Long-Term Debt

12 Months Ended

Dec. 31, 2019

Long-Term DebtLong-term debt consisted of the following:


(in thousands)	December 31, 2019		December 31, 2018
Principal amount of long-term debt	$	20,000	$	10,000
Less: Current portion of long-term debt	—		(1,687)
Long-term debt, net of current portion	20,000		8,313
Debt discount, net of accretion	(317)		(226)
Cumulative accretion of final payment due at maturity	414		58
Long-term debt, including accretion, net of discount and current portion	$	20,097	$	8,145

SVB Loan Agreement

In October 2016, the Company entered into a loan and security agreement with Silicon Valley Bank (“SVB”), which the Company refers to as the SVB Loan Agreement, pursuant to which SVB made certain term loans available to the Company. The SVB Loan Agreement provided for a term loan of up to $6.0 million, which was borrowed by the Company in September 2017. Borrowings under the SVB Loan Agreement bore interest at a variable rate equal to 5.5% plus the greater of (i) 3.5% or (ii) The Wall Street Journal prime rate. In October 2018, in connection with entering into the Hercules Loan Agreement, the Company terminated the SVB Loan Agreement and repaid all amounts due under the SVB Loan Agreement of $4.7 million, including outstanding principal, prepayment premiums and accrued interest. The Company accounted for the termination of the SVB Loan Agreement as an extinguishment and recognized a loss of $229 thousand, which was calculated as the difference between the reacquisition price of the borrowings under the SVB Loan Agreement and the carrying value of the debt at the time of the extinguishment.

The Company recognized aggregate interest expense under the SVB Loan Agreement of $484 thousand and $490 thousand for the years ended December 31, 2018 and 2017, respectively, reflecting an effective interest rate of approximately 11.8% and 12.0%, respectively. As of October 19, 2018, the date of repayment of all borrowings under the SVB Loan Agreement, the contractual interest rate applicable to borrowings under the SVB Loan Agreement was 10.75%.

Hercules Loan Agreements

Hercules Loan Agreement and First Amendment

In October 2018, the Company entered into the Hercules Loan Agreement. The Hercules Loan Agreement provided for aggregate borrowings of up to $13.0 million, consisting of (i) a term loan of up to $8.0 million, which was available upon entering into the agreement, (ii) subject to specified financing conditions, an additional term loan of up to $2.0 million, available for borrowing from January 1, 2019 to March 31, 2019, and (iii) subject to specified financing conditions and the receipt of the second tranche term loan in the amount of $2.0 million described above, an additional term loan of up to $3.0 million, available for borrowing until March 31, 2019. In October 2018, the Company borrowed $8.0 million under the Hercules Loan Agreement. In December 2018, the Company entered into the First Amendment to the Hercules Loan Agreement (the “First Amendment”), which amended the available borrowing dates of the second tranche from between January 1, 2019 and March 31, 2019 to between December 11, 2018 and December 14, 2018 and amended the term loan maturity date to November 1, 2021. In December 2018, the Company borrowed the additional $2.0 million provided under the Hercules Loan Agreement, as amended by the First Amendment. In March 2019, the conditions necessary for borrowing the remaining $3.0 million under the Hercules Loan Agreement, as amended by the First Amendment, were not met and the borrowing capacity expired at that time.

In connection with entering into the Hercules Loan Agreement in October 2018, the Company issued to Hercules warrants for the purchase of 210,638 shares of Series B convertible preferred stock at an exercise price of $1.88 per share (which were subsequently converted to warrants for the purchase of 20,016 shares of common stock at an exercise price of $19.78 per share following the Merger). These warrants were immediately exercisable and expire in October 2028. In addition, in connection with entering into the First Amendment in December 2018, the Company agreed to issue to Hercules warrants for the purchase of a specified number of shares of convertible preferred stock at an aggregate exercise price of $99. On March 18, 2019, as a result of the closing of the Merger with Arsanis on March 13, 2019, the Company issued to Hercules warrants for the purchase of 5,000 shares of common stock of the combined organization at an exercise price of $19.80 per share, each of which reflected the share Exchange Ratio of 1-for-0.5702 applied in the Merger as well as the Reverse Stock Split effected by the combined organization on March 13, 2019. On October 19, 2018 and December 11, 2018, the dates the Company entered into the Hercules Loan Agreement and the First Amendment, respectively, the Company recorded the aggregate initial fair value of the warrants of $132 thousand as a preferred stock warrant liability, with a corresponding amount recorded as a debt discount on the Company’s

consolidated balance sheet. As of March 13, 2019, and December 31, 2018, the fair value of the warrants were $326 thousand and $282 thousand, respectively. Upon the closing of the Merger, the warrants were converted to warrants for common stock and are no longer adjusted to fair value.

2019 Amended and Restated Loan Agreement

In June 2019, the Company refinanced the Hercules Loan Agreement, as amended, and entered into an Amended and Restated Loan and Security Agreement (the “2019 Loan Agreement”) with Hercules. The 2019 Loan Agreement provides for aggregate maximum borrowings of $35.0 million, of which $10.0 million was previously outstanding. The Company agreed to borrow $20.0 million as of the closing date on June 27, 2019, including $10.0 million in new borrowings and $10.0 million rolled over from the previous agreement. An additional $5.0 million is available for borrowing through December 15, 2020 and, subject to approval by Hercules, and an additional term loan of $10.0 million is available through June 15, 2022. Borrowings under the 2019 Loan Agreement bear interest at a variable rate equal to the greater of (i) 8.75% or (ii) 8.75% plus The Wall Street Journal prime rate minus 6.0%. In an event of default, as defined in the 2019 Loan Agreement, and until such event is no longer continuing, the interest rate applicable to borrowings under the 2019 Loan Agreement would be increased by 4.0%.

Borrowings under the 2019 Loan Agreement are repayable in monthly interest-only payments through January 1, 2022, and in equal monthly payments of principal and accrued interest from February 1, 2022 until the maturity date of the loan, which is July 1, 2023. At the Company’s option, the Company may prepay all, but not less than all, of the outstanding borrowings, subject to a prepayment premium of up to 2.0% of the principal amount outstanding as of the date of repayment. In addition, the 2019 Loan Agreement provides for payments by the Company to Hercules of (i) $0.8 million payable upon the earlier of November 1, 2021 or the repayment in full of all obligations under the 2019 Loan Agreement, and (ii) 4.0% of the aggregate principal drawn under the 2019 Loan Agreement payable upon the earlier of maturity or the repayment in full of all obligations under such agreement.

Borrowings under the 2019 Loan Agreement are collateralized by substantially all of the Company’s personal property and other assets except for the Company’s intellectual property (but including rights to payment and proceeds from the sale, licensing or disposition of the intellectual property). Under the 2019 Loan Agreement, the Company has agreed to affirmative and negative covenants to which it will remain subject until maturity or repayment of the loan in full. The covenants include (a) maintaining a minimum liquidity amount of the lesser of (i) 125% of the aggregate principal amount of outstanding borrowings under the June 2019 Loan Agreement and (ii) 100% of the Company and its consolidated subsidiaries’ cash and cash equivalents (other than up to $2.5 million which may be held by an excluded subsidiary, as defined) in an account in which Hercules has a first priority security interest, as well as (b) restrictions on the Company’s ability to incur additional indebtedness, pay dividends, encumber its intellectual property, or engage in certain fundamental business transactions, such as mergers or acquisitions of other businesses. The 2019 Loan Agreement also contains a covenant that requires the Company to repay its loan with Österreichische Forschungsförderungsgesellschaft mbH ("FFG") on or prior to December 31, 2019. The FFG Loan Agreement was settled during the three months ended September 30, 2019 as discussed further below.

