Note 4. Loan and Security Agreement

Current Term Loan

In March 2019, the Company entered into a $24.0 million growth capital term loan facility with Silicon Valley Bank (“SVB”) and WestRiver Innovation Lending Fund VIII, L.P (the “2019 Term Loan”). The two-tranche loan agreement consists of an initial $20.0 million tranche, which was funded upon closing, with the remaining $4.0 million available to be drawn, at the Company’s option, subject to the achievement of positive data, on or prior to August 15, 2019, with respect to the Company’s ongoing Phase 2 clinical trial for AXS-12 in narcolepsy, sufficient to submit a Phase 3 protocol to FDA, provided that the Company has not received any objections from the FDA within thirty days after submission of such Phase 3 protocol. A portion of the first tranche was used to satisfy the Company’s existing obligations under the 2016 Amended Term Loan (as defined below) with SVB and such obligations are considered to be fully repaid and performed.

The loan bears interest at an annual rate equal to the greater of (i) seven and one-half of one percent (7.50%) and (ii) two percent (2%) above the Prime Rate. The loan advances mature in February 2023 and have an interest-only payment period of 12 months, which may be extended to 18 months upon the drawing of the second tranche. Principal payments coming due within twelve months have been classified as current liabilities in the accompanying balance sheet. In addition, the Company is required to pay a final payment fee of 6.0% of the principal amount extended on the date of repayment of the 2019 Term Loan, which is being accreted and amortized into interest expense using the effective interest rate method over the term of the loan.

The Company may prepay all, but not less than all, of the 2019 Term Loan, subject to a prepayment premium of 3.0% of the outstanding principal if prepaid within one year of the effective date of the loan, 2.0% of the outstanding principal if prepaid after the first anniversary of the effective date but on or prior to the second anniversary of the effective date, and 1.0% of the outstanding principal if prepaid after the second anniversary of the effective date. The 2019 Term Loan is collateralized by a security interest in all of the Company’s assets except intellectual property. The Company’s intellectual property is subject to a negative pledge.

Previous Term Loan

Prior to the 2019 Term Loan, the Company had a $20.0 million Term Loan Agreement with SVB which was executed in November 2016 (“2016 Original Term Loan”). The three-tranche term loan consisted of an initial $10.0 million tranche triggered upon closing, with the remaining $10.0 million available to be drawn in two $5.0 million tranches, at the Company’s option, subject to the achievement of certain clinical and financial milestones. The Company did not achieve the conditional criteria to access the second and third tranches before the specified dates and the $10.0 million in additional term loan advances subsequently expired.

The 2016 Original Term Loan bore interest at an annual rate equal to 4.50% plus the prime rate, which is the greater of 3.50% or the Wall Street Journal prime rate, and was payable monthly. It was to mature in November 2020 and had an interest-only payment period until December 1, 2017, which was extendable to May 2018 upon the drawing of the second tranche. Because the Company did not achieve the conditional criteria to access the second and third term advances before the specified dates, the $10.0 million in additional term loan advances expired and the Company began to repay principal in December 2017. Following the interest-only payment period, the Company began making monthly payments of principal and interest and such payments would continue until the maturity date. Principal payments coming due within twelve months had been classified as current liabilities in the accompanying balance sheet. In addition to principal and interest payments under the 2016 Original Term Loan, the Company was required to pay a final payment fee of 8.5% of the principal amount extended on the date of repayment of the 2016 Original Term Loan. The Company accrued the final payment fee into interest expense using the effective interest rate method until the entry into the 2019 Term Loan in March 2019, at which time the Company paid SVB $0.85 million in satisfaction of all final payment fee liabilities due under the 2016 Original Term Loan.

The Company was permitted to prepay all, but not less than all, of the 2016 Original Term Loan subject to a prepayment premium of 3.0% of the outstanding principal if prepaid within two years of the effective date of the loan, 2.0% of the outstanding principal if prepaid during the third year of the loan, and 1.0% of the outstanding principal if prepaid after the third year. The 2016 Original Term Loan was collateralized by a security interest in all of the Company’s assets except intellectual property. The Company’s intellectual property was subject to a negative pledge.

