|6 Months Ended|
Jun. 30, 2021
|Debt Disclosure [Abstract]|
|Notes Payable||Notes Payable
On June 4, 2021, the Company entered into a $35.0 million Loan Agreement with Horizon and Powerscourt. On the closing date, the Company received $20.0 million, with the remaining $15.0 million fundable upon the Company achieving certain predetermined milestones, one of which was achieved in July 2021 (refer to more information below).
Each advance under the Loan Agreement will mature 42 months from the first day of the month following the funding of the advance. Each advance accrues interest at a per annum rate of interest equal to 6.25% plus the prime rate, as reported in the Wall Street Journal (subject to a floor of 3.25%). The Loan Agreement provided for interest-only payments for each advance for the first 18 months. The interest-only period may be extended to 24 months if the Company satisfies the Interest Only Extension Milestone (as defined in the Loan Agreement), which the Company met in the third quarter of 2021. Thereafter, amortization payments will be payable in monthly installments of principal and interest through each advance’s maturity date. Upon ten business days’ prior written notice, the Company may prepay all of the outstanding advances by paying the entire principal balance and all accrued and unpaid interest, subject to prepayment charges of up to 3% of the then outstanding principal balance. Upon the earlier of (i) payment in full of the principal balance, (ii) an event of default, or (iii) the maturity date, the Company will pay an additional final payment of 3% of the principal loan amount to the Lenders.
Each advance of the loan is secured by a lien on substantially all of the assets of the Company, other than Intellectual Property and Excluded Collateral (in each case as defined in the Loan Agreement), and contains customary covenants and representations, including a financial reporting covenant and limitations on dividends, indebtedness, collateral, investments, distributions, transfers, mergers or acquisitions taxes, corporate changes, deposit accounts, and subsidiaries.
The events of default under the Loan Agreement include but are not limited to, failing to make a payment, breach of covenant, or occurrence of a material adverse change. If an event of default occurs, the Lenders are entitled to accelerate the loan amounts due, or
take other enforcement actions. As of June 30, 2021, the Company did not breach any covenants or specified event that could result in an event of default.
The Initial Note of $20.0 million will mature on January 1, 2025 (the “Initial Note Maturity Date”). As of June 30, 2021, the Company was required to make interest-only payments of the Initial Note through January 1, 2023 with monthly amortization payments of principal and interest thereafter through the Initial Note Maturity Date. Subsequent to the second quarter of 2021, the Company satisfied the Interest Only Extension Milestone; refer to further information below.
On June 4, 2021, pursuant to the Loan Agreement, the Company issued warrants to the Lenders to purchase 403,844 shares of the Company’s common stock with an exercise price of $2.60 (the “Warrants”). The Warrants are exercisable for ten years from the date of issuance. The Lenders may exercise the Warrants either by (a) cash or check or (b) through a net issuance conversion. The Warrants, which met equity classification, were recognized as a component of permanent stockholders’ equity within additional paid-in-capital and were recorded at the issuance date using a relative fair value allocation method. The Company valued the Warrants at issuance, which resulted in a discount on the debt, and allocated the proceeds from the loan proportionately to the notes payable and to the Warrants, of which $0.9 million was allocated to the Warrants.
For the three and six months ended June 30, 2021, the Company incurred $2.1 million in debt issuance costs, including legal fees in connection with the Loan Agreement, fees paid directly to the lender, and other direct costs, of which $1.7 million will be paid in the third quarter of 2021. All fees, warrants, and costs paid to the Lenders and all direct costs incurred by the Company are recognized as a debt discount and are amortized to interest expense using the effective interest method over the term of the loan. The effective rate of the Initial Note, including the amortization of the debt discount and issuance costs, and accretion of the final payment, was 16.3% as of June 30, 2021.
Balance sheet information related to the note payable (which only includes the Initial Note as of June 30, 2021) is as follows (in thousands):
1 Balance includes $0.6 million final payment fee
As of June 30, 2021, the estimated future principal payments due on the Initial Note (prior to meeting the Interest Only Extension Milestone, which occurred in the third quarter of 2021) were as follows (in thousands):
1 Balance includes $0.6 million final payment fee
Funding of Second Note Subsequent to June 30, 2021
In the third quarter of 2021, the Company received $10.0 million in gross proceeds under the Loan Agreement. The Second Note was made available in connection with the Company’s successful positive initial results from a Phase1b proof-of-concept study evaluating CERC-002 in adult patients with moderate-to-severe Crohn’s disease. The remaining $5.0 million may be funded upon achieving certain predetermined milestones.
The funding of the Second Note satisfied the Interest Only Extension Milestone for both the Initial Note and the Second Note. Therefore, the Second Note includes interest-only payments through August 1, 2023 and monthly principal and interest payments beginning thereafter through its maturity date on February 1, 2025. As it relates to the Initial Note, the Company’s interest-only
payment period is now extended through July 1, 2023 and the monthly principal and interest payments begin thereafter through its maturity date on January 1, 2025.
The Company will evaluate the accounting impact of the Second Note and extension of the interest only period of the Initial Note in the third quarter of 2021.
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