[1]

On July 29, 2015, the Company and Immune Pharmaceuticals USA Corp. entered into a Loan and Security Agreement (the “Loan Agreement”) with Hercules to borrow $4.5 million with a Company option to borrow an additional $5.0 million prior to June 15, 2016, subject to the achievement of certain clinical milestones and other conditions. The Company will not record the additional $5.0 million loan availability as a liability until the cash is received due to its contingent nature. The Hercules Loan’s maturity date is September 1, 2018 and includes a nine month interest-only payment period following the closing in which escalating principal payments of $0.1 million per month will begin on April 1, 2016. The Loan Agreement includes customary representations, warranties and restrictive covenants, including certain restrictions on the Company’s ability to incur liens and indebtedness. In connection with the Loan, the Company has issued to Hercules a five-year warrant to purchase an aggregate of 214,853 shares of its common stock (or 279,412 shares if the Company closes on the additional $5.0 million), at an exercise price of $1.70 per share, subject to certain adjustments, including, if lower, the effective price of any financing occurring six months after the issuance date. The Company determined the fair value of the Hercules Warrants of $0.3 million on July 29, 2015 using the Binomial Lattice pricing model and recorded that amount as part of debt issuance costs in the condensed consolidated balance sheets since considered as part of the cost of the financing. The fair value of the Hercules Warrants as of September 30, 2015 was $0.2 million and the Company recorded a gain on the change in the estimated fair value of the Hercules Warrants of $0.1 million for the three months ended September 30, 2015 which is recorded in non-operating income (expense) in the condensed consolidated statements of operations. The Loan Agreement is collateralized by a first priority perfected security interest in all tangible and intangible assets of the Company and its subsidiaries, senior to all indebtedness. The interest rate on the Hercules Loan is calculated at the greater of 10% or the prime rate plus 5.25%. The Hercules Loan may be prepaid by the Company at any time, subject to certain prepayment penalties. Hercules may convert up to $1.0 million of the loan in any subsequent institutionally led Company financing on the same terms, conditions and pricing of such subsequent financing. This option to convert would be at the then fair value, as it will be at the same term and pricing as the new investors, therefore it is deemed to have minimal value. The Loan Agreement includes an end of term charge of $0.5 million payable on the earliest to occur of (i) the Term Loan Maturity Date, (ii) the date that Borrower prepays the outstanding Secured Obligations in full, or (iii) the date that the Secured Obligations become due and payable in full (as defined in the Loan Agreement). The Company will accrue this charge as of each reporting period accruing up to the $0.5 million charge over the 37-month term of the Loan Agreement because this charge is a cost of the debt and the Company is obligated to make this payment in the future. For the three months ended September 30, 2015, the Company recorded a charge of $24,000, which has been recorded in non-operating income (expense) in the condensed consolidated statements of operations. The placement agent for the Loan Agreement received $0.3 million upon the closing of the Hercules Loan and warrants to purchase an aggregate of 350,000 shares of common stock, at an exercise price of $1.78 per share, exercisable commencing six months following the issuance date and ending five years following the issuance date. The Company valued the warrants issued to the Hercules placement agent using the Black-Scholes options-pricing model and calculated a fair value of $0.4 million on the date of grant, which has been recorded as part of the debt issuance costs. The Company early adopted ASU 2015-03 Simplifying the Presentation of Debt Issuance Costs and recorded debt issuance costs of $1.3 million relating to placement agent fees, legal fees, closing costs and the fair value of the placement agent warrants as a debt discount in the consolidated balance sheet as of September 30, 2015. ASU 2015-03 requires the use of the effective interest method for the amortization of the debt discount. The Company will amortize the debt discount costs over the term of the Loan, which expires on September 1, 2018. The Company has recorded interest expense of $62,000 for the three months ended September 30, 2015, relating to the amortization of the debt discount, which is recorded in non-operating income (expense) in the condensed consolidated statements of operations. Interest expense for the Loan Agreement was $39,000 for the three months ended September 30, 2015. The net proceeds of the Loan Agreement and the Stock Purchase Agreements with Discover (see Note 11) are intended to be used to finance clinical trials, other research and development expenditures, and for general corporate purposes, including working capital. The Company also repaid the MidCap Financial Trust (“MidCap”) $2.1 million senior secured term loan (see Note 8- footnote 2 below) from the proceeds of the financings plus prepayment fees of $0.5 million, which was recorded in non-operating income (expense) as a loss on the extinguishment of debt in the condensed consolidated statement of operations.

