|9 Months Ended|
Sep. 30, 2018
Loan and Security Agreement with Oxford Finance, LLC
On January 15, 2016, we entered into a loan and security agreement with Oxford Finance, LLC (“Oxford Finance”) pursuant to which we had the option to borrow $10,000,000 in two equal tranches of $5,000,000 each (the “Loan Agreement”). The first tranche of $5,000,000 was funded at close on January 15, 2016 (the “Term A Loans”). The option to fund the second tranche of $5,000,000 (the “Term B Loans”) was exercisable upon the Company achieving positive interim data on the Phase 1 HuMab-5B1 antibody trial in pancreatic cancer and successfully uplisting to either the Nasdaq Stock Market or NYSE MKT on or before September 30, 2016. The option for the Term B Loans expired unexercised on September 30, 2016. The interest rate for the Term A Loans is set on a monthly basis at the index rate plus 11.29%, where the index rate is the greater of the 30-day LIBOR rate or 0.21%. Interest is due on the first day of each month, in arrears, calculated based on a 360-day year. The Term A Loans were interest only for the first year after funding, and the principal amount of the loan is amortized in equal principal payments, plus period interest, over the next 36 months. A facility fee of 1.0% or $100,000 was due at closing of the transaction and was earned and paid by the Company on January 15, 2016. The Company is obligated to pay a $150,000 final payment upon completion of the term of the Term A Loans, and this amount is being accreted using the effective interest rate method over the term of the loans. The Term A Loans can be prepaid subject to a graduated prepayment fee, depending on the timing of the prepayment.
Concurrent with the execution of the Loan Agreement, the Company issued warrants to purchase up to 75,075 shares of common stock to Oxford Finance with an exercise price of $16.65 per share. The warrants were immediately exercisable, may be exercised on a cashless basis and expire on January 15, 2021. The Company recorded $607,338 for the fair value of the warrants as a debt discount within notes payable and an increase to additional paid-in capital on the Company’s balance sheet. We used the Black-Scholes-Merton valuation method to calculate the value of the warrants. The debt discount is being amortized as interest expense over the term of the loan using the effective interest method.
We granted Oxford Finance a perfected first priority lien on all of the Company’s assets with a negative pledge on IP. The Company paid Oxford Finance a good faith deposit of $50,000, which was applied towards the facility fee at closing. The Company agreed to pay all costs, fees and expenses incurred by Oxford Finance in the initiation and administration of the facilities including the cost of loan documentation.
At the initial funding on January 15, 2016, the Company received net proceeds from the Term A Loans of approximately $4,610,000 after fees and expenses. These fees and expenses are being accounted for as a debt discount and classified within notes payable on the Company’s condensed consolidated balance sheet. The Company's transaction costs of approximately $390,000 are presented in the condensed consolidated balance sheet as a direct deduction from the carrying amount of the notes payable, consistent with debt discounts. Debt discounts, issuance costs and the final payment are being amortized or accreted as interest expense over the term of the loan using the effective interest method.
The Loan Agreement also contains customary indemnification obligations and customary events of default, including, among other things, our failure to fulfill certain of the Company's obligations under the Loan Agreement, the occurrence of a material adverse change, which is defined as a material adverse change in the Company's business, operations, or condition (financial or otherwise), a material impairment of the prospect of repayment of any portion of the loan, or a material impairment in the perfection or priority of Oxford Finance’s lien in the collateral or in the value of such collateral. In the event of default by the Company under the Loan Agreement, Oxford Finance would be entitled to exercise their remedies thereunder, including the right to accelerate payment of the debt, upon which we may be required to repay all amounts then outstanding under the Loan Agreement, which could harm the Company's financial condition.
First Amendment to Loan and Security Agreement
On March 31, 2017, we and Oxford Finance signed the First Amendment to Loan and Security Agreement providing that the payment of principal on the Term A Loans that otherwise would have been due on the March 1, 2017 will be due and payable on May 1, 2017 along with any other payment of principal due on May 1, 2017. We were obligated to pay a fully earned and non-refundable amendment fee of $15,000 to the Collateral Agent (as defined in the Loan Agreement). On May 1, 2017, we paid the principal due on May 1, 2017, along with the $15,000 amendment fee.
Second Amendment to Loan and Security Agreement
On July 3, 2018, we and Oxford Finance signed the Second Amendment to Loan and Security Agreement whereby Oxford Finance has (i) consented to the Company’s license and sale to Boehringer Ingelheim of certain preclinical assets (the “Acquired Assets”) and release of any encumbrances under the Loan Agreement that relate to the Acquired Assets, (ii) payments of advisory fees to Greenhill & Company of $385,000 over the course of six months in equal monthly payments, and (iii) deferred principal payments under the Loan Agreement for six months starting with the July 2018 payment, in exchange for the Company granting such additional collateral that was not pledged previously or in which security interest was not granted prior to the Second Amendment. We are obligated to pay a fully earned and non-refundable amendment fee of $5,000 to Oxford Finance, which shall become due and payable upon the earlier of: (i) the maturity date of the term loans, (ii) the acceleration of any term loan, or (iii) the prepayment of the term loans pursuant to the Loan Agreement.
For the three and nine months ended September 30, 2018, the Company recorded interest expense related to the Loan Agreement of $94,755 and $308,271, respectively. For the three and nine months ended September 30, 2017, the Company recorded $138,642 and $445,934 in interest expense related to the term loan, respectively. The annual effective interest rate on the note payable, including the amortization of the debt discounts and accretion of the final payment, but excluding the warrant amortization, was approximately 11.82% and 12.30% as of September 30, 2018 and 2017, respectively.
The future principal payments under notes payable for the Loan Agreement and financed insurance as of September 30, 2018 are as follows:
Notice of Events of Default under Loan and Security Agreement
The Company believes it was in compliance with all applicable covenants set forth in the Loan Agreement as of September 30, 2018. However, on August 14, 2018, the Company received a letter from Oxford Finance (the “Notice”) asserting certain events of default under the Loan Agreement had occurred as a result of certain events the Company reported as having occurred, including, without limitation, (i) the resignation of the Company’s external auditor, CohnReznick LLP (“CohnReznick”), effective August 3, 2018, and its withdrawal of its audit reports for the years 2014 through 2017, (ii) the resignation of four (4) members of the Board of Directors, effective as of July 31, 2018, and (iii) the delisting of the Company’s common stock from The Nasdaq Stock Market LLC on July 11, 2018 (collectively, the “Alleged Default Events”). The Company informed Oxford Finance that it disputes the Alleged Default Events, individually or collectively, constitute a “Material Adverse Change” or other event of default under the Loan Agreement. In addition, the Company already engaged a new auditor, Haskell & White LLP, effective August 22, 2018, and on September 20, 2018, the Court ratified the Delaware Petition. Also, on October 16, 2018, the Company applied for listing on the OTCQB Venture Marketplace (the “OTCQB Marketplace”) and believes it now meets the requisite eligibility requirements; however, there can be no assurance of being listed while the SEC Action is underway. As of November 13, 2018, Company management has been meeting at least weekly since September 30, 2018, to keep Oxford Finance informed on potential fund-raising activities.
The entire disclosure for information about short-term and long-term debt arrangements, which includes amounts of borrowings under each line of credit, note payable, commercial paper issue, bonds indenture, debenture issue, own-share lending arrangements and any other contractual agreement to repay funds, and about the underlying arrangements, rationale for a classification as long-term, including repayment terms, interest rates, collateral provided, restrictions on use of assets and activities, whether or not in compliance with debt covenants, and other matters important to users of the financial statements, such as the effects of refinancing and noncompliance with debt covenants.
Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef