8. 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 Oaktree Agreement 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 September 30, 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 nine months ended September 30, 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.  In January 2022 and August 2022, Journey borrowed $15.0 million and $5.0 million, respectively, against the term loan.  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 loan effective interest rate at September 30, 2022 was 8.38%. 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, which pertain solely to Journey. Journey was in compliance with all applicable financial covenants under the Amendment as of September 30, 2022.

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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 September 30, 2022, and $0.8 million outstanding at December 31, 2021.

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 “Mustang Term Loan” or the “Runway Note”). Under the Mustang Term Loan, $30.0 million of the $75.0 million loan was funded on the Closing Date, with the remaining $45.0 million available if and when Mustang achieves certain predetermined milestones.

The Mustang 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 the rate otherwise reasonably determined by the Lender to be the rate at which U.S. dollar deposits with a term of three months would be offered by banks in London or other offshore interbank markets (the “Applicable Rate”); provided that the Applicable Rate will not be less than 9.25%. At September 30, 2022 the Applicable Rate was 11.69%.

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Mustang has the option to prepay all of the outstanding Runway Note but not less than all. 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 $1.1 million and is accreted over the life of the loan.

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In addition, the Runway Note is secured by a lien on substantially all of Mustang’s assets other than certain intellectual property assets and certain other excluded collateral, and it contains a minimum liquidity covenant and other covenants including among other items, limits on indebtedness and repurchase of stock from employees, officers and directors.  Mustang was in compliance with all applicable covenants as of September 30, 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 upfront fees out of proceeds of $0.4 million consisting of a 1% commitment fee and a deposit of $0.1 million.  In addition, Mustang paid other cash fees directly to third parties comprising of an advisory fee and legal fees totaling $2.3 million. 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 4, 2022.  The fair value of the warrant was recorded in debt discount and will be amortized over the life of the note.

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For the three and nine months ended September 30, 2022, Mustang amortized approximately $0.1 million and $0.3 million, respectively, 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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Interest Expense

The following tables show 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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