Notes Payable

12 Months Ended

Sep. 30, 2014

7.	Notes Payable

In May 2012, the Company entered into a Loan and Security Agreement (the “Loan Agreement”) with Oxford Finance LLC and Silicon Valley Bank. The Loan Agreement provided for a term loan of $30.0 million which was funded upon closing of the transaction in June 2012. Under the terms of the Loan Agreement, interest accrued on the outstanding balance at a rate of 8.95% per annum. In the third fiscal quarter of 2013, the Company met the criteria to extend the interest only payment for six months. Therefore, until January 1, 2014 (the “Amortization Date”) the Company made monthly payments of interest only. In addition to the original principal, a final payment equal to 7% of the original purchase amount of the loan would have been due thirty months from the Amortization Date. The final payment was accreted as interest expense over the term of the debt using the interest method and the related liability of approximately $1.1 million was reported as of September 30, 2013.

The term loan under the Loan Agreement was repaid and terminated in September 2014 and the Company recorded a loss on early extinguishment of debt of approximately $789,000 comprised of the unamortized debt issuance costs, debt discount, and final payment fee.

In accordance with the terms of the Loan Agreement, the Company issued to the lenders warrants to purchase shares of the Company’s common stock equal to 4.55% of the original principal at a price per share equal to the lower of the 10-day average share price prior to closing or the price per share on the day of funding. Accordingly, the Company issued to the lenders warrants to purchase 491,007 shares of the Company’s common stock at an exercise price of $2.78 per share. As of September 30, 2014, none of the lenders’ warrants are outstanding. The relative fair value of the warrants was approximately $1.2 million and was estimated using the Black-Scholes model with the following assumptions: fair value of the Company’s common stock at issuance of $2.80 per share; ten-year contractual term; 96.7% volatility; 0% dividend rate; and a risk-free interest rate of 1.8%. The relative fair value of the warrants was recorded as a debt discount, decreasing notes payable and increasing additional paid-in capital on the accompanying consolidated balance sheets. The debt discount was being amortized to interest expense over the term of the debt using the interest method. For the years ended September 30, 2014, 2013, and 2012 debt discount amortization was approximately $340,000, $505,000 and $180,000, respectively.

AVANIR PHARMACEUTICALS, INC. 10-K