercise remedies against us and the collateral securing the credit facility.

The obligations under the Loan and Security Agreement are collateralized by the Company's personal property (including, among other things, accounts receivable, equipment, inventory, contract rights, rights to payment of money, license agreements, general intangibles and cash), and the Company has agreed to not encumber any of its intellectual property. The Company was required to establish a controlled deposit account with SVB containing at least 85% of the Company's account balances at all financial institutions which can be utilized by the lenders to satisfy the obligations in the event of default by the Company.

The credit facility includes affirmative and negative covenants. The affirmative covenants include, among others, covenants requiring us to maintain legal existence and governmental approvals, deliver certain financial reports, maintain insurance coverage and satisfy certain requirements regarding accounts receivable. The negative covenants include, among others, restrictions on our transferring collateral, incurring additional indebtedness, engaging in mergers or acquisitions, paying dividends or making other distributions, making investments, creating liens, selling assets and suffering a change in control, in each case subject to certain exceptions. The Company was in compliance with these covenants at December 31, 2014.

In addition to principal payments, the Company is also required to make a final payment equal to 5% of the original principal amount of the term loan funded. Upon the entry into the credit facility, the Company was required to pay a term loan facility fee of $200,000 and a revolving line commitment fee of $32,000. Three additional $32,000 revolving line commitment fees will be due and payable on each of the first, second, and third anniversaries of the effective date or upon termination of the revolving line. These fees have been recorded as a discount to the term loan and revolving line of credit balances and are being amortized over the term of the loans. There was no amortization recorded relative to these costs for the year ended December 31, 2014.

In connection with entering into the Loan and Security Agreement, the Company issued warrants to Oxford and SVB exercisable into an aggregate total of 508,476 shares of the Company’s common stock. The warrants are exercisable at $1.18 per share of common stock and have a term of 10 years. The value of the warrants of approximately $558,000 was recorded as debt discount and additional paid in capital in the consolidated balance sheet as of December 31, 2014.

The Company also incurred approximately $241,000 in costs related to securing the credit facility. These loan origination costs have been deferred and will be amortized over the life of the credit facility as interest expense. They are included in other assets in the consolidated balance sheet at December 31, 2014. There was no amortization recorded relative to these costs for the year ended December 31, 2014.

Note payable for working capital advance

In connection with the sale of the Sumavel DosePro business, Endo Ventures provided the Company with an interest-free working capital advance, which is secured by a note. The working capital advance of $7,000,000 was recorded on the consolidated balance sheet, net of a $4,748,000 debt discount. The discount will be amortized as interest expense using the effective interest method over the minimum eight year term of the Supply Agreement, as the advance must be repaid upon termination of the Supply Agreement.