5. Long-Term Obligation

 

As discussed in Note 1, Basis of Presentation and Summary of Significant Accounting Policies – Long-term Obligation, under the Financing Agreement with Biopharma, we make payments to Biopharma calculated as a percentage of our Korlym Receipts.  Biopharma’s right to receive payments will expire once it has received cumulative payments of $45.0 million. Through December 31, 2015, we have paid Biopharma $15.1 million, with an additional payment of $3.0 million made in February 2016.

 

Under the terms of the Financing Agreement, our payments are variable, with no fixed minimums. If there are no net sales, upfront, milestone or other contingent payments in a period with respect to Covered Products, then no payment will be due for that period.

 

We are obligated to make future payments as follows:

 

To secure our obligations in connection with the Financing Agreement, we granted Biopharma a security interest in our rights in patents, trademarks, trade names, domain names, copyrights, know-how and regulatory approvals related to the Covered Products, all books and records relating to the foregoing and all proceeds of the foregoing (together, the Collateral). If we (i) fail to deliver a royalty payment when due and do not remedy that failure within 30 days, (ii) fail to maintain a first-priority perfected security interest in the Collateral in the United States and do not remedy that failure within five business days of receiving notice of such failure or (iii) become subject to an event of bankruptcy, then Biopharma may attempt to recover up to $45.0 million (after deducting any payments we have already made). In addition, pursuant to this agreement, we are not allowed to pay a dividend or other cash distribution, unless we will have cash and cash equivalents in excess of $50.0 million after such payment.

 

The cash payment of $30.0 million received from Biopharma was recorded as a long-term obligation at issuance in August 2012.  We make estimates of the timing of payments during the term of this agreement for purposes of calculating the expected rate of return to Biopharma, the accretion of related interest expense and the current portion of our obligation. Interest expense of $2.8 million and $3.7 million for the years ended December 31, 2015 and 2014, respectively, and total accreted interest of $12.6 million for the period from August 16, 2012, the date of funding of the Financing Agreement, through December 31, 2015, was calculated based on the internal interest rate to Biopharma that would result from these assumed payment streams.  The timing of payment amounts will be based on actual Korlym Receipts recorded in the financial statements over the term of this agreement and may differ from these estimates.  While changes in the timing of Korlym revenue may affect the timing of recognition of interest expense and the split between the current and long-term portions of the obligation at any balance sheet date, the aggregate amount to be repaid to Biopharma is fixed at $45.0 million.

 

The carrying value of the long-term obligation was $27.5 million and $33.9 million as of December 31, 2015 and 2014, respectively. The long-term obligation, including accreted interest, is presented on the balance sheet in two components: the Long-term obligation – current portion, which equates to the estimated amount due under the agreement to be paid within 12 months following the balance sheet date; and the remaining amount, which is included in Long-term obligation, net of current portion. 

 

The following table provides a summary of the payment obligations under the Financing Agreement as of December 31, 2015 and 2014, utilizing the payment assumptions discussed above.

 

 

 

The estimated fair value of the long-term obligation, as measured using Level 3 inputs, approximates the carrying amounts as presented on the balance sheet as of December 31, 2015 and 2014. The estimated fair value was calculated using the income method of valuation. The key assumptions required for the calculation were an estimate of the amount and timing of future product sales and an estimated cost of capital.

 

We capitalized $140,000 of issuance costs related to the Financing Agreement, which are being amortized over the estimated term of the obligation, based on the assumptions discussed above. At December 31, 2015, the unamortized issuance costs were $35,000, and are included in other assets on our balance sheet.