v3.19.3

Note 7 - Term Loans and Convertible Promissory Notes | 9 Months Ended
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Sep. 30, 2019
Notes to Financial Statements |
Debt Disclosure [Text Block] | Note 7. Term Loans and Convertible Promissory Notes Term Loans On November 24, 2015, the Company entered into a loan and security agreement (the “Loan Agreement”) with Oxford, pursuant to which the Company received $3.0 million in proceeds from a Term Loan A and $2.0 million in proceeds from a Term Loan B under the Loan Agreement (collectively the “Term Loans”). The Company issued warrants to purchase 11,829 shares of common stock to Oxford in connection with the Term Loans (‘ Note 10 – Warrants ’ ). The Term Loans bear interest at a floating per annum rate equal to (a) 7.06% plus (ii) the greater of (a) the 30 day U.S. Dollar LIBOR rate reported in the Wall Street Journal on the last business day of the month that immediately precedes the month in which the interest will accrue or (b) 0.19%. The Term Loan A was recorded at its initial carrying value of $3.0 million less debt issuance costs of approximately $141,000, and the Term Loan B was recorded at its initial carrying value of $2.0 million, less debt issuance costs of approximately $3,000. The debt issuance costs are being amortized to interest expense over the life of the Term Loans using the effective interest method. At September 30, 2019, $1.4 million was outstanding under Term Loan A and $1.0 million was outstanding under Term Loan B. As of December 31, 2018, $2.3 million was outstanding under Term Loan A and $1.5 million was outstanding under Term Loan B. The following modifications have been made during the nine months ended September 30, 2019:
| ● | In January 2019, the Company and Oxford Finance agreed to amend the Loan Agreement. Oxford agreed to two months of interest-only payments followed by eight months of repayments upon delivery by February 1, 2019 of an executed term sheet for equity financing that would result in aggregate proceeds to the Company of $20.0 million. The Company was also required to place $200,000 in a segregated bank account that is subject to a blocked control agreement in favor of Oxford. Per the blocked control agreement, the account is subject to bank fees, which Oxford has agreed to have deducted from this account on a monthly basis. The funds in the segregated account were to be released upon the earlier of the consummation of a merger by March 31, 2019 or the consummation of an equity financing. The Company recorded the $200,000 as restricted cash. The maturity date of the Term Loans remained unchanged. The amendment fee amounted to $50,000. The amendment was accounted for as a debt modification.
| ● | In May 2019, the Company and Oxford agreed to an amendment to provide consent to the Merger. This consent amended certain provisions of the Term Loans to protect Oxford’s rights under the original Loan Agreement. The consent allowed Alliqua to be named as an additional borrower.
| ● | In June 2019, the Company and Oxford agreed to amend the Loan Agreement. Oxford agreed to two months of interest-only payments and the maturity date of the Term Loans was extended two months. The amendment fee amounted to $20,000. The amendment was accounted for as a debt modification.
| ● | In August 2019, the Company and Oxford agreed to amend the Loan Agreement. Oxford agreed to two months of interest-only payments followed by five months of scheduled repayments upon receipt by the Company of at least $500,000 by September 30, 2019 to fund operations through October 31, 2019. The maturity date of the Term Loans is March 1, 2020. The amendment was accounted for as a troubled debt restructuring.
