6. Notes Payable

Future principal payments on the notes payable as of December 31, 2016 are as follows (in thousands):


Year ended December 31,
2017	$	1,286
2018		1,485
2019		1,015
2020		5,723
2021		22,893
Thereafter		17,171
Total before unamortized discount and issuance costs		49,573
Less: paid-in-kind interest		(5,782)
Less: unamortized discount and issuance costs		(3,018)
Total notes payable	$	40,773

In 2016, the Company adopted, and retroactively implemented ASU No. 2015-03, "Simplifying the Presentation of Debt Issuance Costs." Under this new guidance, the Company is required to present debt issuance costs as a direct deduction from the related debt liability on our consolidated balance sheet. The cumulative effect of the change as of December 31, 2015 was $22,000 recorded in prepaid expenses and other current assets and $102,000 in other assets to a reduction in the current portion of notes payable and notes payable, net of current portion.

Term Loan Agreement

In December 2016, the Company entered into a Term Loan Agreement (the “Term Loan Agreement”) with CRG Servicing LLC (“CRG”). The Company initially borrowed $40.0 million pursuant to the Term Loan Agreement and may borrow up to an additional $10.0 million at any time through and including July 27, 2018, provided that, among other conditions, the Company receives 510(k) clearance for the marketing of T2BacteriaTM by the U.S. Food and Drug Administration (“FDA”) on or before April 30, 2018 (the “Approval Milestone”). The Term Loan Agreement has a six-year term with three years (through December 30, 2019) of interest-only payments, which period shall be extended to four years (through December 30, 2020) if the Company achieves the Approval Milestone, after which quarterly principal and interest payments will be due through the December 30, 2022 maturity date. Interest on the amounts borrowed under the Term Loan Agreement accrues at an annual fixed rate of (a) prior to the Approval Milestone, 12.50%, 4.0% of which may be deferred during the interest-only period by adding such amount to the aggregate principal loan amount and (b) following the Approval Milestone, 11.50%, 3.5% of which may be deferred during the interest-only period by adding such amount to the aggregate principal loan amount. In addition, if the Company achieves certain financial performance metrics, the loan will convert to interest-only until the December 30, 2022 maturity, at which time all unpaid principal and accrued unpaid interest will be due and payable. The Company is required to pay CRG a financing fee based on the loan principal amount drawn. The Company is also required to pay a final payment fee of 8% of the principal outstanding upon repayment.

The Company may prepay all or a portion of the outstanding principal and accrued unpaid interest under the Term Loan Agreement at any time upon prior notice subject to a certain prepayment fee during the first five years of the term and no prepayment fee thereafter. As security for its obligations under the Term Loan Agreement the Company entered into a security agreement with CRG whereby the Company granted a lien on substantially all of its assets, including intellectual property. The Loan Agreement also contains customary affirmative and negative covenants for a credit facility of this size and type. The Loan Agreement also requires the Company to achieve certain revenue targets, whereby the Company is required to pay double the amount of any shortfall as an acceleration of principal payments. The Loan Agreement includes a subjective acceleration clause whereby an event of default, including a material adverse change in the business, operations, or conditions (financial or otherwise), could result in the acceleration of the obligations under the Loan Agreement. Under certain circumstances, a default interest rate of an additional 4.00% per annum will apply at the election of CRG on all outstanding obligations during the occurrence and continuance of an event of default. CRG has not exercised its right under this clause, as there have been no such events. The Company believes the likelihood of CRG exercising this right is remote.

The Company assessed the terms and features of the Term Loan Agreement in order to identify any potential embedded features that would require bifurcation or any beneficial conversion features. As part of this analysis, the Company assessed the economic characteristics and risks of the Term Loan Agreement, including put and call features. The Company determined that the features of the Term Loan Agreement are either clearly and closely associated with a debt host and do not require bifurcation as a derivative liability, or the fair value of the feature is immaterial. Included in these features are principal payment acceleration clauses triggered by a developmental milestone. Should the Company’s assessment of this milestone change, there could be a non-cash charge in operations. The Company will continue to reassess the features to determine if they require separate accounting on a quarterly basis.

In December 2016, pursuant to the Term Loan Agreement, the Company made an initial draw of $39.2 million, net of financing fees. The Company used approximately $28.0 million of the initial proceeds to repay approximately $27.5 million of outstanding debt pursuant to the Loan and Security Agreement and to repay approximately $479,000 of outstanding debt pursuant to the Promissory Note. Upon the repayment of all amounts owed by the Company under these agreements, all commitments were terminated and all security interests granted by the Company were released.

In connection with the Term Loan Agreement entered into in December 2016, the Company issued to CRG four separate warrants to purchase a total of 528,958 shares of the Company’s common stock. The warrants are exercisable any time prior to December 30, 2026 at a price of $8.06 per share, with typical provisions for termination upon a change of control or a sale of all or substantially all of the assets of the Company. The warrants are classified within shareholders’ equity, and the proceeds were allocated between the debt and warrants based on their relative fair value. The fair value of the warrants was determined by the Black Scholes Merton option pricing model. The fair value of the warrants at December 30, 2016 was $1.8 million.

