LOAN AND SECURITY AGREEMENT
|12 Months Ended|
Jun. 30, 2022
|LOAN AND SECURITY AGREEMENT|
|LOAN AND SECURITY AGREEMENT||
NOTE 5 — LOAN AND SECURITY AGREEMENT
On April 14, 2021, the Company entered into a $30.0 million Loan and Security Agreement (the “Loan Agreement”) with SLR Investment Corp. (“SLR”) and certain other lenders (collectively, the “Lenders”). The Lenders agreed to loan up to $30.0 million consisting of (i) a $15.0 million term A loan that was funded on April 14, 2021, and (ii) term B and term C loans for an aggregate of $15.0 million, which were subject to the Company’s ability to obtain prescribed amounts of financing and achieve certain clinical milestones. The Company did not achieve the initial clinical milestones by January 2022 and the term B and term C loans were no longer a potential source of liquidity. The maturity date of the term A loan was April 1, 2026 (the “Maturity Date”).
In addition, the Company’s cash and cash equivalents became subject to a blocked account control agreement (“BACA”) in favor of the Lenders whereby a cash balance of at least $5.0 million was required beginning on December 31, 2021. In the event of a default under the Loan Agreement, the BACA would have enabled the Lenders to prevent the release of funds from the Company’s cash accounts and accordingly the Company accounted for the BACA as a restricted cash account.
Outstanding borrowings provided for interest at a floating rate equal to (a) 8.75% per annum plus (b) the greater of (i) the rate per annum published by the Intercontinental Exchange Benchmark Administration Ltd. (“IEBA”) for a term of one month and (ii) 0.12% per annum. For the period from April 14, 2021 through February 28, 2022, the IEBA rate for a term of one month was approximately 0.12% per annum. For the period from March 1, 2022 through June 30, 2022, the IEBA rate for a term of one month was approximately 0.23% per annum. Therefore, the contractual rate was 8.98% and 8.87% as of June 30, 2022 and 2021, respectively. The Company was permitted to make interest-only payments on each term loan through May 1, 2023.
The Company was obligated to pay the Lenders (i) a non-refundable facility fee in the amount of 1.00% of each term loan (the “Facility Fee”), and (ii) a final fee equal to 4.75% of the aggregate amount of the term loans funded (the “Final Fee”). As of June 30, 2021, the Company incurred debt discounts for an aggregate of $1.7 million that consisted of $0.5 million for financial advisory and legal fees, an aggregate of $0.8 million for the Facility Fee and the Final Fee, and an aggregate of $0.4 million as an exit fee accounted for as an embedded derivative. The Final Fee was payable upon the earliest to occur of (i) the Maturity Date, (ii) the acceleration of the term loans, and (iii) the prepayment of the term loans. The total debt discount of $1.7 million related to the term A loan was accreted to interest expense using the effective interest method which resulted in an overall current effective interest rate of 12.6%.
Concurrently with the execution of the Loan Agreement, the Company entered into an exit fee agreement (the “Exit Fee Agreement”) that provides for a fee of 4.00% of the funded principal balance of each term loan in the event certain transactions (defined as “Exit Events”) occur prior to April 13, 2031. Exit Events include, but are not limited to, sales of substantially all assets, certain mergers, change of control transactions, and issuances of common stock that result in new investors owning more than 35% of the Company’s shares. As of April 14, 2021, the Company allocated a portion of the proceeds from the term A loan to recognize a liability for the fair value of all embedded derivatives related to the Loan Agreement for approximately $381,000. Fair value of the Exit Events derivative was determined based on the Company’s strategic corporate development plans by considering a detailed evaluation of the different types of Exit Events that could occur and using a discounted rate equivalent to the effective rate for the term A loan. Fair value of embedded derivatives is assessed at the end of each reporting period with changes in fair value recognized as a nonoperating gain or loss. As of June 30, 2022 and 2021, there was a change in fair value of approximately $20,000 and $6,000 recorded as a non-operating loss on change in fair value of embedded derivatives.
As of June 30, 2022, the Company was permitted to prepay the outstanding principal balance of the term loan by incurring a prepayment fee of 2.00% of the outstanding principal balance.
On June 30, 2022, the Company exercised its option to prepay the outstanding principal of the term A loan and terminate the Loan Agreement. Accordingly, the Company paid a total of $16.0 million consisting of the outstanding principal of $15.0 million, the Final Fee of $0.7 million and the prepayment fee of $0.3 million. As of June 30, 2022, a loss on
extinguishment of the Loan Agreement of $1.8 million was recognized for the unaccreted discount of $1.5 million and the 2.00% prepayment penalty of $0.3 million.
The Company’s obligations under the Loan Agreement were secured by a first-priority security interest in substantially all of the Company’s assets, including its intellectual property. This security interest was released on June 30, 2022, upon termination of the Loan Agreement. The Exit Fee Agreement discussed above was not impacted by the termination of the Loan Agreement.
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