Facility financing agreement | 3 Months Ended |
Mar. 31, 2014 |
Facility financing agreement | ' |
11. Facility financing agreement |
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The components and activity from initial recording of the facility financing agreement recorded through March 31, 2014 consist of the following (in thousands): |
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| | March 31, | |
2014 |
2019 notes | | | | |
Initial principal amount | | $ | 120,000 | |
Principal converted to equity | | | (92,500 | ) |
Debt discount-net of amortization | | | (1,546 | ) |
Unaccreted debt issuance expense | | | (83 | ) |
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Net carrying amount of facility financing agreement | | $ | 25,871 | |
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Milestone Rights | | | | |
Initial milestone rights fair value | | $ | 16,276 | |
Debt discount-net of amortization | | | (51 | ) |
Unaccreted debt issuance expense | | | (61 | ) |
Less current portion of milestone rights included in other current liabilities | | | (3,151 | ) |
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Net carrying amount included in other liabilities | | $ | 13,013 | |
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Commitment Asset | | | | |
Initial commitment asset fair value | | $ | 13,393 | |
Tranche B commitment asset fair value | | $ | 2,921 | |
Less Tranche 2 portion of commitment asset | | | (3,656 | ) |
Less Tranche 3 portion of commitment asset | | | (4,580 | ) |
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Commitment asset value included in other assets | | $ | 8,078 | |
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Accretion of debt issuance cost and debt discount in connection with the Facility financing agreement during the three months ended March 31, 2014 are as follows (in thousands): |
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| | Three months ended | |
March 31, 2014 |
Accretion expense- debt issuance cost | | $ | 282 | |
Accretion expense- debt discount | | $ | 6,367 | |
On July 1, 2013, the Company entered into the Facility Agreement providing for the sale of up to $160.0 million of 2019 notes to Deerfield in four equal tranches of $40.0 million principal amount. The 2019 notes accrue interest at a rate of 9.75% per annum until maturity in 2019 or their earlier repayment, repurchase, or conversion. As of March 31, 2014, Deerfield had purchased the first three tranches of 2019 notes in the aggregate principal amount of $120.0 million; therefore, only $40.0 million remain unsold. Deerfield’s obligation to purchase the fourth tranche of 2019 notes is subject to receipt of marketing approval of AFREZZA by the FDA and the shares of common stock issuable upon conversion of all previously sold 2019 notes being freely tradable pursuant to an effective registration statement filed with the SEC or pursuant to Rule 144 under the Securities Act. |
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On February 28, 2014, the Company entered into the Amendment, which modified the terms of the Facility Agreement to provide for the issuance of Tranche B notes to Deerfield in a maximum principal amount equal to (i) if the FDA approves the NDA for AFREZZA and Deerfield purchased the fourth tranche of 2019 notes, 150% of the aggregate principal amount of the 2019 notes that Deerfield has converted into the Company’s common stock on and after the effective date of the Amendment, up to $90.0 million, and (ii) otherwise, 33.33% of the aggregate principal amount of the 2019 notes that Deerfield has converted into the Company’s common stock on and after the effective date of the Amendment, up to $20.0 million, in each case subject to the satisfaction of certain other conditions. The Tranche B notes bear interest at the rate of 9.75% per year, subject to reduction to 8.75% if the Company enters into a collaboration with a third party to commercialize AFREZZA, on the outstanding principal amount, payable in cash quarterly in arrears on the last business day of March, June, September and December of each year. The Company is required to repay 25% of the original principal amount of any Tranche B notes on the third, fourth, fifth and sixth anniversaries of the applicable issue dates of such notes, provided that the entire outstanding principal amount of all Tranche B notes will become due and payable no later than December 31, 2019. The Tranche B notes can be prepaid without penalty or premium commencing two years after issuance thereof. |
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In addition, pursuant to the Amendment, the outstanding first tranche of 2019 notes (the “Tranche 1 notes”) and third tranche of 2019 notes (the “Tranche 3 notes”) held by Deerfield were amended and restated such that Deerfield may, subject to certain limitations, convert up to an additional $60.0 million principal amount under such 2019 notes into common stock after the effective date of the Amendment, at a minimum conversion price of $5.00 per share. The Company also agreed to register for resale up to 12,000,000 shares of common stock issuable upon conversion of the outstanding 2019 notes, as amended and restated, as of the date of the Amendment. |
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Commitment Asset |