Equipment Lease Credit Facility

In October 2015, the Company signed the $10.0 million Credit Facility (the “Credit Facility”) with Essex Capital Corporation (“Essex”) to fund capital equipment needs. As one of the conditions of the Term Loan Agreement, the Credit Facility is capped at a maximum of $5.0 million. Under the Credit Facility, Essex will fund capital equipment purchases presented by the Company. The Company will repay the amounts borrowed in 36 equal monthly installments from the date of the amount funded. At the end of the 36 month lease term, the Company has the option to (a) repurchase the leased equipment at the lesser of fair market value or 10% of the original equipment value, (b) extend the applicable lease for a specified period of time, which will not be less than one year, or (c) return the leased equipment to the Lessor.

In April 2016 and June 2016, the Company completed the first two draws under the Credit Facility of $2.1 million and $2.5 million, respectively. The Company will make monthly payments of $67,000 under the first draw and $79,000 under the second draw. The borrowings under the Credit Facility are treated as capital leases. The amortization of the assets conveyed under the Credit Facility is included as a component of depreciation expense.

Loan and Security Agreement

On July 11, 2014, the Company entered into a loan and security agreement (“Loan and Security Agreement”) with two lenders to borrow up to $30.0 million for operations. The Loan and Security Agreement allows the Company to borrow amounts in two tranches, up to $20.0 million (drawn in amounts not less than $10.0 million upon closing and the remainder drawn in amounts not less than $5.0 million draws) for tranche A and up to $10.0 million for tranche B. The Company borrowed a total of $29.7 million under the Loan and Security Agreement, net of issuance costs. In December 2016, the Company used approximately $27.5 million of the proceeds from the Term Loan agreement to repay the outstanding debt pursuant to the Loan and Security Agreement. Upon the repayment of all amounts owed by the Company under the Loan and Security Agreement, all commitments were terminated and all security interests granted by the Company were released.

The amounts borrowed under the Loan and Security Agreement were collateralized by substantially all of the assets of the Company and bear interest at the one-month LIBOR plus 7.05%. The Company was required to pay interest only payments on the amounts borrowed under the Loan and Security Agreement through July 31, 2016. After the interest-only period, the Company was repaying the amounts borrowed in equal monthly installments until the maturity date. The Loan and Security Agreement required payment of a final fee of 4.75% of the aggregate original principal of amounts borrowed, which the Company accrued over the term of the Loan and Security Agreement. In addition, amounts borrowed could have been prepaid at the option of the Company in denominations of not less than $1.0 million, and any amounts prepaid were subject to a prepayment premium of 1.0% if prepaid prior to the second anniversary of the borrowing date and 0.5% if prepaid prior to the maturity date and after the second anniversary of the borrowing date. The effective interest rate for the Loan and Security Agreement, including final fee interest and non-cash interest, was 9.7%. The Loan and Security Agreement did not include any financial covenants, but did contain a subjective acceleration clause whereby upon an event of default, which includes a material adverse change in the business, operations, or conditions of the Company or a material impairment of the prospect of repayment of any portion of the obligations, the lender could accelerate the Company’s repayment obligations. In the event of default, the lender had first priority to substantially all of the Company’s assets.

The Company assessed the terms and features of the Loan and Security Agreement in order to identify any potential embedded features that would require bifurcation or any beneficial conversion features. As part of this analysis, the Company assessed the economic characteristics and risks of the Loan and Security Agreement, including put and call features. The Company determined that all features of the Loan and Security Agreement were clearly and closely associated with a debt host and do not require bifurcation as a derivative liability, or the fair value of the feature is immaterial.

The Company borrowed the full $20.0 million available under tranche A by December 31, 2014. In May 2015, the Company entered into an amendment to the Loan and Security Agreement whereby the availability to draw up to $10.0 million for tranche B was extended from June 30, 2015 to December 31, 2015. Commencing July 1, 2015, the Company incurred a fee equal to 1.0% per annum of any undrawn amounts under tranche B. This fee was payable on the date tranche B was drawn or upon the expiration of the draw period. The Company paid the $50,000 fee upon drawing the remaining $10.0 million under tranche B on December 28, 2015.

Promissory Note

In May 2011, the Company entered into a promissory agreement (the “Promissory Note”) with a separate lender to borrow up to $1.7 million for the purchase of laboratory equipment and office equipment through December 2013. The Company borrowed a total of $1.4 million under the Promissory Note. The Company paid interest only on the borrowings through December 2013 and was required to make equal monthly payments of principal and interest through the maturity date. In December 2016, the Company used approximately $479,000 of the proceeds from the Term Loan agreement to repay the outstanding debt pursuant to the Promissory Note. Upon the repayment of all amounts owed by the Company under the Promissory Note, all commitments were terminated and all security interests granted by the Company were released.

The amounts borrowed were collateralized by the associated equipment and bear interest at 6.5%. The Promissory Note included financial covenants that required the Company to maintain a minimum cash balance of $300,000. In addition, the Promissory Note contained a subjective acceleration clause whereby an event of default and immediate acceleration of the borrowing occurs if there was a material adverse change in the business, operations, or condition of the Company or a material impairment of the prospect of repayment of any portion of the obligations. In the event of default, the lender had first priority on the laboratory equipment and office equipment purchased with the proceeds.

Interest Expense, Net

Interest expense for the years ended December 31, 2016, 2015 and 2014 was $4.1 million, $2.0 million, and $741,000, respectively. Interest expense for the years ended December 31, 2016, 2015, and 2014 included non-cash interest of $564,000, $354,000, and $112,000, respectively, related to the amortization of debt discounts and deferred financing costs under each of the above agreements. Interest expense for the year ended December 31, 2016 also included a non-cash charge for the extinguishment of debt of $112,000.