Notes to Condensed Consolidated Financial Statements

June 30, 2013

(Unaudited)

1. Summary of Business

Marrone Bio Innovations, Inc. (Company), formerly Marrone Organic Innovations, Inc., was incorporated under the laws of the State of Delaware on June 15, 2006, and is located in Davis, California. In July 2012, the Company formed a wholly-owned subsidiary, Marrone Michigan Manufacturing LLC (MMM LLC), a Michigan corporation, which holds the assets of a manufacturing plant the Company purchased in July 2012 as discussed in Note 2. The Company makes bio-based pest management and plant health products. The Company targets the major markets that use conventional chemical pesticides, including certain agricultural and water markets where its bio-based products are used as substitutes for, or in conjunction with, conventional chemical pesticides. The Company also targets new markets for which there are no available conventional chemical pesticides, the use of conventional chemical pesticides may not be desirable or permissible, or the development of pest resistance has reduced the efficacy of conventional chemical pesticides. The Company delivers EPA-approved and registered biopesticide products and other bio-based products that address the global demand for effective, safe and environmentally responsible products.

The Company is an early stage company with a limited operating history and has only recently begun commercializing its products. As of June 30, 2013, the Company had an accumulated deficit of $89,335,000 and expects to incur losses for the next several years. Since its inception, Company has funded operations primarily with the net proceeds from the private placements of convertible preferred stock, convertible notes, promissory notes, term loans, as well as proceeds from the sale of its products and payments under strategic collaboration agreements and government grants. As a result, the Company will need to generate significant revenue to achieve and maintain profitability. As of June 30, 2013, the Company had a working capital deficit of $12,772,000, which includes $18,991,000 of the current portion of convertible notes payable which will be settled via conversion into the Company’s equity instruments (see Note 10), and cash and cash equivalents of $4,237,000.

The Company has filed a prospectus pursuant to Rule 424(b) under the Securities and Exchange Act, (hereafter referred to as the “Prospectus”) with the U.S. Securities and Exchange Commission (SEC) dated August 1, 2013. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto for the year ended December 31, 2012 included in the Prospectus.

In August 2013, the Company closed its initial public offering of 5,462,500 shares of its common stock (inclusive of 712,500 shares of common stock sold upon the exercise of the underwriters’ option to purchase additional shares) (IPO). The public offering price of the shares sold in the offering was $12.00 per share. The total gross proceeds from the offering to the Company were $65,550,000 and after deducting underwriting discounts and commissions and offering expenses payable by the Company, the aggregate net proceeds received by the Company totaled approximately $56,000,000. Upon the closing of the IPO, all shares of the Company’s outstanding convertible preferred stock and convertible notes automatically converted into shares of common stock and outstanding warrants to purchase convertible preferred stock and certain warrants to purchase common stock were exercised into shares of common stock (See Note 14).

On August 1, 2013, the Company amended and restated its certificate of incorporation to effect a reverse split of shares of its common stock at a 1-for-3.138458 ratio (See Note 13).

The Company participates in a heavily regulated and highly competitive crop protection industry and believes that adverse changes in any of the following areas could have a material effect on the Company’s future financial position, results of operations, or cash flows: inability to obtain regulatory approvals, increased competition in the pesticide market, market acceptance of the Company’s products, weather and other seasonal factors beyond the Company’s control, litigation or claims against the Company based on intellectual property, patent, product, regulatory or other factors, and the Company’s ability to support increased growth.

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2. Significant Accounting Policies

Basis of Presentation

The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. All significant intercompany balances and transactions have been eliminated in consolidation.

The accompanying financial information as of June 30, 2013 and for the three and six months ended June 30, 2013 and 2012 has been prepared by the Company, without audit, pursuant to the rules and regulations of the SEC. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (U.S.) have been condensed or omitted pursuant to such rules and regulations. The December 31, 2012 consolidated balance sheet was derived from audited consolidated financial statements, but does not include all disclosures required by accounting principles generally accepted in the U.S. However, the Company believes that the disclosures are adequate to make the information presented not misleading. These condensed consolidated financial statements should be read in conjunction with the annual consolidated financial statements and the notes thereto, included in the Prospectus.

In the opinion of management, the condensed consolidated financial statements as of June 30, 2013 and for the three and six months ended June 30, 2013 and 2012 reflects all adjustments, which are normal recurring adjustments, necessary to present a fair statement of financial position, results of operations, comprehensive loss and cash flows. The results of operations for the three and six months ended June 30, 2013 are not necessarily indicative of the operating results for the full fiscal year or any future periods.

Cash and Cash Equivalents

The Company considers all highly liquid financial instruments purchased with an original maturity of three months or less to be cash equivalents. Cash and cash equivalents consist of cash on deposit, money market funds and certificates of deposit accounts with U.S. financial institutions. The Company is exposed to credit risk in the event of default by financial institutions to the extent that cash and cash equivalents balances with financial institutions are in excess of amounts that are insured by the Federal Deposit Insurance Corporation. The Company has not experienced any losses on these deposits.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash, cash equivalents, short-term investments, accounts receivable and debt. The Company deposits its cash, cash equivalents and short-term investments with high credit quality domestic financial institutions with locations in the U.S. Such deposits may exceed federal deposit insurance limits. The Company believes the financial risks associated with these financial instruments are minimal.

The Company’s customer base is dispersed across many different geographic areas, and currently most customers are pest management distributors in the U.S. Generally, receivables are due 30 or 90 days from the invoice date and are considered past due after this date. For the three months ended June 30, 2013 and 2012, 6% and 26%, respectively, of the Company’s revenues were generated from international customers. For the six months ended June 30, 2013 and 2012, 8% and 19%, respectively, of the Company’s revenues were generated from international customers.

As of June 30, 2013, one customer accounted for 46% of the Company’s accounts receivable. As of December 31, 2012, four customers accounted for 33%, 17%, 11%, and 11%, respectively, or a total of 72% of the Company’s accounts receivable.

From inception through December 31, 2012, the Company’s principal source of revenues was its Regalia product line. During the three and six months ended June 30, 2013, Grandevo and Regalia were the principal sources of the Company’s total revenues. For the three months ended June 30, 2013 and 2012, these two product lines accounted for 98% and 93%, respectively, of the Company’s total revenues. For the six months ended June 30, 2013 and 2012, these two product lines accounted for 98% and 95%, respectively, of the Company’s total revenues. For the three months and six months ended June 30, 2013, one customer accounted for 60% and 43% of the Company’s total revenues, respectively. For the three months ended June 30, 2012, two customers represented 39% and 26%, or a total of 65%, of the Company’s total revenues. For the six months ended June 30, 2012, four customers represented 37%, 13%, 12% and 11%, or a total of 73%, of the Company’s total revenues.

Inventories

Inventories are stated at the lower of cost or market value (net realizable value or replacement cost) and include the cost of material and external labor and manufacturing costs. Cost is determined on the first-in, first-out basis. The Company

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provides for inventory reserves when conditions indicate that the selling price may be less than cost due to physical deterioration, obsolescence, changes in price levels, or other factors. Additionally, the Company provides reserves for excess and slow-moving inventory on hand that is not expected to be sold to reduce the carrying amount of excess slow-moving inventory to its estimated net realizable value. The reserves are based upon estimates about future demand from the Company’s customers and distributors and market conditions. As of June 30, 2013 and December 31, 2012, the Company had no reserves against its inventories.

Acquisition

On July 19, 2012 (Acquisition Date), the Company purchased land, building and equipment (Manufacturing Plant) for $1,459,000, including $341,000 of transaction costs. The Manufacturing Plant is located in Bangor, Michigan. Prior to the acquisition, the Manufacturing Plant was owned by a bank and sold in a foreclosure auction. Accordingly, the purchase price for the Manufacturing Plant was less than the estimated fair value of the assets acquired by $257,000. The excess of fair value of the assets acquired over the purchase price was allocated on a relative fair value basis to all assets acquired. The acquisition of the Manufacturing Plant will allow the Company to manufacture certain products internally and improve the overall operating efficiencies and margins of the business as the production of these products historically has been outsourced.

