7. Financing Obligations

Autoliv ASP, Inc.

In June 2010, in return for transfer to us of all rights, title and interest in a production line for the commercial manufacture of chemical heat packages completed or to be completed by Autoliv ASP, Inc., or Autoliv, on behalf of us, we paid Autoliv $4,000,000 in cash and issued Autoliv a $4,000,000 unsecured promissory note. In February 2011, we entered into an agreement to amend the terms of the unsecured promissory note. Under the terms of that amendment, the original $4,000,000 note was cancelled and a new unsecured promissory note was issued with a reduced principal amount of $2,800,000, or the New Note. The New Note bears interest beginning on January 1, 2011 at 8% per annum and is being paid in 48 consecutive and equal monthly installments of approximately $68,000.

Teva Pharmaceuticals USA, Inc.

In May 2013, concurrent with the Teva Agreement (see Note 9), we entered into a Convertible Promissory Note and Agreement to Lend, dated as of May 7, 2013, between us and Teva, or the Teva Note. Under the terms of the Teva Note, we may, upon written notice to Teva, draw upon the Teva Note to fund agreed operating budgets related to ADASUVE. The aggregate drawdowns may total up to $25,000,000 and will be due and payable, together with all interest, on the fifth anniversary of the signing of the Teva Note. We may prepay, from time to time, up to one-half of the total amounts advanced plus the related interest outstanding at any time prior to the maturity date. At any time prior to five days before the maturity date, Teva will have the right to convert the then outstanding amounts into shares of our common stock at a conversion price of $4.4833 per share. The Teva Note bears simple interest of 4% per year. We have two years from the effective date of the Teva Note to receive advances.

As of the end of the second quarter of 2014, we had fully drawn down $25,000,000 against the Teva Note. At the time of the drawdowns, the contractual conversion price was less than the value of our common stock. As a result, at each draw down date, we calculated the value of the beneficial conversion feature of the convertible note and recorded an increase to additional paid-in-capital and a discount on the Teva Note which is being amortized to interest expense over the life of the borrowing. Additionally, at each draw, we reclassified the relative portion of the unamortized right-to-borrow asset, classified as an Other Asset, (see Note 9) against the Teva Note, which will is also being amortized to interest expense over the life of the borrowing. The following table shows the effective interest rate for each drawdown after taking into consideration the beneficial ownership features and the right-to-borrow asset discount.


	Draw Amount		Beneficial Conversion Feature		Reclassified Unamortized Right-to- Borrow		Effective Interest Rate
September 2013	$	10,000,000	$	2,455,000	$	900,000		13.9	%
December 2013		5,000,000		657,000		393,000		9.9	%
March 2014		5,000,000		883,000		318,000		11.6	%
June 2014		5,000,000		148,000		252,000		6.6	%

Royalty Securitization Financing

In March 2014, we completed a royalty securitization financing, which consisted of a private placement to qualified institutional investors of $45,000,000 of non-recourse notes issued by our wholly-owned subsidiary, or the Notes, and warrants to purchase 345,661 shares of our common stock at a price of $0.01 per share exercisable for five years from the date of issuance. The Notes bear interest at 12.25% per annum payable quarterly beginning June 15, 2014. All royalty and milestone payments under the Teva Agreement, after paying interest, administrative fees, and any applicable taxes, will be applied to principal and interest payments on the Notes until the Notes have been paid in full.

From the proceeds of the transaction, we established a $6,890,000 interest reserve account, which is classified as a noncurrent asset, to cover any potential shortfall in interest payments. Any remaining amounts in the interest reserve account will be released to us commencing June 15, 2015, subject to meeting certain net sales targets for ADASUVE, or, if not previously released, on December 15, 2015, irrespective of ADASUVE net sales. At September 30, 2014, $4,160,000 remained in the interest reserve account.

The Notes are secured by the right to receive royalty and milestone payments under the Teva Agreement and our equity ownership in the wholly-owned subsidiary. The Notes have no other recourse to us. The Notes may not be redeemed at our option until after March 18, 2016, and may be redeemed after that date subject to the achievement of certain milestones and the payment of a redemption premium for any redemption occurring prior to March 19, 2019. The Notes are not convertible into Alexza equity, nor have we guaranteed them.

We valued the warrants issued to the debt holders utilizing the Black-Scholes valuation model with an assumed volatility of 87%, an estimated life of 5 years, a 1.54% risk-free interest rate and a dividend rate of 0%. The total value of the warrants, $1,721,000, was recognized as an increase to Additional Paid In Capital and as a discount to the Notes. The amount will be amortized into interest expense over a five-year period. We incurred total fees and expenses of $4,171,000, which we recorded as a noncurrent Other Asset, and are amortizing into interest expense over a five-year period.

Future Scheduled Payments

Future scheduled principal payments under the debt obligations as of September 30, 2014 are as follows (in thousands):


	Total
2014 - remaining 3 months		201
2015		—
2016		—
2017		—
2018		25,000
Thereafter		—

Total	$	25,201

The above table excludes any payments pursuant to the $45,000,000 from the royalty securitization financing notes of our wholly-owned subsidiary, which have a legal maturity date in 2027. The principal payments by the subsidiary under the royalty securitization financing will be dependent upon the timing and amounts of royalties and milestone payments received under the Teva Agreement.