[2]

In connection with the merger with Epicept Corporation, which occurred on August 25, 2013, the Company assumed a senior secured term loan, collateralized by substantially all assets of the Company, from MidCap. In conjunction with the July 2015 financing transactions, the Company repaid the MidCap $2.1 million senior secured term loan and paid early termination fees of $0.5 million in connection with the repayment of the senior secured term loan which was recorded as loss on extinguishment of debt in the condensed consolidated statements of operations for the three and nine months ended September 30, 2015. Interest expense recognized for the senior secured term loan was $21,000 and $0.2 million, respectively for the three and nine months ended September 30, 2015 and $0.1 million and $0.3 million for the three and nine months ended September 30, 2014, respectively.

[3]

In April 2014, the Company entered into a three-year, $5.0 million revolving line of credit with Melini Capital Corp. (“Melini”), an existing stockholder, who is related to the Chairman of the board of directors. Borrowings under this revolving line of credit incur interest at a rate of 12% per year, payable quarterly. Any amounts borrowed under the line of credit become due upon the maturity date of April 7, 2017. Drawdowns are available to us within four weeks of an official request. The revolving line of credit is unsecured and subordinated to the Loan Agreement. Either party to the revolving line of credit has the right to terminate this line upon completion of a capital raise in excess of $5.0 million. On April 14, 2015, the revolving line of credit was amended to remove Melini’s right to terminate the line of credit and extended to provide Melini the right to terminate the line on the earlier of (i) one year from the amendment date, or (ii) the completion of a capital raise in excess of $5.0 million. The revolving line of credit was further amended upon the completion of the July 29, 2015 financings in which the Company completed a capital raise greater than $5.0 million. On August 7, 2015, Melini agreed to extend the revolving line of credit until September 30, 2015 and on October 14, 2015, Melini agreed to extend the line of credit until November 30, 2016. In October 2015, the Company paid Melini $0.3 million as reimbursement for direct financial and administrative expenses accrued for the maintenance of the revolving line of credit from April 2014 to March 2016. To date, no amounts have been drawn under the revolving line of credit (see Note 14).

[4]

In March 2012, the Company acquired from MabLife S.A.S. (“MabLife”), through an assignment agreement, all rights, titles and interests in and to the patent rights, technology and deliverables related to the anti-Ferritin mAb, AMB8LK, including its nucleotide and protein sequences and its ability to recognize human acid and basic ferritins. The consideration was as follows: (i) $0.6 million payable in six annual installments (one of such installments being an upfront payment made upon execution of the agreement), and (ii) royalties of 0.6% of net sales of any product containing AMB8LK or the manufacture, use, sale, offering or importation of which would infringe on the patent rights with respect to AMB8LK. The Company is required to assign the foregoing rights back to MabLife, if it fails to make any of the required payments, is declared insolvent or bankrupt or terminates the agreement. In February 2014, the parties revised the payment arrangement for the purchase of the original assignment rights. Remaining payments of $0.1 million per year are due each year in 2015 through 2017. In February 2014, the Company acquired from MabLife, through an irrevocable, exclusive, assignment of all rights, titles and interests in and to the secondary patent rights related to the use of anti-ferritin monoclonal antibodies in the treatment of some cancers, nucleotide and protein sequences of an antibody directed against an epitope common to human acidic and basic ferritins, monoclonal antibodies or antibody-like molecules comprising these sequences. As a full consideration for the secondary patent rights, the Company will pay a total of $150,000 of which $15,000 was paid in 2014 and $25,000 will be paid on the first through fourth anniversary of the agreement and an additional $35,000 on the fifth anniversary of the agreement. Interest expense recognized on the first and secondary patents for the three months ended September 30, 2015 and 2014, aggregated to $0 and $28,000 respectively, and $4,000 and $28,000 for the nine months ended September 30, 2015 and 2014, respectively, which included amortization of the debt discount of $4,000 and $28,000 respectively. As a result of the purchase of the patent rights, the Company recorded an intangible asset of $0.5 million (see Note 4). In the first quarter of 2015, MabLife informed the Company that it has filed for bankruptcy. The Company is considering its options relating to the MabLife assignment agreement.