7. Debt and Interest

Debt

Total debt consists of the following:

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Oaktree Note

In August 2020, Fortress, as borrower, entered into a $60.0 million senior secured credit agreement with Oaktree (the “Oaktree Agreement” and the debt thereunder the “Oaktree Note”).  The Oaktree Agreement contains customary representations and warranties and customary affirmative and negative covenants as well as certain financial covenants, including, among other things, (i) maintenance of minimum liquidity and (ii) a minimum revenue test that requires Journey’s annual revenue to be equal to or to exceed annual revenue projections set forth in the agreement.  Failure by the Company or Journey, as applicable, to comply with the financial covenants will result in an event of default, subject to certain cure rights of the Company.  The Company, was in compliance with all applicable covenants under the Oaktree Agreement as of March 31, 2022.

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The Company is required to make quarterly interest-only payments until the fifth anniversary of the closing date, August 27, 2025, the “Maturity Date,” at which point the outstanding principal amount is due. The Company may voluntarily prepay the Oaktree Note at any time subject to a prepayment fee.  The Company is required to make mandatory prepayments of the Oaktree Note under various circumstances as defined in the Oaktree Agreement.  No mandatory prepayments were required in the three months ended March 31, 2022.

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Journey Working Capital Line of Credit Amendment and Term Loan

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On January 12, 2022, Journey entered into a third amendment (the “Amendment”) of its loan and security agreement with East West Bank, which increased the borrowing capacity of Journey’s revolving line of credit to $10.0 million, from $7.5 million, and added a term loan (“EWB term loan”) not to exceed $20.0 million. Both the revolving line of credit and the EWB term loan mature on January 12, 2026.  The EWB term loan includes two tranches, the first of which is a $15.0 million term loan and the second of which is a $5.0 million term loan (available at Journey’s option through June 12, 2023). On January 12, 2022, Journey borrowed $15.0 million against the first tranche of the EWB term loan to facilitate the VYNE Product Acquisition (see Note 6).  The EWB term loan bears interest at a floating rate equal to 1.73% above the prime rate and is payable monthly. The EWB term loans contain an interest only payment period through January 12, 2024, with an extension through July 12, 2024 if certain covenants are met, after which the outstanding balance of each term loan is payable in equal monthly installments of principal, plus all accrued interest, through the EWB term loan maturity date.  Journey may prepay all or any part of the EWB term loan without penalty or premium, but may not re-borrow any amount, once repaid. Any outstanding borrowing against the revolving line of credit bears interest at a floating rate equal to 0.70% above the prime rate. The Amendment includes customary financial covenants such as collateral ratios and minimum liquidity provisions as well as audit provisions. Journey was in compliance with all applicable covenants under the Amendment as of March 31, 2022.

Journey accounted for the Amendment as a debt modification whereby the remaining unamortized debt issuance costs related to the original revolving facility together with any lender fees and direct third-party costs incurred to issue the Amendment are considered associated with the new arrangement. The fees allocated to the revolving line are capitalized as deferred debt costs (asset) and amortized over the new four-year term of the amended revolving facility. The fees allocated to the EWB term loan are recorded as a debt discount and amortized to interest expense over the four-year term of the EWB term loan under the effective interest method.  

There was no outstanding balance on the revolving line of credit at March 31, 2022, and $0.8 million outstanding at December 31, 2021.

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Mustang Runway Growth Finance Corp. (“Runway”) Debt Facility

On March 4, 2022 (the “Closing Date”), Mustang entered into a $75.0 million long-term debt facility with Runway Growth Finance Corp. (the “Term Loan”). Under the Term Loan, $30.0 million of the $75.0 million loan was funded on the Closing Date, with the remaining $45.0 million fundable Mustang achieves certain predetermined milestones.

The Term Loan matures on April 15, 2027 (the “Maturity Date”).  Starting March 15, 2022, Mustang will make monthly payments of interest only until April 1, 2024 (the “Amortization Date”). The Amortization Date may be extended to April 1, 2025 if Mustang achieves certain predetermined milestones based on equity raises and the initiation of certain clinical trials. After that, Mustang will make monthly payments of interest and principal. If the Amortization Date is extended to April 1, 2025, the monthly payments will be recalculated in equal amounts according to the remaining number of payment dates through the Maturity Date. All unpaid outstanding principal and accrued and unpaid interest will be due and payable in full on the Maturity Date.

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The Runway Note accrues interest at a variable annual rate equal to 8.75% plus the greater of (i) 0.50% and (ii) the three month LIBOR Rate for U.S. dollar deposits or a rate equivalent to the three month LIBOR (the “Applicable Rate”); provided that the Applicable Rate will not be less than 9.25%. At March 31, 2022 the floating interest rate was 9.67%.

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Mustang has the option to prepay all of the outstanding Runway Note but not less. Prepayment would include outstanding principal, accrued interest, prepayment fee and final payment which is equal to the original principal amount of the Runway Note times 3.5% or $1.0 million.

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In addition, Mustang’s Runway Note is secured by a lien on substantially all of our assets other than certain intellectual property assets and certain other excluded collateral, and it contains a minimum liquidity covenant and other covenants that include among other items: (i) limits on indebtedness, repurchase of stock from employees, officers and directors.  Mustang was in compliance with all applicable covenants as of March 31, 2022.

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The Runway Note contains customary events of default, in certain circumstances subject to customary cure periods. Following an event of default and any cure period, if applicable, Runway will have the right upon notice to accelerate all amounts outstanding under the Runway Note, in addition to other remedies available to the lenders as secured creditors of the Mustang.

Pursuant to the terms of the Runway Note, upon closing Mustang paid Runway an upfront commitment fee equal to 1% of the $30 million, or $0.3 million.  In addition, Mustang paid a $75,000 deposit fee to Runway, together with other cash fees of $2.7 million directly to third parties involved in the transaction. Mustang also issued to Runway a warrant to purchase up to 748,036 of Mustang common shares with an exercise price of $0.8021 per share, pursuant to the terms of the Runway Note. In addition, the provisions of the warrant provide for additional warrants to be issued upon funding of the loan tranches.

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The fair value of the warrant was determined utilizing a Black Scholes Model with the following assumptions: risk free rate of return 1.74%, volatility of 57.3%, 10-year life yielding a value of approximately $0.4 million at March 31, 2022.  The fair value of the warrant was recorded in debt discount and will be amortized over the life of the note. For the three months ended March 31, 2022, Mustang amortized approximately $12,900, of debt discount associated with the Runway Note, which was included in interest expense in the condensed consolidated statement of operations.

Partner Company Installment Payments – Licenses

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The following tables show the details of partner company installment payments – licenses for the periods presented.

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Note 2: Imputed interest rate of 4.03% and maturity date of July 29, 2023.

Note 3: Imputed interest rate of 4.25% and maturity date of January 1, 2022.

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Interest Expense

The following table shows the details of interest expense for all debt arrangements during the periods presented. Interest expense includes contractual interest; fees include amortization of the debt discount and amortization of fees associated with loan transaction costs, amortized over the life of the loan:

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