7. Debt
K2 HealthVentures Loan and Security
Agreement
In July 2022, the Company entered into a loan and security
agreement (the “Loan Agreement”) with K2 HealthVentures LLC
(together with its affiliates, “K2HV”, and together with any other
lender from time to time party thereto, the “Lenders”), as
administrative agent for the Lenders, and Ankura Trust Company,
LLC, as collateral agent for the Lenders. The Loan Agreement
provides up to $50.0 million principal in term loans (the “Term
Loan”) consisting of a first tranche of $30.0 million funded at
closing and a subsequent second tranche of up to $20.0 million upon
the Company’s request before March 1, 2025, subject to review by
the Lenders of certain information from the Company and
discretionary approval by the Lenders.
In connection with entering into the Loan Agreement, the Company
also issued to K2HV a warrant to purchase shares of common stock
(see Note 8), which was an incremental cost to the Loan Agreement;
thus, the allocated fair value of the warrant was recorded as part
of the issuance cost.
The Term Loan will mature on August 1, 2026, with interest only
payments for 30 months, and thereafter interest and principal
payments for the remaining 18 months. It bears a variable interest
rate equal to the greater of (i) 7.95% and (ii) the sum of (A) the
prime rate last quoted in The Wall Street Journal (or a comparable
replacement rate, as determined by the Lenders, if The Wall Street
Journal ceases to quote such rate) and (B) 3.20%. Upon the final
payment under the Loan Agreement, the Lenders are entitled to an
end of term charge equal to 6.45% of the aggregate original
principal amount of the term loans made pursuant to the Loan
Agreement. The final payment fee is being accreted and amortized
into interest expense using the effective interest rate method over
the term of the loan. The effective interest is 11.19% for the
first tranche. This could change given it is a variable interest
rate facility.
The Company may prepay, at its option, all, but not less than all,
of the outstanding principal balance and all accrued and unpaid
interest with respect to the principal balance being prepaid of the
term loans, subject to a prepayment premium as follows: 3% of the
loan amounts prepaid if such prepayment occurs in the first year
after funding; 2% if such prepayment occurs in the second year
after funding; 1% if such prepayment occurs in the third year after
funding; and 0% thereafter.
The Lenders may elect at any time following the closing and prior
to the full repayment of the term loans to convert any portion of
the principal amount of the term loans then outstanding, up to an
aggregate of $3.25 million in principal amount, into shares of the
Company’s common stock, $0.0001 par value per share, at a
conversion price of $2.6493, subject to customary 19.99% Nasdaq
beneficial ownership limitations. The Company also granted
registration rights to the Lenders with respect to shares received
upon such conversion.
Further, the Lenders may elect to invest up to $5.0 million in
future equity financings of the Company, provided such investment
is limited to no more than 10% of the total amount raised in such
equity financing.
The Loan Agreement contains customary representations and
warranties, events of default and affirmative and negative
covenants, including covenants that limit or restrict the Company’s
ability to, among other things, dispose of assets, make changes to
the Company’s business, management, ownership or business
locations, merge or consolidate, incur additional indebtedness, pay
dividends or other distributions or repurchase equity, make
investments, and enter into certain transactions with affiliates,
in each case subject to certain exceptions. The Loan Agreement also
contains covenants requiring that the Company maintain cash, cash
equivalents and marketable securities balance of at least $25.0
million so long as the Company’s total market capitalization is
less than $250.0 million.
As security for its obligations under the Loan Agreement, the
Company granted the Lenders a first priority security interest on
substantially all of the Company’s assets (other than intellectual
property), subject to certain exceptions.
The Company capitalized $0.9 million of debt issuance costs which
consist of incremental costs incurred for the Lenders and
third-party legal firms as well as the fair value of the warrant
issued in conjunction with the origination of the term loan. The
book value of debt approximates its fair value given the variable
interest rate. Long-term debt and the unamortized discount balances
are as follows: