Long-term Debt

(A) NovaQuest Long-term Debt

In October 2017, the Company, its subsidiaries, MSI, MHL, MSG and MSIL, as guarantors, and NovaQuest Capital Management, or NovaQuest, entered into (i) a Securities Purchase Agreement, or the NovaQuest Securities Purchase Agreement, and (ii) an Equity Purchase Agreement, or the NovaQuest Equity Purchase Agreement. Pursuant to the NovaQuest Securities Purchase Agreement, the Company has the option, at its discretion, to issue up to $60.0 million aggregate principal amount of notes to NovaQuest and concurrent with each purchase of notes, NovaQuest is obligated to purchase up to $20.0 million of the Company’s common shares on a pro rata basis, subject to certain terms and conditions, through December 31, 2018. The equity purchase price for each such purchase will be equal to 105% of the average of the volume-weighted average price for the five consecutive trading days immediately prior to the relevant purchase date. The Company has committed that it will issue at least $30.0 million aggregate principal amount of notes through December 31, 2018, subject to certain terms and conditions, of which $6.0 million aggregate principal amount was issued in October 2017. With this issuance of $6.0 million aggregate principal amount of notes in October 2017, NovaQuest also purchased 138,361 common shares for $2.0 million in accordance with the terms of the NovaQuest Securities Purchase Agreement.

The notes bear interest at a rate of 15% per annum, of which 5% is payable quarterly, and 10% is payable on a deferred basis on the earlier of the Amortization Date (as defined below) and the repayment in full of the notes. The notes mature on October 16, 2023. The Company will be required to amortize the principal amount of the notes in equal quarterly installments commencing on November 1, 2020, subject to extension at the option of the Company to November 1, 2021, or the Amortization Date, provided certain terms and conditions are met as set forth in the NovaQuest Securities Purchase Agreement. Early redemption of the notes is subject to a redemption charge. The Company’s obligations under the NovaQuest Securities Purchase Agreement are secured by a second-lien security interest in substantially all of the Company’s and its subsidiaries’ respective assets, other than intellectual property. The NovaQuest Securities Purchase Agreement includes customary affirmative and restrictive covenants and representations and warranties, including a minimum cash covenant that applies commencing on the Amortization Date, and also includes customary events of default. Upon the occurrence of an event of default, a default interest rate of an additional 5% may be applied to the outstanding note balance and NovaQuest may declare all outstanding obligations immediately due and payable and take such other actions as set forth in the NovaQuest Securities Purchase Agreement.

Pursuant to the NovaQuest Equity Purchase Agreement, NovaQuest has committed to purchase up to an additional $20.0 million of the Company’s common shares from time to time at the Company’s discretion through December 31, 2018, with an option to extend the commitment through December 31, 2019, subject to certain terms and conditions as set forth in the NovaQuest Equity Purchase Agreement. The Company has committed that it will exercise its option to sell and issue a minimum of $10.0 million of its common shares under the NovaQuest Equity Purchase Agreement through December 31, 2018, subject to certain terms and conditions. The purchase price for the common shares issued pursuant to the NovaQuest Equity Purchase Agreement will be equal to 105% of the average of the volume-weighted average price for the five consecutive trading days immediately prior to the relevant purchase date.

The Company incurred financing costs related to the NovaQuest Securities Purchase Agreement of $1.0 million which are recorded as an offset to long-term debt on the Company’s consolidated balance sheets. These deferred financing costs are being amortized over the term of the debt using the effective interest method, and are included in interest expense in the Company’s consolidated statements of operations. During the year ended March 31, 2018, interest expense included $0.2 million of amortized deferred financing costs related to the NovaQuest notes.

Outstanding debt obligations to NovaQuest are as follows (in thousands):



	March 31, 2018

Principal amount	$	6,000
Less: unamortized debt issuance costs	(854		)
Loan payables less unamortized debt issuance costs	5,146
Less: current maturities	—
Long-term loan payable, net of current maturities and unamortized debt issuance costs	$	5,146