The acquisition was accounted for as an asset acquisition in accordance with ASC 805, Business Combinations . The assets acquired under the Manufacturing Plant acquisition have been included in the Company’s condensed consolidated financial statements from the Acquisition Date. The purchase price was allocated to assets acquired as of the Acquisition Date.

Prior to the allocation of the excess of fair value of the assets acquired over the purchase price, the assets acquired are first measured at their fair values. The Company engaged a third-party valuation firm to assist with its estimated fair value of the assets acquired. The following methods and assumptions are used to estimate the fair value of each class of asset acquired:

Land—Market approach based on similar, but not identical, transactions in the market. Adjustments to comparable sales are based on both the quantitative and qualitative data.

Building—The cost approach, market approach and income approach were used to assess fair value. Cost approach is based on replacement cost new less depreciation adjusted for physical deterioration, functional obsolescence and external/economic obsolescence, as applicable. The market approach is based on similar, but not identical, transactions in the market using both quantitative and qualitative data. The income approach is based on the direct capitalization method using similar but not identical lease rates and making an assessment of net operating income.

Equipment—Both the cost approach and the market approach were used to assess fair value. Cost approach is based on replacement cost new less depreciation adjusted for physical deterioration, functional obsolescence and external/economic obsolescence, as applicable. The market approach is based on similar, but not identical, transactions in the market using both quantitative and qualitative data.

The following table summarizes the estimated fair value of the assets acquired as of the Acquisition Date, which were determined using level two and three inputs as described above (in thousands):

As the Manufacturing Plant had not yet been placed in service as of June 30, 2013, the assets acquired, except the land, were recorded as construction in process as a component of property, plant and equipment in the accompanying condensed consolidated balance sheets as of June 30, 2013 and December 31, 2012.

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Revenue Recognition

The Company recognizes revenues when persuasive evidence of an arrangement exists, delivery and transfer of title has occurred or services have been rendered, the price is fixed or determinable, and collectability is reasonably assured, unless contractual obligations, acceptance provisions or other contingencies exist. If such obligations or provisions exist, revenue is recognized after such obligations or provisions are fulfilled or expire.

Product revenues consist of revenues generated from sales to distributors and from sales of our products to direct customers, net of rebates and cash discounts. For sales of products made to distributors, the Company considers a number of factors in determining whether revenue is recognized upon transfer of title to the distributor, or when payment is received. These factors include, but are not limited to, whether the payment terms offered to the distributor are considered to be non-standard, the distributor history of adhering to the terms of its contractual arrangements with the Company, whether the Company has a pattern of granting concessions for the benefit of the distributor, and whether there are other conditions that may indicate that the sale to the distributor is not substantive. The Company currently recognizes revenue primarily on the sell-in method with its distributors. Distributors do not have price protection or return rights.

The Company offers certain product rebates, which are recorded as reductions to product revenues. An accrued liability for these product rebates is recorded at the time the revenues are recorded.

The Company recognizes license revenues pursuant to strategic collaboration and distribution agreements under which the Company receives payments for the achievement of testing validation, regulatory progress and commercialization events. As these activities and payments are associated with exclusive rights that the Company provides in connection with strategic collaboration and distribution agreements over the term of the agreements, revenues related to the payments received are deferred and recognized over the term of the exclusive distribution period of the respective agreement. No payments were received under these agreements during the three and six months ended June 30, 2013, and $500,000 and $1,000,000 was received during the three and six months ended June 30, 2012, respectively. For the three months ended June 30, 2013 and 2012, the Company recognized $81,000 and $88,000, respectively, as license revenues in the accompanying condensed consolidated statements of operations. For the six months ended June 30, 2013 and 2012, the Company recognized $162,000 and $131,000, respectively, as license revenues in the accompanying condensed consolidated statements of operations. At June 30, 2013, the Company recorded current and non-current deferred revenues of $324,000 and $1,534,000, respectively, related to payments received under these agreements. At December 31, 2012, the Company recorded current and non-current deferred revenues of $324,000 and $1,696,000 respectively, related to payments received under these agreements.

As of June 30, 2013 and December 31, 2012, the Company had no deferred product revenues.

Recently Issued Accounting Pronouncements

There have been no new accounting pronouncements issued during the six months ending June 30, 2013 that are of significance, or potential significance, to the Company. Any recent accounting pronouncements that are of significance, or potential significance, to the Company are set forth in the notes of the annual consolidated financial statements included in the Prospectus.

3. Fair Value Measurements

The following table presents the Company’s financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2013 and December 31, 2012 (in thousands):

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The money market funds held as of June 30, 2013, and December 31, 2012, were in active markets and, therefore, measured based on the Level 1 valuation hierarchy.

The Company estimates the fair value of the common and preferred stock warrant liabilities using the Probability Weighted Expected Return Method (PWERM), which analyzes the returns afforded to common equity holders under multiple future scenarios. Under the PWERM, share value is based upon the probability-weighted present value of expected future net cash flows (distributions to shareholders), considering each of the possible future events and giving consideration to the rights and preferences of each share class. This method is most appropriate when the long-term outlook for an enterprise is largely known and multiple future scenarios can be reasonably estimated.

The common and preferred stock warrant liabilities were valued by a PWERM valuation using six scenarios, which included three initial public offering scenarios, two merger scenarios and a sale of the Company’s intellectual property. An annual discount rate of 35% was applied to both the PWERM valuations as of June 30, 2013 and December 31, 2012. The common stock warrants also include a 10% and 18% discount for lack of marketability as of June 30, 2013 and December 31, 2012, respectively. As the PWERM estimates the fair value of the common and preferred stock warrant liabilities using unobservable inputs, it is considered to be a Level 3 fair value measurement. Changes in the probability weights and discount rates have a significant impact on the fair value of the common and preferred stock warrant liabilities. As a result of the changing probability weights between December 31, 2012 and June 30, 2013, the Company recognized a net gain from the total change in estimated fair value of the common and preferred stock warrant liabilities as shown in the tables below.

The following table provides a reconciliation of the beginning and ending balances for the common and preferred stock warrant liabilities measured at fair value using significant unobservable inputs (Level 3) (in thousands):

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Convertible notes were valued by a PWERM valuation utilizing inputs similar to those used for estimating fair values of the common and preferred stock warrant liabilities described above. A discount rate of 20% and 25% was used for valuing the March and October 2012 Convertible Notes, defined in Note 10, as of June 30, 2013 and December 31, 2012, respectively. A discount rate of 19% and 18% was used for valuing the October 2012 Subordinated Convertible Notes and the December 2012 Convertible Note, both defined in Note 10, as of June 30, 2013 and December 31, 2012, respectively. A discount rate of 19% was used for valuing the First and Second May 2013 Convertible Notes, both defined in Note 10, as of June 30, 2013. These annual discount rates were applied in the PWERM valuation. Changes in the probability weights and discount rates have a significant impact on the valuation of the convertible notes. As a result of the changing probability weights between December 31, 2012 or the issuance dates of the convertible notes issued during the six months ended June 30, 2013 and June 30, 2013, the Company recognized a gain from the change in estimated fair value of the convertible notes as shown in the table below.

The following table provides a reconciliation of the beginning and ending balances for the convertible notes measured at fair value using significant unobservable inputs (Level 3) (in thousands):

During the three months ended June 30, 2013, no transfers were made into or out of the Level 1, 2, or 3 categories.

4. Inventories

Inventories consist of the following (in thousands):

5. Net Loss Per Share

Basic and diluted net loss per share is computed by dividing the net loss attributable to common shareholders by the weighted-average number of shares of common stock outstanding during the period. The Company’s potentially dilutive

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shares, which include outstanding stock options, convertible notes, convertible preferred stock and warrants, have been excluded from the computation of diluted net loss per share for all periods as their effect would be anti-dilutive. Such potentially dilutive shares are excluded when the effect would be to reduce the loss per share.

The following table sets forth potential shares of common stock that are not included in the calculation of diluted net loss per share because to do so would be anti-dilutive as of the end of each period presented (in thousands):

As of June 30, 2013 and 2012, the numbers of shares of common stock issuable upon the exercise of warrants to purchase convertible preferred stock and upon the conversion of convertible preferred stock were at a ratio of one-to-one.

As the Company recorded a loss for the three and six months ended June 30, 2013, all potentially dilutive common shares, comprised of stock options and certain warrants, are anti-dilutive.

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6. Other Assets

Other assets consist of the following (in thousands):

7. Accrued Liabilities

Accrued liabilities consist of the following (in thousands):

8. Factoring and Security Agreement

On June 13, 2013, the Company entered into a factoring and security agreement (Factoring and Security Agreement) with a third-party that would enable the Company to sell the entire interest in certain accounts receivable up to $5,000,000. Under the Factoring and Security Agreement, 15% of the sales proceeds will be held back by the purchaser until collection of such receivables. Such holdbacks are not considered legal securities, nor are they certificated. Upon the sale of the receivable, the Company will not maintain servicing. The purchaser may require the Company to repurchase accounts receivable if (i) the payment is disputed by the account debtor, with the purchaser being under no obligation to determine the bona fides of such dispute, (ii) the account debtor has become insolvent or (iii) upon the effective date of the termination of the Factoring and Security Agreement. The purchaser will retain its security interest in any accounts repurchased by the Company. The Factoring and Security Agreement is secured by all of the Company’s personal property and fixtures, and proceeds thereof, including accounts, inventory, equipment and general intangibles other than intellectual property.

The Company has determined that any sales of accounts receivable under the Factoring and Security Agreement will be treated as a secured borrowing in accordance with ASC 860, Transfers and Servicing. During the three months ended June 30, 2013, there were no sales of the Company’s accounts receivable under the Factoring and Security Agreement.

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9. Debt

Debt consists of the following (in thousands):

The Company believes the carrying values of its debt approximate their fair values at June 30, 2013 and December 31, 2012 based on the interest rates as of those dates compared to similar debt instruments.

Promissory Notes, Term Loan, Revolving Line of Credit and Credit Facility

In May 2008, the Company borrowed $400,000 pursuant to a promissory note with a bank which bears interest at the rate of 6.25% per annum and is repayable in 60 equal monthly installments of $7,785 commencing June 1, 2008. This promissory note was repaid in May 2013.

In March 2009, October 2010 and October 2011, the Company and the bank agreed to modify the terms of its existing revolving line of credit (Revolver). Under the modified terms of the Revolver, the Company’s borrowings under the Revolver are limited to 75% of qualifying accounts receivable with a maximum borrowing limit of $500,000. In March 2012, the Company entered into a change in terms agreement with the bank under which the existing Revolver was replaced by the Term Loan in the amount of $500,000 with a rate of 7.00% per annum, maturing April 1, 2016. The Company’s inventories, chattel paper, accounts receivable, equipment and general intangibles (excluding certain financed equipment and intellectual property) have been pledged as collateral under the Term Loan. There was no outstanding balance on the Revolver as of December 31, 2011 and the Revolver was terminated in March 2012.

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In March 2009, the Company borrowed $650,000 pursuant to a promissory note with the bank which bears interest at the rate of 7.00% per annum and is repayable in six monthly interest only payments starting May 1, 2009, followed by 60 equal monthly installments of $13,000 commencing November 1, 2009, with the final payment due on November 1, 2014.

All of the Company’s inventories, chattel paper, accounts receivable, equipment and general intangibles (excluding certain financed equipment and any intellectual property) have been pledged as collateral for the promissory notes.

On April 13, 2012, the Company borrowed $10,000,000 pursuant to a senior secured promissory note (April 2012 Senior Secured Promissory Note), which bears interest at 15.00% per annum and required the Company to pay the lender non-refundable loan fees of $625,000. The April 2012 Senior Secured Promissory Note is payable in 59 monthly installments of $238,000 beginning in May 2012 with all unpaid principal and interest due in April 2017. The April 2012 Senior Secured Promissory Note is secured by a first priority security interest in substantially all of the Company’s present and future assets. The Company also issued a warrant (Series C Warrant) to the lender to purchase 191,000 shares of the Company’s Series C convertible preferred stock with an exercise price of $7.846 per share. Under its terms, the Series C Warrant would expire, unless exercised, on the earlier to occur of April 2022 or one year after the Company successfully completes a Qualified IPO, however the Series C Warrant was exercised effective upon the completion of the IPO (See Note 14). The Company estimated the fair value of the Series C Warrant using a PWERM valuation based on unobservable inputs, and, therefore, the Series C Warrant is considered to be a Level 3 liability.

The loan fees and the fair value of the Series C Warrant at the date of issuance of $625,000 and $306,000, respectively, were being recorded as a debt discount to the April 2012 Senior Secured Promissory Note and are being amortized to interest expense over the term of the arrangement.

Under the terms of the April 2012 Senior Secured Promissory Note, the Company may elect to prepay the entire outstanding principal balance upon thirty days written notice to the lender. In the event the Company decides to prepay the entire loan balance, the Company will incur a termination fee that is calculated based on the April 2012 Senior Secured Promissory Note’s outstanding principal balance as of the effective date of termination notice. The termination fee is 0% to 3% of the April 2012 Senior Secured Promissory Note’s outstanding balance as of the effective date of termination notice, depending on the timing of the termination.

Under the terms of the December 2012 Convertible Note issued in December 2012 (Note 10), the Company is required to use the proceeds from this convertible note to repay all outstanding balance of the April 2012 Senior Secured Promissory Note within 35 days of closing. The Company repaid the outstanding balance of the April 2012 Senior Secured Promissory Note in January 2013 and has classified the outstanding balance of the April 2012 Senior Secured Promissory Note as of December 31, 2012 as a current liability. The total amount of the payout was $9,451,000 which consisted of $9,139,000 in principal, $34,000 in accrued interest, and an early termination fee of $278,000. The termination fee was recorded as incremental interest expense in the accompanying condensed consolidated statements of operations for the six months ended June 30, 2013.

Activity related to the April 2012 Senior Secured Promissory Note from its issuance on December 31, 2012 through June 30, 2013 consisted of the following (in thousands):

On October 2, 2012, the Company borrowed $7,500,000 pursuant to senior notes (October 2012 Junior Secured Promissory Notes) with a group of lenders. The October 2012 Junior Secured Promissory Notes have an initial term of three years and can be extended for an additional two years in one year increments. During the initial three-year term, the

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October 2012 Junior Secured Promissory Notes bear interest at 12% per annum. If the term of the October 2012 Junior Secured Promissory Notes is extended an additional year, the interest rate increases to 13% during the fourth year. If the term of the October 2012 Junior Secured Promissory Notes is extended for an additional two years, the interest rate is 14% during the fifth year. Interest on the October 2012 Junior Secured Promissory Notes is payable monthly through the initial maturity date of the loan which is October 2, 2015 or through any extension period. The principal and all unpaid interest are due on the maturity date, as may be extended.

