control of the Company that would trigger Deerfield's acceleration rights as specified in the Facility
Agreements, including a change in control in which the acquirer does not meet certain financial
conditions, based on size and credit worthiness. The Company's evaluation of this probability is based on
its expectations as to the size and financial strength of probable acquirers, including history of
collaboration partners, the probability of an acquisition occurring during the term of the Credit Facilities
and other factors, all of which are inherently uncertain and difficult to predict. The May 2011 Modification
reduced the size of the acquirer that would trigger this provision which affected the Company's estimated
fair value of the put right.
valued the Embedded Derivatives on the modification date, both immediately before and after the
transaction, in addition to valuing the Embedded Derivatives at the respective Balance Sheet dates. The
May 2011 Modification resulted in an increase to the value of the Embedded Derivatives of approximately
$65 thousand which was recorded as a component of Loss on Prepayment of the Debt, Net in the
accompanying Statements of Operations and Comprehensive Income for the fiscal year ended June 30,
2011. All other fair value adjustments have been recorded as adjustments to Interest Expense in the
accompanying Statements of Operations and Comprehensive Income during the period incurred.
Embedded Derivatives. Future changes affecting these assumptions could materially affect their
estimated fair value resulting in a corresponding adjustment to the Company's reported results of
operations in future periods. For example, the value of the embedded derivative relating to the variable
interest rate feature as of June 30, 2012 of $656 thousand is based on the assumption that the
Company's total cash and marketable securities balance could fall to between $40 million and $50 million
as of the end of a nine-month period during the remaining 48 months of the facility. The below table
summarizes the potential impact of the use of two other assumptions relating to the periods during which
the Company's total cash and marketable securities are at the levels shown in the table compared to the
assumptions used by management as of June 30, 2012 and the resulting estimated increases to the
value of the Embedded Derivatives in the accompanying Balance Sheet and Interest Expense in the
Statement of Operations and Comprehensive Loss (dollars in thousands):
analysis and the Black-Derman-Toy interest rate model that incorporates the estimates discussed above
for the Embedded Derivatives. The fair value of the debt was determined to be $73.4 million and
$72.6 million at June 30, 2012 and June 30, 2011, respectively.
6,000,000 shares of Common Stock at an exercise price of $7.54 per share (the ``Prior Warrants'').
Pursuant to the terms of the Facility Agreement for the 2009 Loan, the Prior Warrants were terminated
and the Company issued new warrants to Deerfield to purchase 6,000,000 shares of Common Stock at
an exercise price of $3.65 (the ``Exchange Warrants''). The Company also issued Deerfield warrants to
purchase an aggregate of 6,000,000 shares of the Company's Common Stock at an exercise price of
$4.19 (the ``New Warrants'' and collectively with the Exchange Warrants, the ``Warrants'') when the funds
were disbursed on July 31, 2009. The Exchange Warrants contain substantially the same terms as the
Prior Warrants, except they have a lower per share exercise price. The Warrants were exercisable
commencing January 31, 2010, and expire on April 29, 2014, which was extended to June 30, 2016 in
connection with the May 2011 Modification.
estimated fair values. The fair values were determined using a Black-Scholes option pricing model and
were allocated to Warrants and Debt Discount discussed below in the accompanying Balance Sheets.
value of the Exchange Warrants at the new exercise price ($3.65) and the value of the Prior Warrants at
the prior exercise price ($7.54) using a Black-Scholes option pricing model. The Company calculated the
incremental value of the May 2011 Modification's new Warrant term as the difference in the fair value of
the Warrants as of the date of the modification with the new term (June 30, 2016) and the value of the
Warrants with the old term (April 29, 2014) using a Black-Scholes option pricing model.
as of the date of each transaction (dollars in thousands):
recorded to Debt Discount in the accompanying Balance Sheets. The Debt Discount attributable to the