Upon the respective dates of the debt modifications, no gain or loss was recorded, and a new effective interest rate was established based on the carrying value of the debt and the revised cash flows. Interest expense associated with the Term Loans was $100,000 and $173,000 for the three months ended September 30, 2019 and 2018, respectively, and $436,000 and $482,000 for the nine months ended September 30, 2019 and 2018, respectively. As of September 30, 2019, the Company was in compliance with all covenants under the Loan Agreement. Principal payments for the Term Loans due under the loan agreement as of September 30, 2019 are due monthly beginning November 1, 2019 through the Term Loans’ maturity date on March 1, 2020. Convertible Promissory Notes The table below reflects the principal amount of the Notes issued by the Company (in thousands):
|  | September 30, |  |  | December 31, |
|  | 2019 |  |  | 2018 |
Convertible note payable, due on March 29, 2019 interest at 8.0% p.a. |  | $ | - |  |  | $ | 1,500 |
Convertible note payable, due on September 27, 2019 interest at 8.0% p.a. |  |  | - |  |  |  | 1,500 |
Convertible note payable, due on December 21, 2019 interest at 8.0% p.a. |  |  | 1,500 |  |  |  | 1,500 |
Convertible note payable, due on March 29, 2020 interest at 8.0% p.a. |  |  | 1,500 |  |  |  | - |
Convertible note payable, due on April 26, 2020 interest at 8.0% p.a. |  |  | 2,000 |  |  |  | - |
Convertible note payable, due on May 29, 2020 interest at 8.0% p.a. |  |  | 500 |  |  |  | - |
Convertible note payable, due on July 1, 2020 interest at 8.0% p.a. |  |  | 250 |  |  |  | - |
Convertible note payable, due on July 29, 2020 interest at 8.0% p.a. |  |  | 350 |  |  |  | - |
Convertible note payable, due on August 30, 2020 interest at 8.0% p.a. |  |  | 250 |  |  |  | - |
Total |  | $ | 6,350 |  |  | $ | 4,500 |
Outstanding Notes The Notes outstanding at September 30, 2019 were issued with conversion and repayment rights as described below:
| (a) | in the event that the Company issues and sells equity securities with proceeds to the Company of at least $5 million, on or before the maturity date, and after the closing of a reverse merger, then the outstanding principal amount of this convertible promissory note and any unpaid accrued interest will automatically convert in whole into equity securities of the same class sold in the equity financing at a conversion price equal to the cash price paid per share for equity securities in the financing,
| (b) | if the Company consummates a change of control while the Notes remain outstanding, the Company shall repay the holders in cash in an amount equal to 200% of the outstanding principal amount of the Notes; and
| (c) | in the event the Company consummates an IPO on or before the maturity date, then the outstanding principal amount of the Notes and any unpaid accrued interest will automatically convert into common stock at a conversion price equal to the per share offering price to the public for common stock in the IPO.
In July 2019 and August 2019, affiliates of Domain Partners, LLC, a significant shareholder of the Company, purchased from the Company $0.6 million and $0.3 million aggregate principal amount of Notes to fund the Company’s operations. These Notes accrue simple interest on the outstanding principal amount at a rate of 8% per annum and mature in July 2020 and August 2020, respectively. Converted Notes In May 2019, under the terms of the then outstanding Notes, the principal and accrued unpaid interest of two Notes totaling $3.2 million were automatically converted into the Company’s Series B convertible preferred stock. Upon consummation of the Merger, and subject to the terms and conditions of the Merger Agreement each outstanding share of capital stock of Adynxx, was converted into the right to receive the number of shares of the combined Company’s common stock equal to the Exchange Ratio formula in the Merger Agreement. An aggregate of 367,041 post-Merger common shares were issued associated with the conversion of these Notes. In connection with a previous modification, the Company had computed a contingent beneficial conversion feature (“BCF”) that was contingent upon the occurrence of a reverse merger. In accordance with ASC 470 - 20 - 25 - 6, the contingent BCF is not recognized in earnings until the contingency is resolved. Upon the date of the Merger, the full amount of beneficial conversion feature of $2.1 million was recognized as interest expense in the condensed consolidated statement of operations for the nine months ended September 30, 2019. Derivative Liability The Company evaluated its outstanding Notes and determined that certain embedded components relating to conversion and redemption features of those contracts qualified as derivatives, which need to be separately accounted for in accordance with ASC 815. With the consummation of the Merger, several of these clauses no longer apply. However, the redemption provision upon change of control described above is an embedded feature that is required to be bifurcated. As of September 30, 2019, the Company evaluated the fair value of the derivative liability and determined that the bifurcated derivative liability had no value because the Company estimated a zero probability of the embedded feature being triggered. As a result, the Company estimated the fair value of the derivative liability to be $0 at September 30, 2019. Similarly, the embedded derivatives that were in place at December 31, 2018 also had a fair value of $0.

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- Definition The entire disclosure for information about short-term and long-term debt arrangements, which includes amounts of borrowings under each line of credit, note payable, commercial paper issue, bonds indenture, debenture issue, own-share lending arrangements and any other contractual agreement to repay funds, and about the underlying arrangements, rationale for a classification as long-term, including repayment terms, interest rates, collateral provided, restrictions on use of assets and activities, whether or not in compliance with debt covenants, and other matters important to users of the financial statements, such as the effects of refinancing and noncompliance with debt covenants. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 470 -URI http://asc.fasb.org/topic&trid=2208564 + Details
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