Note 8 - Notes, Loans and Financing

6 Months Ended

Jun. 30, 2013

Debt Disclosure [Text Block]

Debt Disclosure [Text Block]

8. Notes, Loans and Financing

The Company is party to a loan agreement as follows:

	June 30, 2013			December 31, 2012
	(in thousands)
May 2011 senior secured term loan due May 27, 2014 (1)	$	4,071		$	4,071
Total notes and loans payable, before debt discount		4,071			4,071
Less: Debt discount		(31	)		(96	)
Total notes and loans payable	$	4,040		$	3,975
Notes and loans payable, current portion	$	4,040		$	3,975
Notes and loans payable, long-term		—			—

(1) The Company entered into a senior secured term loan in the amount of $8.6 million with Midcap in May 2011. The Company had the option to borrow an additional $2.0 million from Midcap on or before December 31, 2011 upon meeting certain conditions, including the commencement of a Phase III clinical trial, which it did not exercise. The interest rate on the loan is 11.5% per year. The Company incurred approximately $0.1 million in issuance costs in connection with the loan and is required to pay a $0.3 million fee on the maturity date of the loan. In addition, the Company issued five year common stock purchase warrants to Midcap granting them the right to purchase 1.1 million shares of the Company’s common stock at an exercise price of $0.63 per share. The basic terms of the loan require monthly payments of interest only through November 1, 2011, with 30 monthly payments of principal and interest that commenced on December 1, 2011. Any outstanding balance of the loan and accrued interest is to be repaid on May 27, 2014. In connection with the terms of the loan agreement, the Company granted Midcap a security interest in substantially all of the Company’s personal property including its intellectual property.

The Company allocated the $8.6 million in proceeds between the term loan and the warrants based on their relative fair values. The Company calculated the fair value of the warrants at the date of the transaction at approximately $0.5 million with a corresponding amount recorded as a debt discount. The debt discount is being accreted over the life of the outstanding term loan using the effective interest method. At the date of the transaction, the fair value of the warrants of $0.5 million was determined utilizing the Black-Scholes option pricing model utilizing the following assumptions: dividend yield of 0%, risk free interest rate of 1.71%, volatility of 110% and an expected life of five years. The Company recognized approximately $0.1 million and $0.2 million of non-cash interest expense during the first six months of 2013 and 2012, respectively, related to the accretion of the debt discount.

The Company entered into a consent agreement with Midcap in June 2012 with respect to the sale of its Ceplene^® asset to Meda. As a result of entering into this consent agreement, the Company paid Midcap $0.8 million as a partial payment of principal on the loan in return for Midcap’s release of security interest in certain assets sold to Meda.

The Company entered into an amendment to the loan agreement with Midcap in August 2012. The amendment was not a result of a default under the loan agreement. Under the amendment, the Company agreed to make a principal prepayment of $1.2 million, which approximates the scheduled principal payments due under the loan agreement from September 1, 2012 through December 31, 2012. As a result of the prepayment, the current principal balance of the loan was reduced to $4.1 million. The Company will continue to make monthly payments of interest to Midcap as per the loan agreement while principal payments are currently being deferred.

The Company also agreed, pursuant to the amendment, to maintain a cash balance of $1.1 million in a bank account that is subject to the security interest maintained by Midcap under the loan agreement. Midcap deducted interest payable under the loan agreement and advanced the Company $0.1 million to cover operating expenses in 2012, resulting in a cash balance of $0.6 million at June 30, 2013. Further, the Company committed to signing a definitive agreement, acceptable to Midcap, by November 15, 2012 with respect to a sale or partnering transaction (which the Company satisfied by entering into a definitive merger agreement with Immune Pharmaceuticals, Ltd. on November 8, 2012).

In July 2013, the Company and Midcap executed a Second Amendment to the Loan and Security Agreement in which the parties agreed that interest payments will continue to be made monthly and one half of the cash that is subject to the security interest maintained by Midcap will be returned to the Company upon the favorable stockholder vote to approve the final conditions to the closing of the merger. Any past defaults under the loan agreement have been waived and principal payments on the loan are scheduled to begin September 1, 2013 unless the loan agreement restructuring the loan has been executed.

The Company’s term loan with Midcap contains a subjective acceleration clause, which allows the lender to accelerate the loan’s due date in the event of a material adverse change in the Company’s ability to pay its obligations when due. The Company believes that its losses from operations, its stockholders’ deficit and a cash balance that is lower than its loan payable collectively increase the likelihood of the due date being accelerated in this manner, and therefore the Company has classified loan repayments due more than twelve months from the date of these financial statements as a short term liability. The original deferred financing fees and debt discount continue to be amortized over the life of the debt that was assumed when the obligation was originally recorded.