Note 4 - Debt

9 Months Ended

Sep. 30, 2013

4. Debt

On September 30, 2013, CBLI entered into a Loan and Security Agreement (the “Loan Agreement”) with Hercules Technology II, L.P. (“Hercules”) pursuant to which the company issued a $6 million note and received net proceeds of $5.9 million. The loan bears interest at the greater of (i) 10.45% per annum or (ii) 10.45% plus the prevailing prime rate minus 4.25%. The loan matures on January 1, 2017, and requires interest-only payments for the initial 12 months and principal and interest payments in 27 monthly installments thereafter. If, prior to June 30, 2014, and subject to Hercules’ approval, CBLI obtains a contract award from the Biomedical Advanced Research Development Authority (“BARDA”) or other funding sources sufficient to fund a series of studies for Entolimod as a radiation countermeasure, which would reasonably be expected to provide a basis for submitting a Biological License Application (“BLA”) to the FDA for licensure of Entolimod as a radiation countermeasure, CBLI may obtain an additional $4 million in loan proceeds at its option.

In connection with the Loan Agreement, CBLI granted a first priority lien in substantially all of CBLI’s assets (exclusive of intellectual property). The Loan Agreement also contains representations and warranties by CBLI and Hercules, indemnification provisions in favor of Hercules, customary covenants (including limitations on other indebtedness, liens, acquisitions, investments and dividends, and not including financial covenants), and events of default (including payment defaults, breaches of covenants, material adverse events and events leading to bankruptcy or insolvency). Prepayment of the loan is subject to a penalty rate applied to the balance of the secured obligation and ranges from 1% to 3% based on the date the loan is prepaid. Additionally, Hercules has a right to participate in subsequent private placements of CBLI equity securities at the same price, terms and conditions as other investors, up to an aggregate amount of $1 million.

As additional consideration for the loan, CBLI issued Hercules a five-year warrant to purchase 156,250 shares of CBLI common stock at an exercise price of $1.60 per share. CBLI recorded the fair value of the warrant of $117,999 as equity and as a discount to the carrying value of the loan. The fair value of the warrant was calculated using the Black-Scholes option pricing model with the following assumptions:

Risk-free interest rate	0.48	%
Expected dividend yield	0.00	%
Expected life (years)	2.50
Expected volatility	82.29	%

Reflected as a discount to the loan are the following items: the warrant, a $100,000 facility fee CBLI paid to Hercules which was deducted from the gross proceeds of the loan, and a $550,000 payment that is due upon full repayment of the loan or on the maturity date, whichever occurs sooner. In connection with the closing of the loan, CBLI incurred $102,000 in debt issuance costs, primarily related to legal fees, which are included in non-current assets in our consolidated balance sheet. CBLI will amortize the loan discounts and debt issuance costs to interest expense over the term of the loan using the effective interest rate method, which approximates 16.6%. Additionally, the $550,000 end-of-term charge is also reflected as a long-term liability in conjunction with the $6 million note.

The following schedule shows the payments for principal and the end of term charge on the loan by calendar year:

2013	$	-
2014		351,527
2015		2,246,215
2016		2,495,163
2017		1,457,095
Total	$	6,550,000

On September 3, 2013, Panacela entered into a Master Agreement (the “Panacela Loan”) with Open Joint Stock Company “Rusnano” and CBLI pursuant to which Panacela issued a $1,530,000 note to Rusnano. The Panacela Loan bears interest at a rate of 16.3% per annum and matures on September 3, 2015, at which time Panacela must repay all unpaid principal and accrued interest. Prior to March 3, 2015, the loan is mandatorily convertible into shares of Panacela preferred stock at a conversion price of $1,057 per share if Panacela completes a qualified financing in accordance with the terms of the Panacela Loan. Subsequent to March 3, 2015, Rusnano has the option to convert the unpaid principal plus interest into shares of Panacela Preferred Stock at a conversion price of $1,057 per share, or if Panacela has a qualified financing event, at a discounted price of 0.75 times the purchase price per share.

In connection with the Panacela Loan, CBLI issued Rusnano a warrant that has an exercise period that begins upon an event of default on the Panacela Loan and expires on December 31, 2016. Upon an event of default, Rusnano has the option to assign 69.2% of the unpaid principal and interest under the Panacela Loan to CBLI in exchange for shares of CBLI common stock at a price of $1.694 per share.

- Definition

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.

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