| Subsequent Events | Note 7 — Subsequent Events
On July 11, 2016, the Company announced a change in its clinical and product development strategy that focuses on neuromodulation rather than counterpulsation, the Company’s prior therapeutic approach. The Company believes that this new clinical strategy will provide a more cost effective way to develop a fully-implantable system, a faster path to commercialization, and broader access to the NYHA Class III heart failure market.
On July 22, 2016, the Company entered into a securities purchase agreement with an investor for an offering of shares of convertible preferred stock with gross proceeds of approximately $3.5 million in a registered direct offering. The transaction closed on July 26, 2016 and the Company issued 3,468 shares of Series B Convertible Preferred Stock. Concurrently, in a private placement, the investor received warrants to purchase 3,689,361 shares of common stock at an exercise price of $0.94. The warrants are exercisable for 36 months commencing six months from the closing date.
The Series B Preferred Stock is non-voting and convertible into a total of 3,689,361 shares of common stock at the holder’s election at any time at a conversion price of $0.94 per share. Subject to limited exceptions, a holder of Series B Convertible Preferred Stock will not have the right to exercise any portion of its shares if the holder, together with its affiliates, would beneficially own over 4.99% of the number of shares of the Company’s common stock outstanding immediately after giving effect to such exercise; provided, however, that upon not less than 61 days’ prior notice, the holder may increase such percentage, provided that it does not exceed 9.99%. Immediately upon closing of the transaction, 865 shares of the Series B Convertible Preferred Stock were converted into 920,000 shares of common stock.
Under the securities purchase agreement, the Company agreed not issue or announce the issuance or proposed issuance of any common stock or common stock equivalents for 60 days from the date of the agreement and that it will not affect or contract to effect a “Variable Rate Transaction” as defined in the securities purchase agreement so long as the investor holds warrants. The Company granted to the investor, if it issues any shares of common stock or common stock equivalents for cash consideration, indebtedness or a combination of units, within twelve (12) months after the closing date, the right to participate in up to 50% of such subsequent financing on the same terms, conditions and price.
In connection with the transaction, the Company paid the placement agent an aggregate cash placement fee equal to 6% of the aggregate gross proceeds raised in the offering and issued warrants to purchase shares of the Company’s common stock equal to 6% of the shares of common stock sold to investors in the offering. The warrant issued to the placement agent was immediately exercisable at an exercise price of $1.35 per share and will be exercisable for five years after the closing of the offering.
Subject to limited exceptions, the warrants issued to the investor and the placement agent will not be exercisable if the holder, together with its affiliates, would beneficially own over 4.99% of the number of shares of common stock outstanding immediately after giving effect to such exercise; provided, however, that upon not less than 61 days’ prior notice, the holder may increase such percentage, provided that it does not exceed 9.99%. The exercise price and number of the shares of common stock issuable upon exercising the warrants will be subject to adjustment in the event of any stock dividends and splits, reverse stock split, recapitalization, reorganization or similar transaction, as described therein. In addition, the warrants (but not the warrant issued to the placement agent) is subject to reduction of the exercise price if the Company subsequently issues common stock or equivalents at an effective price less than the current exercise price of such warrants.
On August 5, 2016, the Company acquired the Aquadex product line from Gambro UF Solutions, Inc., a subsidiary of Baxter International Inc. (the “Seller”) a global leader in the hospital products and dialysis markets. Pursuant to an asset purchase agreement (the “Purchase Agreement”), the Company acquired certain assets exclusively related to the production and sale of the Aquadex™ FlexFlow product (the “Business”) for consideration consisting of $4.0 million paid in cash, and 1,000,000 shares of the Company’s common stock. The Aquadex FlexFlow product is a medical device that can be used to treat heart failure patients as well as other patients with fluid overload who have failed diuretic therapy.
Under the Purchase Agreement, the Company has agreed that: (i) if the Company disposes of any of the Business assets for a price that exceeds $4.0 million within three years of the closing, the Company will pay Seller 40% of the amount of such excess; and (ii) if shares of the Company’s common stock cease to be publicly traded on the Nasdaq Capital Market, Seller has the option to require the Company to repurchase, in cash (subject to limited exceptions), all or any part of the common shares held by Seller at a price equal to their fair market value, as determined by a third-party appraiser.
Under the Purchase Agreement, the Company granted to Seller, if the Company proposes to issue or sell new shares of the Company’s common stock, any securities convertible into, exchangeable or exercisable for such shares, or options, warrants or other rights to acquire such shares on or prior to July 31, 2017 (the “Subsequent Financing”), the right to purchase all or a part of its pro rata portion of such new securities on terms not less favorable than the most favorable terms received by any other party in such Subsequent Financing.
The Purchase Agreement includes customary representations, warranties, and covenants of the Company and Seller, as well as provisions relating to indemnity, confidentiality, non-competition, non-solicitation, and other matters.
Upon closing of the transactions contemplated by the Purchase Agreement, the Company entered into a patent license agreement and a registration rights agreement, discussed below, as well as a transition services agreement, pursuant to which the Seller shall provide certain services related to the Business to the Company following the closing of the transactions contemplated by the Purchase Agreement, and a commercial manufacturing and supply agreement, pursuant to which the Company will purchase certain products and inventory related to the Business from the Seller for up to eighteen months following the closing of the transactions contemplated by the Purchase Agreement.
On August 5, 2016, upon closing of the transactions contemplated by the Purchase Agreement, the Company entered into a patent license agreement with Seller (the “Patent License Agreement”), pursuant to which it obtained, for no additional consideration, a world-wide license under patents used in the Business to make, have made, use, sell, offer for sale and import, the Aquadex FlexFlow product in the “field of use.” The “field of use” is defined as system and apparatus only capable of performing isolated ultrafiltration for treatment of congestive heart failure, and methods to the extent used therein (excluding system, apparatus, or methods performing any kind of renal therapy or dialysis and/or any system capable of providing substitution fluid). The license is exclusive, with respect to some patents, and non-exclusive, with respect to other patents. Under the Patent License Agreement, Seller has agreed to use commercially reasonable efforts to continue maintenance of seven “required maintenance patents,” and the Company has agreed to reimburse Seller for all fees, costs, and expenses (internal or external) incurred by Seller in connection with such continued maintenance.
The rights granted to the Company under the Patent License Agreement will automatically revert to Seller in the event the Company ceases operation of the Business or file for, have filed against us, or otherwise undertake any bankruptcy, reorganization, insolvency, moratorium, or other similar proceeding. In addition, for two years following the closing, the Patent License Agreement is not assignable by the Compnay (including in connection with a change of control) without Seller’s prior written consent.
On August 5, 2016, upon closing of the transactions contemplated by the Purchase Agreement, the Company entered into a registration rights agreement with Seller (the “Registration Rights Agreement”), pursuant to which Seller or its affiliates has the right to request that the Company file a registration statement with the SEC to register all or part of the common shares. Upon receipt of any such request, the Company agreed to use its reasonable best efforts to prepare and file a registration statement as expeditiously as possible but in any event within 30 days of such request, and to cause the registration statement to become effective in accordance with Seller’s intended method of distribution. The Company also agreed to pay the expenses incurred in connection with any such registration.
On August 4, 2016, in connection with the Company’s acquisition of the Business, the Company repaid all amounts outstanding under its existing debt facility with Silicon Valley Bank (the “Bank” ) (the “Prior Loan Agreement” ) at which time the Company’s obligations under the Prior Loan Agreement immediately terminated, other than those that were specified as surviving termination. The Company paid to the Bank approximately $6.0 million, consisting of the then outstanding principal balance due of approximately $5.5 million, accrued but unpaid interest of approximately $3,200, a final payment of $400,000 and a prepayment premium of approximately $109,000. In connection with the termination, the Bank agreed to release its security interests in all collateral under the Prior Loan Agreement.
On August 5, 2016, the Company entered into a new loan and security agreement with the Bank (the “New Loan Agreement” ). Under the New Loan Agreement, the Bank has agreed to provide the Company with up to $5.0 million in debt financing, consisting of (i) a term loan in an aggregate original principal amount not to exceed $4.0 million (the “Term Loan” ) and (ii) a revolving line of credit in an aggregate principal amount not to exceed $1.0 million outstanding at any time (the “Revolving Line” ; together with the Term Loan, the “Loans” ). The proceeds from the Loans will be used for general corporate and working capital purposes.
Advances under the Term Loan will accrue interest at a floating per annum rate equal to 2.50% above the prime rate as published in the money rates section of The Wall Street Journal, provided that, in the event such prime rate of interest is less than zero, such prime rate shall be deemed to be zero. The Company is entitled to make interest-only payments on advances under the Term Loan through March 31, 2017 (the “Amortization Date” ). Commencing on April 1, 2017, and continuing on the first day of each calendar month thereafter, the Company is required to repay advances under the Term Loan in 36 consecutive equal monthly installments of principal plus interest. In the event the Company completes an equity issuance resulting in unrestricted and unencumbered net cash proceeds in an amount of at least $25 million on or before March 31, 2017, the Amortization Date will be extended by six months, and the Company will be required to repay advances under the Term Loan in 30 consecutive equal monthly installments of principal plus interest, commencing on October 1, 2017 and continuing on the first day of each calendar month thereafter. All outstanding principal and accrued interest with respect to advances under the Term Loan are due and payable in full on March 1, 2020. Upon the occurrence and during the continuance of an event of default (as defined in the New Loan Agreement), the obligations to the Bank bear interest at a rate per annum which is 4% above the rate that is otherwise applicable.
Under the Revolving Line, the Company may borrow the lesser of $1.0 million or 80% of the Company’s eligible accounts (subject to customary exclusions), minus the outstanding principal balance of any advances under the Revolving Line. Advances under the Revolving Line will accrue interest at a floating per annum rate equal to 1.75% or 1.0% above the prime rate, depending on whether the Company has maintained net liquidity (as defined in the New Loan Agreement) in an amount equal to or greater than six times its monthly cash burn amount (as defined in the New Loan Agreement) for the period specified in the New Loan Agreement. Interest on the principal amount outstanding under the Revolving Line is payable monthly on the last calendar day of the month until March 31, 2020, at which time all outstanding principal and unpaid interest with respect to advances under the Revolving Line are due and payable in full.
The New Loan Agreement requires proceeds of accounts to be deposited into a designated bank account. Amounts received in such account will be applied to reduce the obligations under the Revolving Line, unless net liquidity is in an amount equal to or greater than six times monthly cash burn amount, in which case such amounts will be transferred to the Company’s operating account so long as no event of default exists.
Advances under both the Term Loan and the Revolving Line are subject to various conditions precedent, including without limitation the Company’s compliance with financial covenants relating to the Company’s net liquidity relative to its monthly cash burn amount, which the Company does not currently meet.
The New Loan Agreement contains customary representations, as well as customary affirmative and negative covenants. Among other restrictions, the negative covenants, subject to exceptions, prohibit or limit the Company’s ability to do the following: declare dividends or redeem or purchase equity interests; incur additional liens; make loans and investments; incur additional indebtedness; engage in mergers, acquisitions, and asset sales; transact with affiliates; undergo a change in control; add or change business locations; and engage in businesses that are not related to its existing business. The New Loan Agreement also requires the Company to maintain at all times upon the earlier to occur of (i) the funding date of the initial advance under the Term Loan or (ii) the funding date of the initial advance under the Revolving Line, tested on the last day of each month: (i) net liquidity in an amount equal to or greater than four times the Company’s monthly cash burn amount and (ii) unrestricted cash and cash equivalents in accounts with the Bank or its affiliates equal to or greater than 1.25 of the amount of all of the Company’s outstanding obligations to the Bank.
The Company’s obligations under the New Loan Agreement are secured by a security interest in the Company’s assets, excluding intellectual property and certain other exceptions. The Company is subject to a negative pledge covenant with respect to its intellectual property.
The Company’s obligations under the New Loan Agreement may be accelerated upon the occurrence of an “event of default,” which is defined to include customary events for a financing arrangement of this type, including, without limitation, payment defaults, defaults in the performance of affirmative or negative covenants (including financial ratio maintenance requirements), bankruptcy or related defaults, defaults on certain other indebtedness, the material inaccuracy of representations or warranties, material adverse changes and revocations of government approvals.
Under the New Loan Agreement, the Company also agreed to pay the Bank the following fees, in addition to certain expenses incurred by the Bank in connection with the Loans: a commitment fee of $7,500, due and paid by the Company on the effective date of the New Loan Agreement; annual fees of $7,500 due and payable by the Company on the first, second, and third anniversaries of the effective date of the New Loan Agreement, as well as upon the occurrence of other events, such as an event of default or termination of the New Loan Agreement, whichever is earliest to occur; a termination fee in an amount equal to (i) 2.0% of the Revolving Line if terminated on or before the one-year anniversary of the effective date of the New Loan Agreement or (ii) 1.0% of the Revolving Line if terminated after the one-year anniversary of the effective date of the New Loan Agreement; a final payment equal to 2.50% of the original principal amount of advances under the Term Loan or $25,000 in the event there are no advances under the Term Loan; and a prepayment premium in an amount ranging from 1.0% to 3.0% of the outstanding principal amount of advances under the Term Loan. |
