6. Term Loan

On August 21, 2018, the Company entered into a Loan and Security Agreement (Loan Agreement) with Silicon Valley Bank (SVB), pursuant to which the Company may obtain a loan of aggregate principal amount of up to $15.0 million (Term Loans), which becomes available in three tranches, each of an aggregate principal amount of up to $5.0 million. Contemporaneously with executing the Loan Agreement, the Company drew down the first $5.0 million tranche. The second and third $5.0 million tranches may be drawn only upon the achievement of certain development milestones. Borrowings under the Loan Agreement bear interest at the greater of (i) 6.0% or (ii) a floating per annum rate 1.0% above the prime rate (for an interest rate of 6.25% at September 30, 2018), with interest only due and payable monthly, until March 1, 2020 (unless extended under the conditions set forth in the Loan Agreement), at which time interest and principal will be due and payable monthly in equal monthly payments; are subject to a final payment fee equal to 6.75% of the aggregate principal amount.

The Company may prepay all, but not less than all, of the loaned amounts subject to a prepayment fee in the amount of 3.0% of the outstanding principal balance if such prepayment occurs prior to August 21, 2019; 2.0% of the outstanding principal balance if such prepayment occurs on or after August 21, 2019, but prior to August 21, 2020; or 1.0% of the outstanding principal balance if such prepayment occurs on August 21, 2020 or at any time thereafter prior to the maturity date of the Term Loans on August 1, 2022. The Loan Agreement is secured by substantially all of the Company’s personal property, except for its intellectual property and requires the Company to maintain the lesser of $10 million or 80% of its cash and cash equivalents with SVB. The Loan Agreement contains customary covenants that limit the Company’s ability to dispose of assets, enter into mergers or acquisitions, incur indebtedness, incur liens, pay dividends or make distributions on the Company’s capital stock, make investments or loans, and enter into certain affiliate transactions, among others. The Loan Agreement contains customary events of default that include, among others, non-payment defaults, covenant defaults, the occurrence of a material adverse change, and inaccuracy of representations and warranties. The occurrence of an event of default could result in an increase to the applicable interest rate of 5.0%, and the consequent obligation for the Company to repay all amounts outstanding under the Loan Agreement.

In connection with the Loan Agreement, the Company issued a warrant to SVB to purchase 73,529 of the Company’s common stock at a price per share of $1.87. The warrant was immediately exercisable, will expire on August 21, 2028, contains a cashless exercise provision and is classified as equity. If the Company is to draw the second or third tranche available under the Loan Agreement, the Company will grant an additional amount of common stock issuable upon exercise of the warrant based upon the principal amount advanced. In no event will the number of common stock issuable pursuant to the exercise of the warrant exceed 220,588 in aggregate.

The fair value of the warrant and the debt issuance costs were recorded as debt discounts and together with the final payment fee are being amortized using the effective interest rate method over the term of the loan. As of September 30, 2018, the effective interest rate on the initial tranche of the loan was 9.38% and the unamortized debt discount was $0.2 million. Amortization of the debt discount and accrual of final payment was $17,000 for the three months ended September 30, 2018.

Scheduled payments due under the Loan Agreement, excluding the final payment fee of $0.3 million and interest payments, are as follows:


	September 30, 2018
	(in thousands)
2020	$	1,667
2021		2,000
2022		1,333

Total	$	5,000

During the three and nine months ended September 30, 2018, the Company recognized $0.1 million of interest expense related to the Loan Agreement.