In July 2017, we entered into a venture loan and security agreement (“Loan Agreement”) with Horizon Technology Finance Corporation (“Horizon”), which provides for up to $10.0 million in loans, including an initial loan in the amount of $7.0 million funded upon signing of the Loan Agreement. An additional $ million loan is subject to our achievement of the following milestones on or prior to March 31, 2018:

 

 

 

 

Repayment of the loans is on an interest-only basis through December 31, 2018, followed by monthly payments of principal and accrued interest for the balance of the 46-month term. The loans bear interest at a floating coupon rate of one-month LIBOR (floor of 1.10%) plus 8.40%. A final payment equal to 5.0% of each loan tranche will be due on the scheduled maturity date for such loan. In addition, if we repay all or a portion of the loan prior to the applicable maturity date, we will pay Horizon a prepayment penalty fee, based on a percentage of the then outstanding principal balance, equal to 4% if the prepayment occurs during the interest-only payment period, 3% if the prepayment occurs during the 12 months following such period, and 2% thereafter.

 

Our obligations under the Loan Agreement are secured by a first priority security interest in all of our assets, with the exception of our intellectual property. We agreed not to pledge or otherwise encumber our intellectual property assets, subject to certain exceptions.

 

The Loan Agreement includes customary affirmative and restrictive covenants, excluding any covenants to attain or maintain certain financial metrics, and also includes customary events of default, including for payment failures, breaches of covenants, change of control and material adverse changes. Upon the occurrence of an event of default and following any applicable cure periods, a default interest rate of an additional 5% may be applied to the outstanding loan balances, and Horizon may declare all outstanding obligations immediately due and payable and take such other actions as set forth in the Loan Agreement.

 

In connection with the Loan Agreement, we issued Horizon seven-year warrants to purchase an aggregate of 46,770 shares of our common stock (“Horizon Warrants”). The per share exercise price of the Horizon Warrants was the lower of (i) $11.76 or (ii) the price per share of any securities that may be issued by the Company in an equity financing during the next 18 months. We issued Horizon an additional warrant that will only become exercisable upon the funding of the second tranche of the loan, the number of shares and exercise price to be calculated at such time. We agreed to file a registration statement covering the resale of the shares underlying the Horizon Warrants. In accordance with ASC 480,

, as amended by ASU, No. 2017-11, which we early adopted during 2017, these warrants have been classified as equity. The fair value of these warrants at the time of issuance was determined using a Lattice valuation model and was recorded in the Balance Sheet.

 

The key assumptions used to value the Horizon Warrants were as follows:

 

 

In connection with the closing of the Offering on September 25, 2018, the Horizon Warrants became exercisable to purchase an aggregate of shares of common stock at an exercise price of $ per share.

 

In accordance with the guidance in ASU 2017-11, we recognized the effect of triggering the down round feature as a dividend in our Balance Sheets at December 31, 2018 and as an addition to net loss attributable to common stockholders and in our calculation of basic and fully diluted earnings per share in our Statements of Operations and Comprehensive Loss for the year ended December 31, 2018.

 

 

On February 2, 2018, we entered into an amendment to the Original Loan Agreement (the “Amended Loan Agreement”) pursuant to which we prepaid $3.0 million of the outstanding $7.0 million principal amount and provided Horizon with a lien on our intellectual property. The other terms of the Original Loan Agreement remained unchanged.

 

On March 21, 2018, we entered into an Amended and Restated Venture Loan and Security Agreement (the “Restated Loan Agreement”) with Horizon and Molteni pursuant to which Horizon assigned approximately $ million of the $ million outstanding principal balance of the loan to Molteni and Molteni was appointed collateral agent and assumed majority and administrative control of the debt. Under the Restated Loan Agreement, the interest only payment and forbearance periods were extended to December 31, 2019. In addition, Molteni has the right to convert its portion of the debt into shares of our common stock at a conversion price of $7.20 per share and is required to effect this conversion of debt to equity if we complete an equity financing resulting in gross proceeds of at least $10.0 million at a price per share of common stock in excess of $7.20 and repay the $1.6 million balance of Horizon’s loan amount. The lien on our intellectual property remains in place at this time. As the present value of the cash flows under the terms of the Restated Loan Agreement is less than 10% different from the remaining cash flows under the terms of the Amended Loan Agreement prior to being amended and restated, the Restated Loan Agreement was accounted for as a debt modification. Accordingly, expenses incurred as a result of the modification were expensed as incurred and the previously deferred fees and costs related to the debt will continue to be amortized over the remaining term along with the related warrants issued as part of the agreement described in Note 9 “Rights Agreement.”

 

In connection with the Restated Loan Agreement, we issued Horizon seven-year warrants to purchase shares of our common stock at an exercise price of $ per share. The new Horizon warrants have been classified as equity and their fair value at the time of issuance was determined using a Black Scholes valuation model and was recorded in the Balance Sheets as a discount to the debt obligation.

 

The key assumptions used to value the new Horizon warrants were as follows: