|12 Months Ended|
Dec. 31, 2020
7. Debt Agreements
Horizon and Molteni Loan
In July 2017, we entered into a venture loan and security agreement (the “Horizon Loan Agreement”) with Horizon Technology Finance Corporation (“Horizon”), which provided up to $10.0 million in loans, including an initial loan in the amount of $7.0 million funded upon signing of the Horizon Loan Agreement.
In connection with the Horizon Loan Agreement, we issued Horizon seven-year warrants to purchase common stock (the “Horizon Warrants”). The Horizon Warrants were classified as equity and the fair value of the Horizon Warrants at the time of issuance was determined using a Lattice valuation model.
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.
In February 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.
In March 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 $2.4 million of the $4.0 million outstanding principal balance of the loan to Molteni and Molteni was appointed as the collateral agent and assumed majority and administrative control of the loan. Under the Restated Loan Agreement, Molteni had the right to convert its portion of the debt into shares of our common stock at a conversion price of $216.00 per share and was 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 $216.00 and repay the $1.6 million balance of Horizon’s loan amount. In connection with the Restated Loan Agreement, we issued additional warrants to purchase an aggregate of 223 shares of our common stock with an exercise price per share of $216.00 to Horizon (collectively, the “Horizon Warrants”). These warrants were classified as equity and the key assumptions used to value these warrants as of the date of the issuance were as follows:
In consideration of Molteni’s entry into the Horizon Loan Agreement and the Molteni Purchase Agreement (see Note 3), in March 2018, we entered into a rights agreement (the “Rights Agreement”) with Molteni pursuant to which we agreed to (i) issue Molteni seven-year warrants to purchase 3,000 shares of our common stock at an exercise price of $216.00 per share (the “Molteni Warrants”), (ii) provide Molteni customary demand and piggy-back registration rights with respect to the shares of common stock issuable upon conversion of its loan and exercise of the Molteni Warrants, (iii) designate one member of our board of directors following conversion of the loan in full and (iv) provide board observer rights to Molteni if it has not designated a board nominee as well as certain information rights. The board designation, observer and information rights will terminate at such time as Molteni ceases to beneficially own at least one percent of our outstanding capital stock (inclusive of the shares issuable upon conversion of debt under the Restated Loan Agreement and exercise of the Molteni Warrants). The Molteni Warrants have been classified as equity and their fair value at the time of issuance was determined using a Black Scholes valuation model. The amount was allocated equally between the Restated Loan Agreement and the Purchase Agreement and was recorded in the Balance Sheets as a discount to the Molteni loan and a contract asset, respectively.
The key assumptions used to value the Molteni Warrants were as follows:
Repayment of the loans was on an interest-only basis, 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 and Molteni prepayment penalty fees.
In connection with our equity offering in September 2018, the Horizon Warrants to purchase 12,223 shares of our common stock at $45.00 per share became exercisable. 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. We calculated the dividend of approximately $0.3 million resulting from the trigger of the down round provision in September 2018 using the Black Scholes Option Pricing Model and the assumptions indicated in the table below:
In September 2019, we entered into an amendment to the Restated Loan Agreement pursuant to which the interest-only payment and forbearance periods were extended by one year to December 31, 2020 and the maturity date was extended by one year to June 1, 2022. In connection with the amendment to the Restated Loan Agreement (as clarified by a second amendment in March 2020), the final payments to the lenders were increased by an aggregate of approximately $0.3 million (exclusive of a restructuring fee payable to Horizon) and the conversion provisions related to Molteni’s portion of the loan amount were revised to eliminate the mandatory conversion feature, to reduce the conversion price to $6.75 and to cap the number of shares issuable upon conversion to 114,093.
In accordance with ASC 470, Debt, the amendment to the loan from Molteni is accounted for under debt extinguishment accounting, which required us to extinguish the carrying amount of the loan prior to the amendment and reacquire the loan after the amendment. As a result, during the year ended December 31, 2019, we recorded approximately $0.3 million gain on debt extinguishment related to the write-off of the balance of the accreted final payment of the loan. The modification to the loan from Horizon did not constitute debt extinguishment and, therefore, did not have any impact to our financial statements.
In October 2020, we entered into the DSRA Agreement with Molteni and Horizon to settle our obligations for $1.6 million in cash, the transfer of certain Probuphine assets to Molteni, including all of our manufacturing equipment, and the termination of our rights to future payments under the Purchase Agreement with Molteni. The DSRA Agreement, provided for the release to us of the remaining collateral. As a result, during the year ended December 31, 2020, we recorded an approximately $0.1 million loss on debt extinguishment.
Molteni Convertible Loan
Due to the conversion provision of the Molteni Convertible Loan, ASC 815, Derivatives and Hedging required us to classify the conversion provision as an embedded derivative with changes in the fair value recorded in the statements of operations and comprehensive loss.
The key assumptions used to value the Convertible Loan embedded derivative were as follows:
In connection with the amendment to the Molteni Purchase Agreement (see Note 3), in June 2019, the Molteni Convertible Loan, together with unpaid accrued interest, was converted in full into 14,943 shares of our common stock at $45.00 per share upon the receipt of EMA approval of Sixmo. As a result, we recorded approximately $0.1 million loss on debt extinguishment.
Paycheck Protection Program Loan
On April 20, 2020, we received an approximately $654,000 loan ("PPP Loan") pursuant to the Paycheck Protection Program of the CARES Act. The PPP Loan matures in April 2022 with an annual interest rate of 1.0%. The PPP Loan originally had a six month deferral of payments period which was extended to sixteen months during the third quarter of 2020 and may be prepaid at any time without penalty. All other terms remained the same. Forgiveness of the loan, when requested, is not automatic and is only available for principal that is used for the limited purposes that expressly qualify for forgiveness under SBA requirements. The proceeds of the PPP Loan are to be used to retain workers and maintain payroll and make mortgage interest, lease and utility payments. A loan forgiveness application was submitted in December 2020. Approximately $0.3 million of the PPP loan is included in current portion of long-term debt and approximately $0.3 million is included in long- term debt on our balance sheet at December 31, 2020.
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