11. Warrants and Derivative Liabilities

Senior Convertible Note Warrant

On April 4, 2012, the Company entered into a Purchase Agreement for the Initial Note and on December 20, 2012, the Company entered into the Amendment pursuant to which it exchanged the Initial Note for the Exchanged Note, as described in Note 10. The Initial Note included a warrant to purchase 3,094,060 shares of the Company’s common stock. The warrant is exercisable at any time on or after the date that is six months after the issuance of the warrant and entitles CVI to purchase shares of the Company’s common stock for a period of five years from the initial date the warrant becomes exercisable at a price equal to $5.45 per share, subject to certain price-based and other anti-dilution adjustments. The warrant may not be exercised if, after giving effect to the conversion, CVI together with its affiliates would beneficially own in excess of 4.99% of the Company’s common stock. This percentage may be raised to any other percentage not in excess of 9.99% at the option of CVI, upon at least 61-days prior notice to the Company, or lowered to any other percentage, at the option of CVI, at any time.

The Company calculated the fair value of the derivative liabilities, as further described in Note 10 “Debt”, and warrants utilizing an integrated lattice model. The lattice model is an option pricing model that involves the construction of a binomial tree to show the different paths that the underlying asset may take over the option’s life. A lattice model can take into account expected changes in various parameters such as volatility over the life of the options, providing more accurate estimates of option prices than the Black-Scholes model.

The Company accounts for the warrant as a liability due to certain adjustment provisions within the warrant, which requires that it be recorded at fair value. The warrant is subject to revaluation at each balance sheet date and any change in fair value will be recorded as a change in fair value in other income (expense) until the earlier of expiration or its exercise at which time the warrant liability will be reclassified to equity.

Following is a summary of the key assumptions used to calculate the fair value of the warrant:

Fiscal Year 2013	September 30, 2013
Risk-free interest rate		1.02	%		1.13	%
Expected annual dividend yield		—	%		—	%
Expected volatility		72.0	%		71.9	%
Term (years)		4.01			4.27
Fair value	$	2.5 million		$	3.0 million

Fiscal Year 2012	March 31, 2013			December 31, 2012			September 30, 2012			June 30, 2012			April 4, 2012
Risk-free interest rate		0.67	%		0.75	%		0.63	%		0.77	%		1.19	%
Expected annual dividend yield		—	%		—	%		—	%		—	%		—	%
Expected volatility		71.7	%		80.6	%		80.9	%		80.8	%		80.0	%
Term (years)		4.51			4.76			5.01			5.28			5.5
Fair value	$	3.4 million		$	4.4 million		$	7.1 million		$	8.6 million		$	7.0 million

The Company recorded a gain, resulting from the decrease in the fair value of the CVI warrant, of $0.5 million and $0.9 million to change in fair value of derivatives and warrants in the three and six months ended September 30, 2013, respectively. The Company recorded a gain of $1.5 million and a loss of $0.1 million in the three and six months ended September 30, 2012, respectively.

On October 9, 2013, the Company entered into the Second Amendment with CVI. Pursuant to the Second Amendment, the Company exchanged the warrant for a new warrant (the “Exchanged Warrant”), with a reduced exercise price of $2.61 per share of common stock. Other than the reduced exercise price, the Exchanged Warrant has the same terms and conditions as the original warrant. The Company expects to record approximately $1.1 million to non-cash interest expense for the impact of the Second Amendment on the warrant liability during the three months ending December 31, 2013.

Senior Convertible Note Derivative Liability

The Company determined certain embedded derivatives issued with the Initial Note required accounting as a liability, which requires they be accounted for as a standalone liability subject to revaluation at each balance sheet date with changes in fair value recorded as change in fair value of derivatives and warrants until the earlier of exercise or expiration.

The terms of the December 2012 debt modification reduced the conversion price of the Initial Note from $4.85 per share to $3.19 per share in the Exchanged Note. As a result the Company revalued these derivatives pre- and post-modification and recorded the difference of $0.5 million as a debt discount and a derivative liability. (See Note 10, “Debt,” for further discussion.)

Following is a summary of the key assumptions used to value the convertible notes derivative features:

	September 30,			June 30,
Fiscal Year 2013	2013			2013
Principal outstanding (000’s)	$	10,411		$	14,389
Stock price	$	2.34		$	2.64
Percentage volume condition met		80.2	%		87.5	%
Expected volatility		66.3	%		65.8	%
Risk free interest rate		0.10	%		0.21	%
Bond yield		15.5	%		16.7	%
Recovery rate		35.0	%		37.0	%
Redeemable		yes			yes
Total time (years)		1.00			1.26
Dilution effect		yes			yes
Fair value	$	0.2 million		$	0.5 million
Fair value as a percent of par		0.7	%		3.3	%

Fiscal Year 2012	March 31, 2013			December 31, 2012			Post- modification December 20, 2012			Pre-modification December 20, 2012			September 30, 2012				June 30, 2012			April 4, 2012
Principal outstanding (000’s)	$	15,380		$	20,944		$	20,944		$	24,074		$		24,074		$	25,000		$	25,000
Stock price	$	2.67		$	2.62		$	2.95		$	2.95		$	4.15$			$	4.68		$	3.97
Percentage volume condition met		80.5	%		94.5	%		94.9	%		28.6	%			51.0	%		75.2	%		85.9	%
Expected volatility		66.9	%		73.5	%		72.5	%		72.5	%			70.0	%		71.0	%		75.0	%
Risk free interest rate		0.20	%		0.23	%		0.25	%		0.25	%			0.23	%		0.33	%		0.44	%
Bond yield		16.5	%		16.5	%		16.5	%		16.5	%			15.0	%		16.0	%		15.0	%
Recovery rate		30.0	%		30.0	%		30.0	%		30.0	%			30.0	%		30.0	%		30.0	%
Redeemable		yes			yes			yes			yes			yes				yes			yes
Total time (years)		1.51			1.76			1.79			1.79				2.01			2.28			2.5
Dilution effect		yes			yes			yes			yes			yes				yes			yes
Fair value as a percent of par		3.4	%		4.9	%		7.1	%		3.9	%			11.4	%		17.9	%		15.1	%
Fair value	$	0.5 million		$	1.0 million		$	1.5 million		$	0.9 million		$	2.8 million			$	4.5 million		$	3.8 million

Based on historical VWAP of the Company’s common stock as well as the historic average dollar trading volume of the Company’s common stock, the percentage volume condition is the probability that the Company will convert monthly installment payments into the Company’s common stock. The expected volatility rate was estimated based on an equal weighting of the historical volatility of the Company’s common stock and the implied volatility of the Company’s traded options. To determine the risk-free interest rate, an interpolated rate was used based on the one, two and three-year United States Treasury rates. The bond yield was estimated using comparable corporate debt and yield information. The recovery rate of the Exchanged Note was estimated by reviewing historical corporate debt that went into default. The bond is redeemable by the Company at any point after the one-year anniversary of the grant date provided certain provisions within the note. The total time is based on the actual 30-month contractual terms. It was determined that there is a dilution effect based on the Company’s ability to make payments in shares of common stock.

The Company recorded the decrease in the fair value of the derivative liabilities of $0.3 million as a gain to changes in fair value of derivatives and warrants in both the three and six months ended September 30, 2013, and similarly, gains of $1.7 million and $1.0 million in the three and six months ended September 30, 2012, respectively.

Senior Secured Term Loan - Warrant

On June 5, 2012, the Company entered into a Loan and Security Agreement with Hercules. (See Note 10, “Debt,” for additional information regarding the Loan and Security Agreement.) In conjunction with this agreement, the Company issued a warrant to purchase 139,276 shares of the Company’s common stock. The warrant is exercisable at any time after the issuance of the warrant and expires on December 5, 2017, at a price equal to $3.59 per share subject to certain price-based and other anti-dilution adjustments.

The Company accounts for the warrant as a liability due to certain provisions within the warrant, which requires that it be recorded at fair value. The warrant is subject to revaluation at each balance sheet date and any change in fair value will be recorded as changes in fair value of derivatives and warrants until the earlier of expiration or its exercise at which time the warrant liability will be reclassified to equity.

Following is a summary of the key assumptions used to calculate the fair value of the warrant:

Fiscal Year 2013	September 30, 2013			June 30, 2013
Risk-free interest rate		1.09	%		1.20	%
Expected annual dividend yield		—	%		—	%
Expected volatility		72.1	%		72.3	%
Term (years)		4.18			4.43
Fair Value	$	0.2 million		$	0.2 million

Fiscal Year 2012	March 31, 2013			December 31, 2012			September 30, 2012			June 30, 2012			June 5, 2012
Risk-free interest rate		0.70	%		0.75	%		0.64	%		0.80	%		0.77	%
Expected annual dividend yield		—	%		—	%		—	%		—	%		—	%
Expected volatility		72.01	%		80.14	%		81.18	%		80.32	%		79.99	%
Term (years)		4.68			4.93			5.18			5.44			5.5
Fair Value	$	0.2 million		$	0.2 million		$	0.4 million		$	0.5 million		$	0.4 million

The Company prepared its estimates for the assumptions used to determine the fair value of the warrants issued in conjunction with both the Convertible Note and Term Loan utilizing the respective terms of the warrants with similar inputs, as described above.

The Company recorded a decrease in the fair value of the Hercules warrant resulting in a gain of less than $0.1 million during the three and six months ended September 30, 2013. The Company recorded a decrease in the fair value of $0.1 million as a gain to change in fair value of derivatives and warrants during the three months ended September 30, 2012 and recorded no change during the six months ended September 30, 2012.