As part of the terms of the October 2012 Junior Secured Promissory Notes, the Company is required to pay a fee of 5% of the funded principal amount to the agent that facilitated the borrowing and provides management of the relationship with the group of lenders (Agent Fee). This Agent Fee is payable within 30 days after all interest and principal have been paid. For each year the Company extends the maturity date of the October 2012 Junior Secured Promissory Notes beyond the initial term, the agent will receive an additional 1% fee based on the funded principal amount. The present value of the unpaid Agent Fee, based on 5% of the funded principal amount, or $261,000 as of the closing date of the October 2012 Junior Secured Promissory Notes was recorded as both deferred financing costs as a component of current and non-current other assets and non-current other liabilities. The amortization of the deferred financing costs and the accretion of the Agent Fee are recorded to interest expense over the term of the arrangement. As of June 30, 2013 and December 31, 2012, $469,000 and $270,000, respectively, of the Agent Fee, including the amounts relating to the additional funds received from the issuance of the April 2013 Junior Secured Promissory Notes discussed below, was recorded under non-current other liabilities. In addition, the Company incurred an additional $66,000 in financing-related costs, primarily legal fees. These costs were recorded as deferred financing costs as a component of current and non-current other assets and are being amortized to interest expense over the term of the arrangement.

The October 2012 Junior Secured Promissory Notes are secured by the Company’s ownership interest in MMM LLC, a security interest in the assets of the Manufacturing Plant, and all of the Company’s other assets, subject to certain permitted liens. This security interest is subordinate to the security interest held by the holders of the April 2012 Senior Secured Promissory Note as described above, which also have a security interest in MMM LLC.

The Company also issued warrants (Common Stock Warrants) to the group of lenders to purchase a number of shares of common stock equal to 15% of the funded principal amount of the October 2012 Junior Secured Promissory Notes divided by 70% of the value of common stock in a sale of the Company or a Qualified IPO, with such Common Stock Warrants to have an exercise price of 70% of the value of common stock in a sale of the Company or a Qualified IPO. The Common Stock Warrants would be automatically exercised immediately prior to expiration on the earlier to occur of a Qualified IPO or a sale of the Company or the maturity of the October 2012 Junior Secured Promissory Notes. The October 2012 Junior Secured Promissory Notes could be prepaid six months after the initial funding date or earlier if a Qualified IPO or a sale of the Company occurs. As the predominant settlement feature of the Common Stock Warrants is to settle a fixed monetary amount in a variable number of shares, the Common Stock Warrants are accounted for under ASC 480, Distinguishing Liabilities from Equity (ASC 480). Accordingly, the Common Stock Warrants were recorded at estimated fair value on their issuance date and are adjusted to its estimated fair value as of each reporting date with the change in estimated fair value recorded as a component of change in estimated fair value of financial instruments in the Company’s condensed consolidated statements of operations. The fair value of the Common Stock Warrants at the date of issuance of $282,000 is recorded as a discount to the October 2012 Junior Secured Promissory Notes and is being amortized to interest expense over the term of the arrangement. The Company estimated the fair value of the Common Stock Warrants using a PWERM valuation based on unobservable inputs, and, therefore, the Common Stock Warrants are considered to be Level 3 liabilities.

The October 2012 Junior Secured Promissory Notes contain certain covenant requirements which include a requirement to maintain a minimum cash balance of the lesser of the April 2012 Senior Secured Promissory Note indebtedness described above or $5,000,000. As discussed above, the April 2012 Senior Secured Promissory Note was fully paid off in January 2013. The Company is also precluded from adding additional debt without lender approval unless such debt is subordinated to the October 2012 Junior Secured Promissory Notes and not more than $2,000,000. In the event of default on the October 2012 Junior Secured Promissory Notes, the lenders may declare the entire unpaid principal and interest immediately due and payable.

On April 10, 2013 (Conversion Date), the Company entered an amendment to increase by up to $5,000,000 the amount available under the terms of the loan agreement with respect to the October 2012 Junior Secured Promissory Notes. Under this amendment, an additional $4,950,000 was issued in partial consideration for $3,700,000 in cash received and in partial conversion for the cancellation of $1,250,000 of the total principal balance of the October 2012 Subordinated Convertible Note described in Note 10 (collectively, April 2013 Junior Secured Promissory Notes). The total amount

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borrowed under the amended loan agreement for the October 2012 Junior Secured Promissory Notes and the April 2013 Junior Secured Promissory Notes increased from $7,500,000 to $12,450,000 as of the Conversion Date. The accrued interest of $74,000 for the partially converted October 2012 Subordinated Convertible Note as of the Conversion Date shall be repaid or converted on the applicable maturity date of the October 2012 Subordinated Convertible Note.

In conjunction with the issuance of the April 2013 Junior Secured Promissory Notes, the Company issued additional warrants (Additional Common Stock Warrants) to purchase a number of shares of common stock equal to 20% of the funded principal amount of the April 2013 Junior Secured Promissory Notes divided by 70% of the value of common stock in a sale of the Company or a Qualified IPO, with such Additional Common Stock Warrants to have an exercise price of 70% of the value of common stock in a sale of the Company or a Qualified IPO. As the predominant settlement feature of the Additional Common Stock Warrants is to settle a fixed monetary amount in a variable number of shares, the Common Stock Warrants are accounted for under ASC 480. Accordingly, the Additional Common Stock Warrants were recorded at estimated fair value on their issuance date and are adjusted to its estimated fair value as of each reporting date with the change in estimated fair value recorded as a component of change in estimated fair value of financial instruments in the Company’s condensed consolidated statements of operations. The fair value of the Additional Common Stock Warrants at the date of issuance was estimated to be $465,000. The Company estimated the fair value of the Additional Common Stock Warrants using a PWERM valuation based on unobservable inputs, and, therefore, the Additional Common Stock Warrants are considered to be Level 3 liabilities.

The debt holder who converted $1,250,000 principal balance of the October 2012 Subordinated Convertible Note (with a fair value of $1,360,000 on the date of conversion) also loaned an additional $2,500,000 in cash as part of the April 2013 Junior Secured Promissory Notes (collectively, the $3,750,000 Notes). The Company accounted for the conversion as an extinguishment of debt in accordance with ASC 470-50, Debt Modifications and Extinguishments (ASC 470-50). The $1,360,000 fair value of the partially converted October 2012 Subordinated Convertible Note on the Conversion Date was derecognized and the fair value of the $3,750,000 Notes with the portion of the fair value of the Additional Common Stock Warrants issued to this debt holder on the date of issuance was recorded. The Company recorded the $49,000 excess of the total fair value of the $3,750,000 Notes and the related Additional Common Stock Warrants on the issuance date over total consideration received as a gain on extinguishment of debt in the accompanying condensed consolidated statements of operations for the three and six months ended June 30, 2013.

The following table shows the consideration received, fair values of the notes and common stock warrants issued and calculation of the gain on extinguishment of debt for the $3,750,000 Notes (in thousands):

The remaining fair value to the Additional Common Stock Warrants of $113,000, net of the fair value of the Additional Common Stock Warrants issued of $352,000 related to the $3,750,000 Notes discussed above, was recorded as a debt discount to the April 2013 Junior Secured Promissory Notes and is being amortized to interest expense over the term of the arrangement.

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As a result of the amendment described above, the Company is also required to pay the Agent Fee, 5% of the $3,700,000 in cash received from the April 2013 Junior Secured Promissory Notes, under the same terms as the October 2012 Junior Secured Promissory Notes. In addition, the portion of the Agent Fee relating to the converted October 2012 Subordinated Convertible Note that would be due under the terms of the October 2012 Subordinated Convertible Note will be paid under the terms of the October 2012 and April 2013 Junior Secured Promissory Notes. The present value of the unpaid Agent Fee of $172,000, based on 5% of the funded principal amount of $4,250,000, as of the closing date of the April 2013 Junior Secured Promissory Notes was recorded as both deferred financing costs as a component of current and non-current other assets and non-current other liabilities. The amortization of the deferred financing costs and the accretion of the Agent Fee are recorded to interest expense over the term of the arrangement.

In addition, the Company incurred an additional $24,000 in financing-related costs, primarily legal fees. These costs were recorded as deferred financing costs as a component of current and non-current other assets and are being amortized to interest expense over the term of the arrangement.

