Quarterly report pursuant to Section 13 or 15(d)

Note 6 - Note Payable

v3.20.1
Note 6 - Note Payable
3 Months Ended
Mar. 31, 2020
Notes to Financial Statements  
Debt Disclosure [Text Block]
   
6.
Note Payable
  
On
May 22, 2017,
the Company entered into a Term Loan Agreement as amended on
December 12, 2017
and
November
29,2018
(collectively the
“2017
Loan Agreement”) with affiliates of CRG LP (“CRG”). The credit facility consists of
$20,000,000
drawn at closing and access to additional funding of up to an aggregate of
$10,000,000
for a total of
$30,000,000
available under the credit facility. On
December 29, 2017,
the Company accessed the remaining
$10,000,000
available under the credit facility.
 
A portion of the initial loan proceeds were used to repay all of the amounts owed by the Company under its
2016
Loan Agreement with Western Alliance Bank. The remainder of the loan proceeds (after deducting loan origination costs and other fees and expenses incurred in connection with the
2017
Loan Agreement), plus any additional amounts that
may
be borrowed in the future, will be used for general corporate purposes and working capital.
 
In connection with the
2017
Loan Agreement, the Company issued
two
10
-year warrants to CRG to purchase a total of
2,220
shares of the Company’s common stock at an exercise price of
$950.00
per share (See Note
10
). 
 
Under the
2017
Loan Agreement, as in effect prior to the
November 12, 2019
amendment, the credit facility had a
six
-year term with
four
years of interest-only payments after which quarterly principal and interest payments were to be due through the maturity date. Amounts borrowed under the
2017
Loan Agreement accrued interest at an annual fixed rate of
12.5%,
4.0%
of which
may,
at the election of the Company, could be paid in-kind during the interest-only period by adding such accrued amount to the principal loan amount each quarter. During the
three
months ended
March 31, 2019,
the Company paid interest in-kind of
$318,000
which was added to the total outstanding principal loan amount. The Company was also required to pay CRG a final payment fee upon repayment of the loans in full equal to
5.0%
of the sum of the aggregate principal amount plus the deferred interest added to the principal loan amount during the interest-only period.  
 
As security for its obligations under the
2017
Loan Agreement, the Company entered into security agreements with CRG whereby the Company granted CRG a lien on substantially all of the Company’s assets, including intellectual property.
  
The terms of the
2017
Loan Agreement also required the Company to meet certain financial and other covenants. These covenants require the Company to maintain cash and cash equivalents of
$2,000,000
and, each year through the end of
2022,
to meet a minimum total annual revenue threshold. In the event that the Company did
not
meet the minimum total annual revenue threshold for a particular year, then the Company could retroactively cure the shortfall by either issuing additional equity in exchange for cash or incurring certain additional permitted indebtedness, in each case, in an amount equal to
2.0
times the shortfall. Any such amounts would be applied to prepay the loans. The
2017
Loan Agreement also contained customary affirmative and negative covenants for a credit facility of this size and type, including covenants that limit or restrict the Company’s ability to, among other things, incur indebtedness, grant liens, merge or consolidate, dispose of assets, make investments, make acquisitions, enter into transactions with affiliates, pay dividends or make distributions, license intellectual property rights on an exclusive basis or repurchase stock, in each case subject to customary exceptions.
 
On
November 12, 2019,
the Company and CRG amended the
2017
Loan Agreement (the “Amendment
No.
3”
). In connection with the amendment, the Company converted approximately
$28,981,000
of the outstanding principal amount under the term loan plus accrued interest, the prepayment premium and the back-end facility fee for an aggregate amount of converted debt obligations of approximately
$31,300,000.
The debt obligations converted into
31,300
shares of the newly authorized Series B convertible preferred stock and warrants to purchase up to
9,893,776
shares of common stock were also issued. The warrants have a term of
5
years and an exercise price equal to
120%
of the Series convertible B preferred stock conversion price of
$1.53
or
$1.836
per share (see Note
9
). CRG entered into a
one
year lock up agreement on all securities that it holds.
 
The Amendment
No.
3
to the
2017
Loan Agreement addressed, among other things:
 
 
repayment provisions were amended such that repayment is permitted only with, or after, the redemption in full of the Series B convertible preferred stock issued to CRG;
 
the interest only payment period and the period during which the Company
may
elect to pay the full interest in PIK interest payments was extended through the
23rd
date after the
first
payment date. Pursuant to the amendment, CRG shall consent to the payment of such interest in the form of PIK loans, provided that (i) as of such payment date,
no
default shall have occurred and be continuing, and (ii) the principal amount of each PIK loan shall accrue interest in accordance with the provisions of the
2017
Loan Agreement;
 
modified certain of the covenants, including (i) to permit issuance of the Series B convertible preferred stock and any preferred stock issued in the equity financing and the exercise and performance by the Company of its rights and obligations in connection with such CRG preferred stock and any preferred stock issued in the equity financing, (ii) eliminate the Company’s ability to enter into permitted acquisitions, (iii) further restrict the incurrence of additional indebtedness and removal of the equity cure right, and (iv) eliminate the minimum revenue requirement; and
 
the back-end facility fee on the aggregate remaining principal balance on the term loan shall be increased from
5%
to
25%.
 
During the
three
months ended
March 31, 2020,
the Company paid interest in-kind of
$126,000
which was added to the total outstanding principal loan amount. 
 
As of
March 31, 
2020,
the Company was in compliance with all covenants.
 
As of
March 31, 2020
and
December 31, 2019,
$4,110,000
and
$3,983,000,
respectively, was recorded on the consolidated balance sheets, as note payable, noncurrent portion, which is net of the remaining unamortized debt discount. 
 
The Company accounted for the changes in the
2017
Loan Agreement as a troubled debt restructuring. The Company reduced the amount of the debt obligation by the fair value of the equity interests transferred. The remaining difference was charged to the loss on debt restructuring and reported on the consolidated statements of operations and comprehensive loss. The equity interests transferred included the
31,300
shares of the newly authorized Series B convertible preferred stock and warrants to purchase up to
9,893,776
shares of common stock. The Company determined the fair value of the Series B convertible preferred stock on
November 26, 2019
using the option pricing method. The following assumptions were present in the calculation: (
1
) value of Company equity based on
$0.869
per common share, which was the closing common stock price on the date of the valuation (
November 26, 2019); (
2
) volatility of
73%;
(
3
) term of
2
years; and (
4
) risk-free rate of
1.58%.
The fair value of the Series B convertible preferred stock was determined to be
$1,023.23
for an aggregate fair value amount of approximately
$32,027,000.
The Company determined the fair value of the warrants on the date of issuance to be approximately
$3,502,000
using the Black-Scholes option pricing model (see Note
10
– Common Stock.) After consideration of the fair value of the equity interests transferred and the carrying value of the debt, the remaining difference is the loss on debt restructuring of
$6,705,000,
which was recorded in the consolidated statement of operations for the year ended
December 31, 2019.
 
As of
March 31, 2020,
future minimum payments under the note payable are as follows (in thousands): 
 
Year Ending December 31,
 
 
 
 
2020 (remaining 9 months)
  $
-
 
2021
   
-
 
2022
   
-
 
2023
   
5,992
 
Total payments
   
5,992
 
Less: Amount representing interest
   
(1,871
)
Present value of obligations
   
4,121
 
Less: Unamortized debt discount
   
(11
)
Note payable, noncurrent portion
  $
4,110