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In connection with the issuance of the Tranche 1 notes and the Milestone Rights, the Company recorded a commitment asset, or the Commitment Asset, on July 1, 2013. As a result of the Amendment, the Company recorded an additional commitment asset with an estimated fair value equal to $2.9 million. The Commitment Asset remaining as of March 31, 2014 represents the right to receive $40.0 million funding under tranche 4 of 2019 notes and up to $90 million of funding under Tranche B notes, subject to the achievement of certain milestones, pursuant to the Facility Agreement, as amended. The Commitment Asset is derecognized and recorded as a debt discount on the 2019 notes and Tranche B notes when issued and amortized using the effective interest rate method over the life of the notes. Prior to derecognition occurring, the Company monitors the Commitment Asset on an ongoing basis to determine whether an impairment indicator is present that would result in a full or partial write down of the Commitment Asset as a result of events that may lead to the subsequent tranches of notes not being issued. Based on the monitoring procedures performed through March 31, 2014, the Company did not identify any indicators of impairment. |
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Amendment to the outstanding Tranche 1 and Tranche 3 notes |
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The amendment and restatement of the outstanding Tranche 1 and Tranche 3 notes, pursuant to the Amendment, did not represent a troubled debt restructuring in the notes because the Amendment did not result in Deerfield granting a concession to the Company. In addition, the Amendment did not result in a substantial modification to the terms of the Tranche 1 and Tranche 3 notes. |
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The impact of the Amendment to the Tranche 1 and Tranche 3 notes will be accounted for as a prospective yield adjustment. Specifically the value of the Tranche B Commitment Asset was considered a fee received from the creditor as consideration for the Amendment and will be amortized as an adjustment of interest expense over the remaining term of the Tranche 1 and Tranche 3 notes using the effective interest method. As a result of the Amendment, the value of the Tranche B Commitment Asset was allocated between the Tranche 1 and Tranche 3 notes, which decreased the amount of debt discount on the Tranche 1 and Tranche 3 notes. |
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Conversion Option |
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For accounting purposes, the Company evaluated the embedded conversion option in the 2019 notes as a redemption feature because the number of shares issuable upon conversion is based on the volume weighted average prices for specified periods prior to the conversion date (as opposed to being fixed). Accordingly, conversions by Deerfield were treated as redemptions of the 2019 notes and, as discussed below, the Company analyzed whether the conversion option required bifurcation as an embedded redemption feature. As of December 31, 2013, Deerfield had converted $6.5 million principal amount of the second tranche of 2019 notes (the “Tranche 2 notes”) for equity, resulting in an issuance of 1,293,224 shares of the Company’s common stock. Upon the conversion, the principal balance of the notes were recorded in equity and an expense was recognized in the Statement of Operations in the amount of $0.6 million for the difference between the principal amount of the notes converted and their carrying amount (which included unamortized discount and debt issuance costs). |
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During January 2014, Deerfield elected to convert the remaining $33.5 million of Tranche 2 notes, which resulted in the issuance of 6,559,251 shares of the Company’s common stock. During the three months ended March 31, 2014, the Company recorded an expense of $3.0 million for the difference between the principal amount of the notes converted and their carrying amount (which included unamortized discount and debt issuance costs). |
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In March 2014, following the Amendment, which allowed Deerfield to convert up to an additional $60 million principal amount under the outstanding Tranche 1 and Tranche 3 notes, Deerfield elected to convert the full $40.0 million of outstanding principal amount of the Tranche 3 notes and $12.5 million of principal amount of the Tranche 1 notes, pursuant to which the Company issued Deerfield 7,121,120 and 2,142,709 shares of the Company’s common stock, respectively. As a result of these conversions, the Company recorded the principal balance of the notes in equity and an expense of $3.0 million for the difference between the principal amount of the notes converted and their carrying amount (which included the unamortized discount and debt issuance costs) and the write-off of the derivative liability that was previously bifurcated from the Tranche 3 notes. |
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In addition, the Company considered whether the amendment to the 2019 notes would result in the bifurcation of the conversion option in the Tranche 1 notes. Upon the issuance of the Tranche 1 notes on July 1, 2013 and as of March 31, 2014, the Company concluded that the conversion option was not required to be separated primarily due to the discount in the Tranche 1 notes not being deemed substantial under ASC 815-15-25-26. |
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