The amendment to the loan agreement also amended the interest provision applicable to the October 2012 and April 2013 Junior Secured Promissory Notes to allow any holder of the October 2012 and April 2013 Junior Secured Promissory Notes to request the Company to defer all interest due monthly to the applicable maturity date, and the optional prepayment provision applicable to the October 2012 and April 2013 Junior Secured Promissory Notes to allow the Company to repay the outstanding amount of the October 2012 and April 2013 Junior Secured Promissory Notes, either (i) with the written consent of the lender or the agent on such lenders’ behalf, or (ii) without such consent provided that the Company pays the interest that would have been due from the prepayment date to the initial maturity date.

Activity related to the October 2012 and April 2013 Junior Secured Promissory Notes from December 31, 2012 through June 30, 2013 consisted of the following (in thousands):

On June 14, 2013, the Company entered into a credit facility agreement (June 2013 Credit Facility) with a group of lenders that are, or that are affiliated with, existing investors in the Company. Under the June 2013 Credit Facility, the lenders have committed to permit the Company to draw an aggregate of up to $5,000,000, and, subject to the Company’s obtaining additional commitments from lenders, such amount may be increased to up to $7,000,000. The June 2013 Credit Facility expires on June 30, 2014. During the term of the June 2013 Credit Facility, the Company may request from the lenders up to four advances, with each advance equal to one quarter of each lender’s aggregate commitment amount. The Company will issue a promissory note in the principal amount of each such advance that will accrue interest at a rate of 10% per annum. The principal and all unpaid interest under the promissory notes are due on the maturity date, and the Company may not prepay the promissory notes prior to the maturity date without consent of at least a majority in interest of the aggregate principal amount of the promissory notes then outstanding under the credit facility. In connection with the June 2013 Credit Facility, the Company agreed to pay a fee of 2% of the total commitment amount to the lenders. In addition, the Company incurred an additional $8,000 in financing-related costs, primarily legal fees. These costs were recorded as deferred financing costs as a component of current other assets and are being amortized to interest expense over the term of the arrangement.

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In conjunction with the June 2013 Credit Facility, the Company issued warrants (June 2013 Warrants) to purchase a number of shares of common stock equal to 10% of the total committed amount of the June 2013 Credit Facility divided by 70% of the value of common stock in a sale of the Company or a Qualified IPO, with such June 2013 Common Stock Warrants to have an exercise price of 70% of the value of common stock in a sale of the Company or a Qualified IPO. The June 2013 Common Stock Warrants expire upon the earlier of June 14, 2023 or the sale of the Company. As the predominant settlement feature of the June 2013 Warrants is to settle a fixed monetary amount in a variable number of shares, the Common Stock Warrants are accounted for under ASC 480. Accordingly, the Common Stock Warrants were recorded at estimated fair value on their issuance date and are adjusted to its estimated fair value as of each reporting date with the change in estimated fair value recorded as a component of change in estimated fair value of financial instruments in the Company’s condensed consolidated statements of operations. The fair value of the June 2013 Warrants at the date of issuance of $435,000 is recorded as a deferred financing cost as a current other asset and is being amortized to interest expense over the term of the arrangement. The Company estimated the fair value of the Common Stock Warrants using a PWERM valuation based on unobservable inputs, and, therefore, the Common Stock Warrants are considered to be Level 3 liabilities.

As of June 30, 2013, there were no amounts outstanding under the June 2013 Credit Facility and in August 2013, the Company’s Board of Directors resolved not to call for any advances under the June 2013 Credit Facility (See Note 14).

The Company is also required to comply with certain affirmative and negative covenants under the debt agreements discussed above. In the event of default on the debt, the lender(s) may declare the entire unpaid principal and interest immediately due and payable. As of June 30, 2013, the Company was in compliance with all of the affirmative and negative covenants, and there were no events of default, as defined in the agreements, related to the debt.

10. Convertible Notes Payable

Convertible notes payable consists of the following (in thousands):

Convertible Notes

During March 2012 through April 2012, the Company issued and sold in a series of closings $8,076,000 of convertible notes (March 2012 Convertible Notes) to existing preferred stock holders. During October 2012, the Company issued an additional $1,000,000 convertible note (October 2012 Convertible Note) to another existing preferred stock holder.

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Collectively, the March 2012 Convertible Notes and the October 2012 Convertible Note are referred to as the “March and October 2012 Convertible Notes,” and they accrue interest at 10% per annum. The principal and accrued interest then outstanding under the March and October 2012 Convertible Notes (Outstanding Balance) would mature on September 30, 2013 (Maturity Date) or earlier, at which time all such Outstanding Balance would automatically convert into a new series of preferred stock to be authorized immediately prior to the Maturity Date.

The Outstanding Balance may become due and payable prior to the Maturity Date upon an event of default. The Maturity Date may be extended by six months with the written approval of the holders of at least 80% of the Outstanding Balance, and the Company may not incur any debt senior in preference to the March and October 2012 Convertible Notes without the written consent of holders of 70% of the Outstanding Balance.

Under the terms of the note, if the Company closes an initial public offering in which the Company receives gross cash proceeds, before underwriting discounts, commissions and fees, of at least $30,000,000 (a Qualified IPO) or a sale of substantially all of the Company’s assets or a series of transactions that result in the transfer of more than 50% of the Company’s outstanding voting power (an Acquisition), the Outstanding Balance of the March 2012 Convertible Notes would be automatically converted into shares of the Company’s common stock at a rate of 70% of the per share price of the Company’s common stock sold in the Qualified IPO or the Acquisition. In the event of a Qualified IPO or Acquisition, the Outstanding Balance of the October 2012 Convertible Note would automatically converted into shares of the Company’s common stock at a rate of 80% of the per share price of the Company’s common stock sold in the Qualified IPO or the Acquisition. Upon the closing of the IPO in August 2013, the all outstanding principle and accrued interest of the March and October 2012 Convertible Notes were converted into shares of the Company’s common stock at a rate of 70% and 80% of the per share price, respectively (See Note 14).

Alternatively, the Outstanding Balance would have been automatically converted into other new securities, as follows, if prior to closing the Qualified IPO or the Acquisition, the Company had closed an equity financing for an aggregate consideration of at least $5,000,000 (a Qualified Equity Financing). If prior to closing the Qualified IPO or the Acquisition, the Company had closed a Qualified Equity Financing, the Outstanding Balance of the March 2012 Convertible Notes would have converted into the equity securities issued in the equity financing at 80% of the purchase price of such securities. In the event of a Qualified Equity Financing, the Outstanding Balance of the October 2012 Convertible Note would have converted into the equity securities issued in the equity financing at 85% of the purchase price of such securities.

On the issuance date and at each reporting date, the Company has assessed the probability of the potential conversion scenarios under the terms of the March and October 2012 Convertible Notes and has determined that the predominant settlement feature of the March and October 2012 Convertible Notes will be the conversion of the March and October 2012 Convertible Notes into shares of the Company’s common stock issuable at a 30% or 20% discount to the per share price payable in connection with the completion of the Qualified IPO or the Acquisition during the term of the arrangement. As the predominant settlement feature of the March and October 2012 Convertible Notes is to settle a fixed monetary amount in a variable number of shares, the March and October 2012 Convertible Notes fall within the scope of ASC 480. Accordingly, the March and October 2012 Convertible Notes were recorded at estimated fair value on their respective issuance dates and are adjusted to their estimated fair value as of each reporting date with the change in estimated fair value recorded as a component of change in estimated fair value of financial instruments in the Company’s condensed consolidated statements of operations.

The Company estimated the fair value of the March and October 2012 Convertible Notes as of the issuance dates to be $9,343,000 and $1,772,000, respectively. As the Company received total cash proceeds of $9,076,000 through the issuance of the March and October 2012 Convertible Notes, the Company determined that $2,039,000 of the excess of the estimated fair value of the March and October 2012 Convertible Notes on the issuance dates over cash proceeds to the Company represents a deemed dividend to preferred stockholders, and this amount was reflected in the net loss attributable to common stockholders for the year ended December 31, 2012 in the Company’s consolidated statements of operations.

