background image
ARRAY BIOPHARMA, INC.
Notes to the Financial Statements
For the Fiscal Years Ended June 30, 2012, 2011 and 2010
be incorrect, it could have a material impact on the estimated fair value of the variable interest rate
feature.
To estimate the fair value of the contingent put right, the Company estimates the probability of a change in
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.
To account for the impact of the May 2011 Modification on the Embedded Derivatives, the Company
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.
Management will continue to assess the assumptions used in its determination of the fair value of the
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):
Assumed Number of Months
As of
Cash Balance
June 30, 2012
Scenario 1
Scenario 2
$50 million or greater
39
27
6
Between $40 million and $50 million
9
18
36
Between $30 million and $40 million
-
3
6
Less than $30 million
-
-
-
Effective Interest Rate
7.7%
8.1%
8.8%
Derivative Fair Value
$656
$1,563
$2,858
Additional Interest Expense
$ -
$ 907
$2,202
F-32
ARRAY BIOPHARMA, INC.
Notes to the Financial Statements
For the Fiscal Years Ended June 30, 2012, 2011 and 2010
Fair Value of the Debt
The Company estimates the fair value of the Deerfield debt using a combination of a discounted cash flow
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.
Warrants Issued to Deerfield
In consideration for providing the 2008 Loan, the Company issued warrants to Deerfield to purchase
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.
The Company allocated the loan proceeds between the debt and the Warrants based upon their relative
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.
The Company calculated the incremental value of the Exchange Warrants as the difference between the
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.
A summary of the estimated fair value of the Warrants and the loan proceeds allocated to the debt follows
as of the date of each transaction (dollars in thousands):
Warrant
Proceeds
Value
2008 Loan
$ 80,000
$ 20,589
2009 Loan including Exchange Warrants
40,000
15,706
May 2011 Modification
N/A
3,090
$ 39,385
Debt Discount
The value of the Warrants and the initial value of the Embedded Derivatives discussed above were
recorded to Debt Discount in the accompanying Balance Sheets. The Debt Discount attributable to the
F-33