Note 4. Loan and Security Agreement

Current Term Loan

2019 Term Loan

In March 2019, the Company entered into a $24.0 million growth capital term loan facility (the “2019 Term Loan”) with Silicon Valley Bank (“SVB”) and WestRiver Innovation Lending Fund VIII, L.P (“WestRiver”). The two-tranche loan agreement consists of an initial $20.0 million tranche (the “Term A Loan Advance”), which was funded upon closing, with the remaining $4.0 million (the “Term B Loan Advance”) initially available to be drawn, at the Company’s option, subject to the achievement of positive data, on or prior to August 15, 2019 (which was extended to December 31, 2019, in connection with the First Amendment to the 2019 Term Loan, as discussed below), with respect to the Company’s 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 (the “Milestone Event”). 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, which consisted of $5.6 million in outstanding principal balance and $0.85 million as a final payment fee, and such obligations are considered to be fully repaid and performed. The Term B Loan Advance of $4.0 million was not drawn down by the Company and has since expired.

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 initially had an interest-only payment period of 12 months (which was extended to 18 months in connection with the First Amendment to the 2019 Term Loan, as discussed below), extendable to 18 months upon the drawing of the Term B Loan Advance (which is now extendable to 24 months as a result of the First Amendment to the 2019 Term Loan). The Company did not draw down on the Term B Loan Advance, and therefore, the interest-only monthly payment period was not extended. Principal payments coming due within twelve months have been classified as current liabilities in the accompanying balance sheet. In addition, the Company was initially 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 was increased to 6.3% in connection with the First Amendment to the 2019 Term Loan, as discussed below), which is being accreted and amortized into interest expense using the effective interest rate method over the term of the loan.

The Company could initially 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.

First Amendment to the 2019 Term Loan

On July 25, 2019 (the “First Amendment Effective Date”), the Company entered into the first amendment to the 2019 Term Loan (the “First Amendment to the 2019 Term Loan”). Under the First Amendment to the 2019 Term Loan, the interest-only monthly payment period was extended to 18 months after the date of the 2019 Term Loan, which may be further extended to 24 months upon receipt by the Company of the Term B Loan Advance. The Company’s ability to draw down the Term B Loan Advance was extended to December 31, 2019, subject to the Company’s achievement of the Milestone Event prior to or on December 31, 2019. The Term B Loan Advance and the Term A Loan Advance (together, the “Loan Advances”) mature on February 1, 2023 (the “Maturity Date”).

Pursuant to the 2019 Term Loan, as amended by the First Amendment to the 2019 Term Loan, following the interest-only payment period, the Company will begin making monthly payments of principal in equal monthly installments for 30 consecutive months (provided, that, upon the occurrence of the Milestone Event, the repayment schedule will be decreased to 24 consecutive months) and monthly payments of interest, until the Maturity Date. Interest will accrue on the unpaid principal balance of the outstanding Loan Advances at a floating per annum rate equal to the greater of (i) seven and one-half of one percent (7.50%) and (ii) two percent (2.0%) above the prime rate. The First Amendment to the 2019 Term Loan increased the final payment fee, payable upon the Company’s repayment of the Loan Advances from 6.0% to 6.3% of the original principal amount of the Loan Advances.

The Company may prepay all, but not less than all of the Loan Advances, subject to a prepayment fee of 3.0% of any amount prepaid prior to the first anniversary of the First Amendment Effective Date, 2.0% of the amount prepaid if the prepayment occurs after the first anniversary of the First Amendment Effective Date through and including the second anniversary of the First Amendment Effective Date, or 1.0% of the amount prepaid if the prepayment occurs after the second anniversary of the First Amendment Effective Date, but prior to the Maturity Date. These percentages are unchanged from the original 2019 Term Loan.

The Company evaluated whether the First Amendment to the 2019 Term Loan entered into in July 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 First Amendment to the 2019 Term Loan is less than 10% different from the remaining cash flows under the terms of the 2019 Term Loan, the First Amendment to the 2019 Term Loan was accounted for as a debt modification. Therefore, the unamortized balance of debt discount costs incurred in connection with 2019 Term Loan are being amortized through maturity in February 2023 utilizing the effective interest rate method.

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 $379,167 and $216,667 for the three months ended March 31, 2020 and 2019, respectively. In addition, amortization of the final payment fee was $119,014 and $69,665 for the three months ended March 31, 2020 and 2019, respectively.

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


	March 31,		December 31,
	2020		2019

Total Outstanding Debt	$	20,000,000	$	20,000,000
Add: accreted liability of final payment fee		523,378		404,364
Less: unamortized debt discount, long-term		(312,573)		(405,071)
Less: current portion of long-term debt		(4,666,667)		(2,666,667)
Loan payable, long-term	$	15,544,138	$	17,332,626

Current portion of long-term debt	$	4,666,667	$	2,666,667
Less: current portion of unamortized debt discount		(98,235)		(64,375)
Loan payable, current portion	$	4,568,432	$	2,602,292

Further information on warrants issued related to the debt financings and amendments are disclosed in Note 6 - Stockholders’ Equity under the “Warrants” section.

Amortization of the debt discount in relation to warrants issued as described above was $58,638 and $37,768 for three months ended March 31, 2020 and 2019, respectively.

Scheduled Principal Payments on Outstanding Debt, as of March 31, 2020, are as follows:


2020		2,666,667
2021		8,000,000
2022		8,000,000
2023		1,333,333
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, 2020.