As of December 31, 2012 and June 30, 2013, the estimated fair value of the March and October 2012 Convertible Notes was $22,518,000 and $18,991,000, respectively. Due to changes in the probability and timing of the completion of, and estimated proceeds from, a Qualified IPO or an Acquisition between the dates of issuance and December 31, 2012 and between December 31, 2012 and June 30, 2013, the estimated fair value of the March and October 2012 Convertible Notes increased by $10,721,000 and decreased by $4,017,000 during these periods respectively, which was recognized as additional expense and income, respectively, in the change in estimated fair value of financial instruments for the year ended December 31, 2012 and the six months ended June 30, 2013 in the Company’s condensed consolidated statements of operations.

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As discussed above, the Company is not required to pay interest on the March and October 2012 Convertible Notes, but interest accrues as part of the principal balance under the March and October 2012 Convertible Notes and would be convertible, along with the initial principal, into a new series of preferred stock at the Maturity Date or common stock if earlier converted in connection with a Qualified IPO.

October 2012 Subordinated Convertible Note

On October 16, 2012, the Company borrowed $2,500,000 pursuant to a convertible note (October 2012 Subordinated Convertible Note) from a lender. The October 2012 Subordinated Convertible Note has an initial term of three years and can be extended for an additional two years in one-year increments. During the initial three-year term, the October 2012 Subordinated Convertible Note bears interest at 12% per annum. If the term of the October 2012 Subordinated Convertible Note is extended an additional year, the interest rate increases to 13% during the fourth year. If the term of the October 2012 Subordinated Convertible Note is extended for an additional two years, the interest rate is 14% during the fifth year. The accrued interest and principal on the October 2012 Subordinated Convertible Note is payable at maturity.

In April 2013, the Company entered an amendment to convert $1,250,000 of the outstanding principal balance of the October 2012 Subordinated Convertible Note to the April 2013 Junior Secured Promissory Notes, as defined and further discussed in Note 9. The accrued interest of $74,000 for the partially converted October 2012 Subordinated Convertible Note as of the Conversion Date shall be repaid or converted on the applicable maturity date of the October 2012 Subordinated Convertible Note. The Company accounted for the exchange as an extinguishment of debt in accordance with ASC 470-50 and derecognized the $1,360,000 fair value of the October 2012 Subordinated Convertible Note and recorded a $49,000 gain on extinguishment of debt which was reflected in the Company’s condensed consolidated statements of operations. In addition, the portion of the Agent Fee relating to the converted October 2012 Subordinated Convertible Note that would be due under the terms of the October 2012 Subordinated Convertible Note will be paid under the terms of the October 2012 and April 2013 Junior Secured Promissory Notes. The amount of the unamortized converted Agent Fee on the date of conversion recorded under non-current other liabilities of $48,000 and the amount recorded as a component of current and non-current other assets of $39,000 was written off and recorded as an adjustment to interest expense (See Note 9).

As part of the terms of the October 2012 Subordinated Convertible Note, the Company is required to pay the Agent Fee of 5% of the funded principal amount to the agent that facilitated the borrowing and provides management of the relationship with the lender and who also facilitated the October 2012 Junior Secured Promissory Notes discussed in Note 9 above. This Agent Fee is payable within 30 days after all interest and principal have been paid. For each year the Company extends the maturity date of the October 2012 Subordinated Convertible Note beyond the initial term, the agent will receive an additional 1% fee based on the funded principal amount. The present value of the unpaid Agent Fee, based on 5% of the funded principal amount, or $87,000 as of the closing date of the October 2012 Subordinated Convertible Note was recorded as both deferred financing costs as a component of current and non-current other assets and non-current other liabilities. The amortization of the deferred financing costs and the accretion of the Agent Fee are recorded to interest expense over the term of the arrangement. As of June 30, 2013 and December 31, 2012, $48,000 and $89,000, respectively, of the Agent Fee, including the effect of the amendment of the October 2012 Subordinated Convertible Note discussed above, was recorded in non-current other liabilities. In addition, the Company incurred an additional $22,000 in financing-related costs, primarily legal fees. These costs were recorded as deferred financing costs as a component of current and non-current other assets and are being amortized to interest expense over the term of the arrangement.

The October 2012 Subordinated Convertible Note is secured by certain assets of the Company, subject to certain permitted liens. This security interest is subordinate to the security interest held by the holders of the April 2012 Senior Secured Promissory Note and the October 2012 Junior Secured Promissory Note, both described in Note 9.

Under the terms of the note, if the Company closed a Qualified IPO or an Acquisition, the October 2012 Subordinated Convertible Note and any accrued interest would be automatically converted into shares of the Company’s common stock at a rate of 85% of the purchase price of common stock sold, provided the closing occurred on or prior to eighteen months from the issuance date of the October 2012 Subordinated Convertible Note. The conversion rate would be adjusted to 80% of the purchase price of such securities, if the closing occurred on or after eighteen months from the issuance date of the October 2012 Subordinated Convertible Note through the date of maturity. Upon the closing of the IPO in August 2013, the all outstanding principle and accrued interest of the October 2012 Subordinated Convertible Note were converted into shares of the Company’s common stock at a rate of 85% of the per share price (See Note 14).

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On the issuance date and at each reporting date, the Company has assessed the probability of potential conversion under its terms of the October 2012 Subordinated Convertible Note and has determined that the predominate settlement feature of the October 2012 Subordinated Convertible Note will be the conversion of the October 2012 Subordinated Convertible Note into shares of the Company’s common stock issuable at a 15% or 20% discount to the per share price payable upon the completion of a Qualified IPO, an Acquisition, or Qualified Equity Financing. As the predominant settlement feature of the October 2012 Subordinated Convertible Note is to settle a fixed monetary amount in a variable number of shares, the October 2012 Subordinated Convertible Note falls within the scope of ASC 480. Accordingly, the October 2012 Subordinated Convertible Note was recorded at estimated fair value on its issuance date and is adjusted to its estimated fair value as of each reporting date with the change in estimated fair value recorded as a component of change in estimated fair value of financial instruments in the Company’s condensed consolidated statements of operations.

The Company estimated the fair value of the October 2012 Subordinated Convertible Note as of the issuance date to be $2,662,000. As the Company received cash proceeds of $2,500,000 through the issuance of the October 2012 Subordinated Convertible Note, $162,000 of the excess of the estimated fair value of the October 2012 Subordinated Convertible Note on the issuance date over cash proceeds was recorded as additional interest expense for the year ended December 31, 2012 in the Company’s condensed consolidated statements of operations.

As of December 31, 2012, the principal balance and the estimated fair value of the October 2012 Subordinated Convertible Note was $2,500,000 and $2,797,000, respectively. As of June 30, 2013, the principal balance and the estimated fair value of the October 2012 Subordinated Convertible Note was $1,250,000 and $1,626,000, respectively. Due to changes in the probability and timing of the completion of, and estimated proceeds from, a Qualified IPO or an Acquisition between the date of issuance and December 31, 2012 and between December 31, 2012 and June 30, 2013, the estimated fair value of the October 2012 Subordinated Convertible Note increased by $70,000 and $72,000 during these periods, respectively, which was recognized as additional expense in the change in estimated fair value of financial instruments for the year ended December 31, 2012 and the six months ended June 30, 2013 in the Company’s condensed consolidated statements of operations.