(B) Hercules Long-term Debt

In October 2017, the Company, its subsidiaries, MSI, MHL, MSG and MSIL as guarantors, and Hercules Capital, Inc., or Hercules, entered into a Loan Agreement, or the Hercules Loan Agreement, which provides up to $40.0 million principal amount of term loans, or the Term Loans. A first tranche of $25.0 million principal amount was funded upon execution of the Hercules Loan Agreement in October 2017 and the remaining $15.0 million principal amount was funded in March 2018. The Term Loans bear interest at a variable per annum rate at the greater of (i) the prime rate plus 4.00% and (ii) 8.25%. The interest rate on the Term Loans was 8.75% at March 31, 2018. The Term Loans mature on May 1, 2021, subject to extension to November 1, 2021 if certain milestones are met. The Company is obligated to make monthly payments of accrued interest until June 1, 2019, or the Interest-only Period, followed by monthly installments of principal and interest through the maturity date. The Interest-only Period may be extended until June 1, 2020 if certain milestones are met as defined in the Hercules Loan Agreement. Prepayment of the Term Loan is subject to a prepayment charge. The Company is also obligated to pay an end of term charge of 6.55% of the principal amount at maturity. The Company’s obligations under the Hercules Loan Agreement are secured by a second security interest in substantially all of the Company’s and its subsidiaries’ respective assets, other than intellectual property. The Hercules Loan Agreement includes customary affirmative and restrictive covenants and representations and warranties, including a minimum cash covenant that ceases to apply if the Company achieves certain clinical development and financing milestones as set forth in the Hercules Loan Agreement. The Hercules Loan Agreement also includes customary events of default. Upon the occurrence of an event of default, a default interest rate of an additional 5.00% may be applied to the outstanding principal balance, and Hercules may declare all outstanding obligations immediately due and payable and take such other actions as set forth in the Hercules Loan Agreement.

Concurrent with each funding of the Term Loans, the Company is required to issue to Hercules a warrant, or the Warrants, to purchase a number of its common shares equal to 3.00% of the principal amount of the relevant Term Loan funded divided by the exercise price, which is based on the lowest three-day volume-weighted average price for the three consecutive trading days prior to the funding date for such Term Loan. The Warrants may be exercised on a cashless basis, and are immediately exercisable through the seventh anniversary of the applicable funding date. In connection with the first tranche funded under the Hercules Loan Agreement, the Company issued a Warrant to Hercules exercisable for an aggregate of 49,800 of its common shares at an exercise price of $15.06 per common share. Concurrent with the funding of the second tranche, the Company issued a Warrant to Hercules exercise for an aggregate of 23,910 of its common shares at an exercise price of $18.82 per common share. The Company accounted for the Warrants as equity instruments since they were indexed to the Company’s common shares and met the criteria for classification in shareholders’ equity (deficit). The relative fair value of the Warrants related to the first and second tranche funding were approximately $0.5 million and $0.3 million, respectively, and were treated as a discount to the Term Loans. This amount is being amortized to interest expense using the effective interest method over the life of the Term Loans. The Company estimated the fair value of the Warrants using the Black-Scholes model based on the following key assumptions:



	Tranche 1	Tranche 2

Exercise price	$15.06	$18.82
Common share price on date of issuance	$14.39	$18.96
Volatility	73.2%	72.3%
Risk-free interest rate	2.15%	2.78%
Expected dividend yield	—%	—%
Contractual term (in years)	7.00 years	7.00 years

The Company issued the first tranche of the Term Loans at a discount of $2.1 million, including the relative fair value of the related Warrant, and incurred financing costs of $1.3 million relating to the Hercules Loan Agreement which are recorded as an offset to long-term debt on the Company’s consolidated balance sheets. The second tranche of the Term Loans was issued at a discount of $1.3 million, including the relative fair value of the related Warrant. The debt discount and deferred financing costs are being amortized over the term of the debt using the effective interest method, and are included in interest expense in the Company’s consolidated statements of operations. During the year ended March 31, 2018, interest expense included $0.5 million of amortized debt discount and issuance costs related to the Term Loans.

Outstanding debt obligations to Hercules are as follows (in thousands):



	March 31, 2018

Principal amount	$	40,000
End of term charge	2,620
Less: unamortized debt discount and issuance costs	(4,142		)
Loan payables less unamortized debt discount and issuance costs	38,478
Less: current maturities	—
Long-term loan payable, net of current maturities and unamortized debt discount and issuance costs	$	38,478

Annual maturities of long-term debt outstanding as of March 31, 2018 are as follows (in thousands):



Years Ended March 31,

2019	$	—
2020	15,779
2021	21,464
2022	5,526
2023	1,846
Thereafter	1,385
Total	$	46,000