In November 2018, the Company amended the 2016 Original Term Loan with SVB to provide an additional $4.0 million growth capital loan. The additional capital was available to be drawn on the amendment effective date which was November 26, 2018 through May 31, 2019, at the Company’s option, conditioned upon the achievement of a clinical milestone, which required the Company’s receipt of positive data of the Company’s Phase 2 clinical trial of AXS-12 for the treatment of narcolepsy, sufficient to submit a Phase 3 protocol to the FDA and to proceed to a Phase 3 trial (“2016 Amended Term Loan”). The financial terms for this additional growth capital were more favorable than those of the 2016 Original Term Loan. All other terms and conditions from the 2016 Original Term Loan agreement remained in place. The additional $4.0 million growth capital loan had to be drawn by May 31, 2019 and would bear interest at an annual rate equal to the greater of the prime rate plus 2.00%, or 7.25%, if drawn. The Company’s obligations under the 2016 Amended Term Loan, along with the ability of the Company to draw down on the additional $4.0 million tranche, were considered performed and completed in connection with the establishment of the 2019 Term Loan.

The Company evaluated whether the 2019 Term Loan entered into in March 2019 represented a debt modification or extinguishment in accordance with ASC 470-50, Debt – Modifications and Extinguishments. As the present value of the cash flows under the terms of the 2019 Term Loan is less than 10% different from the remaining cash flows under the terms of the 2016 Original Term Loan and the 2016 Amended Term Loan, the 2019 Term Loan was accounted for as a debt modification. Since the borrowing capacity of the 2019 Term Loan is greater than the borrowing capacity from the 2016 Original Term Loan and the 2016 Amended Term Loan, the unamortized balance of debt discount costs incurred in connection with those loans and additional debt discount costs incurred in connection with entry into the 2019 Term Loan, are being amortized through maturity in February 2023 utilizing the effective interest rate method.

Loan Interest Expense and Amortization

The Company incurred interest expense of $216,667 and $206,868 for the three months ended March 31, 2019 and 2018, respectively. In addition, amortization of the final payment fee was $69,665 and $76,586 for the three months ended March 31, 2019 and 2018, respectively.

The outstanding debt and unamortized debt discount balances are as follows:


	March 31,		December 31,
	2019		2018

Total Outstanding Debt	$	20,000,000	$	6,388,889
Add: accreted liability of final payment fee		37,461		663,459
Less: unamortized debt discount, long-term		(664,313)		(99,595)
Less: current portion of long-term debt		(555,556)		(3,333,333)
Loan payable, long-term	$	18,817,592	$	3,619,420

Current portion of long-term debt	$	555,556	$	3,333,333
Less: current portion of unamortized debt discount		(19,789)		(41,939)
Loan payable, current portion	$	535,767	$	3,291,394

In connection with the 2016 Original Term Loan, SVB and Life Science Loans, LLC received warrants to purchase an aggregate 65,228 shares of the Company’s common stock at an exercise price of $7.41 per share, which are exercisable for seven years from the date of issuance. The warrants were classified as a component of stockholders’ equity. Additionally, in connection with the 2016 Amended Term Loan, SVB and WestRiver Innovation Lending Fund VIII, L.P. received warrants to purchase an aggregate 15,750 shares of the Company’s common stock at an exercise price of $3.06 per share, which are exercisable for seven years from the date of issuance. Both of these warrants were classified as a component of stockholders’ equity. Prior to entering into the 2019 Term Loan, the fair value of these warrants and the closing costs were recorded as debt discounts and were being amortized using the effective interest rate method over the term of the loan. Due to the debt modification upon entry of the 2019 Term Loan, the unamortized balance of the deferred debt issuance costs incurred with the 2016 Amended Term Loan will continue to be amortized through maturity in February 2023 along with the debt issuance costs of the 2019 Term Loan utilizing the effective interest rate method.

In connection with the 2019 Term Loan, SVB and WestRiver received warrants to purchase an aggregate 70,000 shares of the Company’s common stock at a price per share equal to $8.10. The warrants will be earned based upon the usage of the facility and are exercisable until March 4, 2026. The warrants were classified as a component of stockholder’s equity, of which 58,332 warrants were immediately exercisable and the remaining 11,668 warrants will be issued based on usage of the second tranche of the 2019 Term Loan. The additional warrants will be immediately exercisable if and when they are issued by the Company. The relative fair value of the warrants of approximately $0.4 million at the time of issuance, which was determined using the Black-Scholes option-pricing model, was recorded as additional paid-in capital and reduced the carrying value of the debt. The discount on the debt is being amortized to interest expense over the term of the debt utilizing the effective interest rate method.

Amortization of the debt discount in relation to warrants issued as described above was $37,768 and $31,895 for the three months ended March 31, 2019 and 2018, respectively.

Scheduled Principal Payments on Outstanding Debt, as of March 31, 2019, are as follows:


2019		—
2020		6,111,110
2021		6,666,667
2022		6,666,667
2023		555,556
Total principal payments outstanding	$	20,000,000

The Company was in compliance with all covenants and requirements of its financing arrangements as of and during the three months ended March 31, 2019.