December 2012 Convertible Note

On December 6, 2012, the Company borrowed $12,500,000 pursuant to a convertible note (December 2012 Convertible Note) from an existing preferred stock holder that also is an affiliate of one of the Company’s distributors. The December 2012 Convertible Note has an initial maturity date of October 16, 2015 and can be extended for an additional two years in one year increments. During the initial approximately three-year (two-year and ten-month) term, the December 2012 Convertible Note bears interest at 10% per annum. If the term of the December 2012 Convertible Note is extended an additional year, the interest rate increases to 12% during the fourth year. If the term of the December 2012 Convertible Note is extended for an additional two years, the interest rate is 14% during the fifth year. The maturity date of the December 2012 Convertible Note shall be contemporaneously extended with the October 2012 Subordinated Convertible Note described above. The accrued interest and principal on the December 2012 Convertible Note is payable at maturity.

Under the terms of the note, the December 2012 Convertible Note may not be pre-paid unless such prepayment is mandated by a sale event. A sale event as defined in the agreement is the transfer of substantially all of the Company’s assets, a transaction or series of transactions that result in the transfer of more than 50% voting power of the Company, or transactions that result in gross proceeds of at least $120,000,000 (Sale Event). In the case of a Sale Event, the holder could have elected to either convert all outstanding principal and accrued interest into shares of common stock in accordance with the conversion terms of this agreement or receive cash equal to the principal and accrued interest then outstanding multiplied by 133.33% if the Sale Event occurred prior to or as of June 30, 2013 or multiplied by 142.86% if the Sale Event occurred after June 30, 2013.

A Qualified Financing means an equity financing for which the gross proceeds are at least $20,000,000 and at least 50% of the amount invested comes from sources other than holders of the Company’s equity, strategic investors, or affiliates (Qualified Financing). In the event of a Qualified Financing, all outstanding principal and unpaid interest on the December 2012 Convertible Note would be automatically converted into new securities issued and sold in such qualified financing at a rate of 75% of the purchase price of such new securities provided the closing occurred on or prior to June 30, 2013. The conversion rate would be adjusted to 70% of the purchase price of such new securities, if the closing occurred after June 30, 2013. Upon the closing of the IPO in August 2013, the all outstanding principle and accrued interest of the December 2012 Convertible Note were converted into shares of the Company’s common stock at a rate of 70% of the per share price (See Note 14).

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In the event of a non-qualified financing (Non-Qualified Financing) or the Sale Event, the holder of the December 2012 Convertible Note would have the right, but not the obligation, to convert all or a part of the outstanding principal and unpaid interest on the December 2012 Convertible Note into the same type of securities issued in the Non-Qualified Financing. A Non-Qualified Financing represents either a convertible note financing or an equity transaction that does not qualify as a Qualified Financing.

If the Non-Qualified Financing related to an equity financing or Sale Event, the number of shares of common stock or common stock equivalents to be received by the holder of the December 2012 Convertible Note would be calculated by dividing the principal and unpaid accrued interest elected to be converted by the holder by a price per share equal to the price per share paid in the Non-Qualified Financing multiplied by a conversion discount.

If the Non-Qualified Financing related to a debt financing, the December 2012 Convertible Note holder would have received new convertible notes convertible into the shares of common stock or common stock equivalents at a per share price equal to the conversion price per share applicable to the other convertible debt issued in the Non-Qualified Financing multiplied by a conversion discount. In each case, if the Non-Qualified Financing occurred on or before June 30, 2013, the conversion rate would be equal to 75%, and thereafter the conversion rate would be equal to 70%.

On the issuance date and at each reporting date, the Company has assessed the probability of the potential conversion scenarios under the terms of the December 2012 Convertible Note and has determined that the predominant settlement feature of the December 2012 Convertible Note will be the conversion of the December 2012 Convertible Note into shares of the Company’s common stock issuable at a 25% or 30% discount to the per share price payable in connection with the completion of a Qualified Financing or a Sale Event during the term of the arrangement. As the predominant settlement feature of the December 2012 Convertible Note is to settle a fixed monetary amount in a variable number of shares, the December 2012 Convertible Note falls within the scope of ASC 480. Accordingly, the Company determined that the December 2012 Convertible Note should be recorded at estimated fair value on its issuance date and adjusted to its estimated fair value as of each reporting date with the change in estimated fair value recorded as a component of change in estimated fair value of financial instruments in the Company’s condensed consolidated statements of operations.

Following the issuance of the December 2012 Convertible Note, the Company estimated the fair value of the December 2012 Convertible Note as of the issuance date using a PWERM valuation consisting of six scenarios. This valuation included three initial public offering scenarios, two merger scenarios and a sale of the Company’s intellectual property along with the applicable conversion ratios based on the estimated timing of each scenario. Based on this valuation, the Company estimated the fair value of the December 2012 Convertible Note to be $16,355,000 as of the issuance date. As the holder of the December 2012 Convertible Note was an affiliate of one of the Company’s distributors at the date of issuance, the $3,855,000 excess of the estimated fair value of the December 2012 Convertible Note on the date of issuance over gross cash proceeds has been recorded as a reduction of revenue to the extent of revenue recognized from the distributor, $245,000 ($110,000 from license revenue and $135,000 from product revenues), and the remaining excess of $3,610,000 has been recorded separately to an operating expense in accordance with ASC 605-50, Customer Payments and Incentives, in the Company’s condensed consolidated statements of operations for the year ended December 31, 2012.

As of December 31, 2012 and June 30, 2013, the estimated fair value of the December 2012 Convertible Note was $16,545,000 and $18,417,000, respectively. Due to changes in the probability and timing of, and estimated proceeds from, the completion of a Qualified IPO or an Acquisition between the dates of issuance and December 31, 2012 and between December 31, 2012 and June 30, 2013, the estimated fair value of the December 2012 Convertible Note increased by $100,000 and $1,243,000 during these periods, respectively, which was recognized as additional expense in the change in estimated fair value of financial instruments for the year ended December 31, 2012 and six months ended June 30, 2013 in the Company’s condensed consolidated statements of operations.

The December 2012 Convertible Note purchase agreement also required the Company to use the proceeds from this note to repay all outstanding obligations under the April 2012 Senior Secured Promissory Note within 35 days of closing as discussed in Note 9.

In addition to the repayment requirement under the terms of the December 2012 Convertible Note discussed above, the Company is also required to comply with certain other affirmative and negative covenants under the convertible debt agreements discussed above. In the event of default on the convertible debt, the lender may declare the entire unpaid principal and interest immediately due and payable. As of June 30, 2013, the Company was in compliance with all of such affirmative and negative covenants, and there were no events of default as defined in the December 2012 Convertible Note agreement.

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First and Second May 2013 Convertible Notes

On May 22, 2013, the Company completed the sale of convertible notes under a convertible note purchase agreement in the amount of $3,529,000 in a private placement to 22 investors (First May 2013 Convertible Notes). The First May 2013 Convertible Notes accrue interest at a rate of 10% per annum and mature on May 22, 2016, unless extended in one year increments for a period of no more than two years. In the event the maturity date is extended, the interest rate increases from 10% to 12% in the first year of the extension to May 22, 2017, and if extended for an additional year thereafter, the interest rate increases to 14% in the second year of the extension to May 22, 2018. In addition, if there is an event of default, which may occur as a result of, among other things, an uncured default under the terms of another debt instrument in an aggregate principal amount in excess of $100,000, the then-applicable interest rate shall be increased by 4%. The First May 2013 Convertible Notes may be pre-paid at any time without penalty.

In addition, on May 28, 2013, the Company completed the sale of a convertible note under a separate convertible note purchase agreement in the amount of $3,000,000 in a private placement (Second May 2013 Convertible Note). The Second May 2013 Convertible Note accrues interest at a rate of 10% per annum and matures on May 30, 2016, unless extended in one year increments for a period of no more than two years. In the event the maturity date is extended, the interest rate increases from 10% to 12% in the first year of the extension to May 30, 2017, and if extended for an additional year thereafter, the interest rate increases to 14% in the second year of the extension to May 30, 2018. In addition, if there is an event of default, which may occur as a result of, among other things, an uncured default under the terms of another debt instrument in an aggregate principal amount in excess of $100,000, the then-applicable interest rate shall be increased by 4%. The Second May 2013 Convertible Note may not be pre-paid in whole or in part prior to the maturity date unless in accordance with the Sale Event, as defined in Note 9 above.

Under the terms of the notes, no payments are due under the First and Second May 2013 Convertible Notes until maturity. In an event of a Qualified Financing, all outstanding principal and accrued interest due under the First and Second May 2013 Convertible Notes would be automatically converted into the number of shares of the Company’s common stock determined by dividing such unpaid amounts by 70% of the per share price of the Company’s common stock sold in such qualified financing. Upon the closing of the IPO in August 2013, all outstanding principle and accrued interest of the First and Second May 2013 Convertible Notes were converted into shares of the Company’s common stock at a rate of 70% of the per share price (See Note 14).

Alternatively, in the earlier event of a Non-Qualified Financing of equity or debt securities the First and Second May 2013 Convertible Notes may have been converted, at the option of the holder, into the same type of securities issued in such financing, and in the earlier the Sale Event, the First and Second May 2013 Convertible Notes may have been either, at the option of the holder, repaid the principal and accrued interest then outstanding multiplied by 142.86% or converted at a discount into shares of the Company’s common stock.

If the Qualified Financing, Non-Qualified Financing, or Sale Event had not occurred from the date of issuance of the convertible note through January 14, 2014, the holder of the Second May 2013 Convertible Note may have elected to convert all outstanding principal and accrued interest into a number of shares of common stock determined by dividing this amount by the greater of (i) the per share price into which the Outstanding Balance under the Second May Convertible Note would be converted at their maturity in the event a Qualified Financing had not occurred as of September 30, 2013, or (ii) the purchase price paid per share for the most recent Non-Qualified Financing that occurred prior to a Sale Event, provided such Non-Qualified Financing was at least $2,000,000 and at least 50% of the proceeds of such Non-Qualified Financing were from persons or entities who were not common shareholders, or common share equivalents or affiliates of the Company.

Under the terms of the convertible note purchase agreements entered into in connection with the issuance of the First and Second May 2013 Convertible Notes, the Company has agreed to certain covenants, including certain restrictions on the incurrence of additional indebtedness, payment of distributions on the Company’s capital stock and entry into certain transactions with affiliates. The First and Second May 2013 Convertible Notes are unsecured.

On the issuance date and at each reporting date, the Company has assessed the probability of potential conversion under its terms of the First and Second May 2013 Convertible Notes and have determined that the predominate settlement feature of the First and Second May 2013 Convertible Notes will be the conversion of the First and Second May 2013 Convertible Notes into shares of the Company’s common stock issuable at a 30% discount to the per share price payable upon the completion of a Qualified IPO, an Acquisition, or Qualified Equity Financing. As the predominant settlement feature of the First and Second May 2013 Convertible Notes are to settle a fixed monetary amount in a variable number of shares, the First and Second May 2013 Convertible Notes fall within the scope of ASC 480. Accordingly, the First and

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Second May 2013 Convertible Notes were recorded at estimated fair value on their issuance dates and are adjusted to estimated fair value as of each reporting date with the change in estimated fair value recorded as a component of change in estimated fair value of financial instruments in the Company’s condensed consolidated statements of operations.

The Company estimated the fair value of the First May 2013 Convertible Notes as of the issuance date to be $4,907,000. As the Company received cash proceeds of $3,529,000 through the issuance of the First Convertible Note, the Company determined that $1,378,000 of the excess of the estimated fair value of the First May 2013 Convertible Note on the issuance date over cash proceeds to the Company represents a deemed dividend to preferred stockholders, and this amount was reflected in the net loss attributable to common stockholders for the three and six months ended June 30, 2013 in the Company’s condensed consolidated statements of operations.

As of June 30, 2013, the estimated fair value of the First May 2013 Convertible Note was $4,978,000. Due to changes in interest rates used to estimate the discount rate between the date of issuance and June 30, 2013, the estimated fair value of the First May 2013 Convertible Note increased by $35,000 during this period, which was recognized as additional expense in the change in estimated fair value of financial instruments for the three and six months ended June 30, 2013 in the Company’s condensed consolidated statements of operations.

The Company estimated the fair value of the Second May 2013 Convertible Note as of the issuance date to be $4,162,000. As the Company received cash proceeds of $3,000,000 through the issuance of the Second May 2013 Convertible Note, $1,162,000 of the excess of the estimated fair value of the Second May 2013 Convertible Note on the issuance date over cash proceeds to the Company was recorded as additional interest expense for the three and six months ended June 2013 in the Company’s condensed consolidated statements of operations.

As of June 30, 2013, the estimated fair value of the Second May 2013 Convertible Note was $4,222,000. Due to changes in interest rates used to estimate the discount rate between the date of issuance and June 30, 2013, the estimated fair value of the Second May 2013 Convertible Note increased by $33,000 during this period, which was recognized as additional expense in the change in estimated fair value of financial instruments for the three and six months ended June 30, 2013 in the Company’s condensed consolidated statements of operations.

11. Stock Option Plans

As of June 30, 2013, there were 2,062,000 options outstanding and 332,000 options available for grant under the outstanding option plans.

The Company recognized $340,000 and $88,000 in compensation for the three months ended June 30, 2013 and 2012, respectively. The Company recognized $588,000 and $381,000 in compensation for the six months ended June 30, 2013 and 2012, respectively. During the three and six months ended June 30, 2013, the Company granted 152,000 and 201,000 options, respectively, at a weighted-average exercise price of $12.08 and $11.99 per share, respectively.

12. Commitments and Contingencies

Contingencies

The Company is subject to legal proceedings and claims that arise in the normal course of business. As of June 30, 2013, there were no current proceedings or litigation involving the Company that management believes would have a material adverse impact on its business, financial position, results of operations or cash flows.

13. Reverse Stock Split

On August 1, 2013, the Company amended and restated its certificate of incorporation to effect the conversion of its outstanding convertible preferred stock into common stock on a 1-for-1 basis followed immediately by a reverse split of shares of its common stock (including the common stock issued upon conversion of the convertible preferred stock) at a 1-for-3.138458 ratio (the “Reverse Stock Split”). The amendment also increased the number of shares of common stock authorized for issuance to 250,000,000 shares. The par value of the common stock was not adjusted as a result of the Reverse Stock Split.

All issued and outstanding common stock, preferred stock, and warrants for common stock or preferred stock, and the related per share amounts contained in the condensed consolidated financial statements, have been retroactively adjusted to give effect to this Reverse Stock Split for all periods presented.

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14. Subsequent Events

In August 2013, the Company closed its initial public offering of 5,462,500 shares of its common stock (inclusive of 712,500 shares of common stock sold upon the exercise of the underwriters’ option to purchase additional shares). The public offering price of the shares sold in the offering was $12.00 per share. The total gross proceeds from the offering to the Company were $65,550,000 and after deducting underwriting discounts and commissions and offering expenses payable by the Company, the aggregate net proceeds received by the Company totaled approximately $56,000,000. In connection with the IPO:

After the closing of the IPO, the Company had 19,133,000 shares of common stock and 151,000 warrants to purchase common stock outstanding and there were no shares of convertible preferred stock, preferred stock warrants or balances related to convertible notes outstanding.

In August 2013, the Company’s Board of Directors resolved not to call for any advances under the June 2013 Credit Facility.

On September 9, 2013, the Company entered into a lease agreement for a new 28,700 square foot office and laboratory facility located in Davis, California. The initial term of the lease is for a period of 60 months commencing on the later of the date of substantial completion of initial improvements to the leased property, or May 1, 2014. The monthly base rent is $46,000 for the first 12 months with a 3% increase each year thereafter. The Company will have the option to extend the lease term twice for a period of five years each.

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