Debt

Maturities of long-term debt as of December 31, 2015, are as follows (in thousands):



2016	$	6,666
2017	6,667
2018	6,667
2019	—
2020	—
Thereafter	7,000
Principal balance outstanding	27,000
Less: unamortized discounts	(4,615		)
Net carrying value of long-term debt	22,385
Less: current portion	(6,414		)
Long-term portion	$	15,971

Interest expense related to long-term debt for the years ended December 31, 2015, 2014 and 2013 was $3,060,000, $2,750,000 and $5,672,000, respectively.

Term Debt and Revolving Line of Credit

In December 2014, the Company entered into a loan and security agreement (the 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 principal balances of the term loan and line of credit at December 31, 2015 were $20,000,000 and $0, respectively. The outstanding principal balances of the term loan and line of credit at December 31, 2014 were $20,000,000 and $1,450,000, respectively.

The Company was required to make interest-only payments on the term loan through January 1, 2016, and thereafter equal monthly payments of principal and interest are required 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 the Company and the collateral securing the credit facility.

The obligations under the Loan and Security Agreement are collateralized by the Company's personal property 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. On April 23, 2015, in connection with the sale of the Zohydro ER business, the Company, Oxford and SVB entered into an amendment to the loan and security agreement terminated all encumbrances on the Company's personal property related to its Zohydro ER business. The remaining obligations under the loan and security agreement remain substantially unchanged.

The credit facility includes affirmative and negative covenants. The affirmative covenants include, among others, covenants requiring the Company to maintain a liquidity ratio of 1.25 to 1 through the Company’s receipt of positive data from placebo-controlled trials in the United States and European Union of ZX008, 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 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, 2015 and 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. Two additional $32,000 revolving line commitment fees will be due and payable on each of the second and third anniversary 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. Interest expense recorded relative to these costs for the years ended December 31, 2015 and 2014 was immaterial.

In connection with entering into the Loan and Security Agreement, the Company issued warrants to Oxford and SVB exercisable into an aggregate total of 63,559 shares of the Company’s common stock, of which warrants for 31,779 shares of common stock were exercised in 2015. The warrants are exercisable at $9.44 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, 2015 and 2014. Interest expense recorded relative to these costs for the years ended December 31, 2015 and 2014 was immaterial.

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 the Note. The working capital advance of $7,000,000 was initially recorded on the consolidated balance sheet net of a $4,748,000 debt discount. The discount is being 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. The balance of the note payable, net of unamortized discount, was $2,835,000 and $2,461,000 at December 31, 2015 and 2014, respectively.

Healthcare Royalty Financing Agreement

On July 18, 2011, the Company closed the Healthcare Royalty Financing Agreement with Healthcare Royalty. Under the agreement, the Company borrowed $30,000,000 and the Company agreed to repay the principal together with a specified return to Healthcare Royalty. The Healthcare Royalty Financing Agreement was originally scheduled to terminate on March 31, 2018, but Healthcare Royalty exercised its right to early terminate the agreement on May 16, 2014, as discussed below.

In conjunction with the agreement, the Company issued a warrant exercisable for up to 28,125 shares of the Company’s common stock. The warrant is exercisable at $72.00 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). The Company recognized other income (expense) in relation to the change in the fair value of the Healthcare Royalty common stock warrant of ($13,000) and $378,000 for the years ended December 31, 2015 and 2014, respectively, in the statement of operations.

Healthcare Royalty had the option to terminate the 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. 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 agreement, the Company was obligated to make a final payment of $40,041,000. The Company no longer has any further payment obligations under the Financing Agreement after the final payment was made.

The Company determined that the early termination resulted in an extinguishment of the outstanding debt and recognized a loss of $1,254,000 which was recorded as non-operating expenses in the statement of operations. 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), debt acquisition costs, and accrued interest expenses related to the Healthcare Royalty Financing Agreement.

The rights of the Company and Healthcare Royalty to terminate the agreement early, as well as other terms, met the definition of an embedded derivative. As a result, the Company carved out the embedded derivatives and determined the fair value of each derivative. The fair value of the embedded derivatives of $247,000 was derecognized upon termination of the agreement and is included in the loss on early extinguishment of debt in the statement of operations for the year ended December 31, 2014.