In connection with entering into the Hercules Loan Agreement and the First Amendment, the Company had deferred $180 thousand associated with upfront (1) fees associated with entering into the agreement, (2) the fair value of the warrants issued and (3) the fair value of an embedded derivative associated with the accelerated redemption feature. The $180 thousand is classified as a debt discount, which is reflected as a reduction of the carrying value of long-term debt on the Company’s consolidated balance sheet and is being amortized to interest expense over the term of the loan using the effective interest method. As a result of the June 2019 refinancing and entering into the 2019 Loan Agreement, the Company considered whether the previous debt was either extinguished or modified based on the difference in the cash flows of the previous and new debt. The Company determined that Hercules Loan Agreement, as amended by the First Amendment, was modified. Accordingly, the unamortized debt discount of the previous debt and newly incurred fees paid to the lender related to the 2019 Loan Agreement will be amortized to interest expense over the life of the new debt arrangement using the effective interest method.

The Company recognized aggregate interest expense under the Hercules Loan Agreement, as amended by the First Amendment, and the 2019 Loan Agreement of $1.8 million and $236 thousand during the twelve months ended December 31, 2019 and 2018, respectively. Interest expense includes $61 thousand and $355 thousand related to the accretion of the debt discount and the final payment for the year ended December 31, 2019, respectively. As of December 31, 2019, the unamortized debt discount was $317 thousand. The annual effective interest rate on the 2019 Loan Agreement is 10.9%. There were no principal payments due or paid under the Hercules Loan Agreement, as amended by the First Amendment, during the twelve months ended December 31, 2019. Principal payments begin in January 2022.

FFG Loan Agreements

Between September 2011 and March 2017, Arsanis GmbH entered into a series of funding agreements with FFG that provided for loans and grants to fund qualifying research and development expenditures of X4 GmbH on a project-by-project basis, as approved by FFG. Amounts due under the FFG loans bear interest at rates ranging from 0.75% to 2.00% per annum. Giving effect to the Settlement Agreement (as defined below), the loans matured at various dates between March 31, 2019 and March 31, 2021. Interest on amounts due under the loans is payable semi-annually in arrears, with all principal and remaining accrued interest due upon maturity.

On March 8, 2019, Arsanis, Merger Sub, X4 and Arsanis GmbH entered into a Settlement Agreement with FFG (the “Settlement Agreement”) in respect to allegations by FFG in February 2019 that Arsanis and Arsanis GmbH breached certain reporting, performance and other obligations in connection with grants and loans made by FFG to Arsanis GmbH between September 2011 and March 2017 to fund qualifying research and development expenditures. Pursuant to the terms of the Settlement Agreement, in exchange for FFG’s waiver of all claims against Arsanis and Arsanis GmbH (except for its claims for repayment of the loans and regular interest but including its waiver of claims for repayment of grants and interest exceeding regular interest), subject to compliance by Arsanis and Arsanis GmbH with the terms of the Settlement Agreement, Arsanis GmbH agreed to repay the outstanding loan principal (plus regular interest accrued thereon) on an accelerated payment schedule of three years instead of five years, with the final accelerated installment due and payable on June 30, 2021. The parties also agreed, among other things, that (i) the portion of such loans to be repaid in 2019 will be $2.9 million on the first business day following March 31, 2019, and such amount was paid on April 1, 2019, and (ii) until all of the loans have been repaid and subject to other terms specified in the Settlement Agreement, commencing April 30, 2019, a minimum cash balance equal to 70% of the then-outstanding principal amount of the loans will be maintained at X4 Pharmaceuticals (Austria) GmbH in an account held with an Austrian bank.

The Company recognized interest expense under the FFG agreement of $316 thousand for the year ended December 31, 2019. In September 2019, the Company repaid all amounts due under the FFG loans and recognized a loss on extinguishment of debt of $566 thousand, which was calculated as the difference between the reacquisition price of the borrowings under the FFG Loan Agreement and the carrying value of the debt at the time of the extinguishment.

As of December 31, 2019, future principal payments and the final payment due under the Company’s loan agreements were as follows (in thousands):


Year Ending December 31	Total
2020	$	—
2021	—
2022	11,897
2023	8,103
Long-term debt	$	20,000