Convertible Debt

6 Months Ended

Jun. 30, 2022

Debt Disclosure [Abstract]

Convertible Debt

7. Convertible Debt

On April 1, 2022, the Company entered into a loan and security agreement (the "Loan Agreement") with K2 HealthVentures LLC ("K2HV"), and together with any other lender from time to time party thereto, the “Lenders”), K2HV as administrative agent for the Lenders, and Ankura Trust Company, LLC, as collateral agent for the Lenders. The Loan Agreement provides term loan commitments of up to $45.0 million in four potential tranches: (i) a $20.0 million term loan funded on April 1, 2022, (the “First Tranche Term Loan”), (ii) a $5.0 million term loan commitment (the “Second Tranche Term Loan Commitment”), (iii) a $15.0 million term loan commitment (reduced to $10.0 million if a second tranche term loan is made) (the “Third Tranche Term Loan Commitment”), and (iv) a $10.0 million term loan commitment (the “Fourth Tranche Term Commitment”). The timing and availability of the tranche term loan commitments are subject to various conditions, including that no events of default have occurred. The availability period of the Second Tranche Term Loan Commitment ends December 31, 2022. The availability of the Third Tranche Term Loan Commitment begins January 1, 2023 and ends no later than July 31, 2023 and is subject to the achievement of a clinical milestone event. The Fourth Term Loan Commitment availability ends May 1, 2024, unless the third tranche milestone is met, which would adjust such date to May 1, 2025. The Second Tranche Term Loan Commitment and Fourth Tranche Term Loan Commitment are subject to a satisfactory loan review by the Lenders who may provide the advances in their sole discretion. The Fourth Tranche Term Loan Commitment is also subject to an additional 1% facility fee.

The facility carries a 48-month term with interest only payments for 24 months, subject to increase to up to 36 months upon the Company drawing on the Third Tranche Loan Commitment and no event of default having occurred. Subsequent to the interest-only period, the Company is required to make equal monthly payments of principal plus interest until the loans mature on April 1, 2026. The term loans bear a variable interest rate equal to the greater of 7.75% and (ii) the sum of (A) the prime rate last quoted in The Wall Street Journal (or a comparable replacement rate if The Wall Street Journal ceases to quote such rate) and (B) 4.25%. The variable interest rate at June 30, 2022, was 9.0%. Upon final payment or prepayment of the loans, the Company must pay a final payment equal to 5.45% of the loans borrowed ("Final Fee"), which is being accrued to interest expense over the term of the loan. The Company has an option to prepay the loans in whole, subject to a prepayment fee of 3% prior to the first anniversary of the April 1, 2022, funding date, 2% after the first anniversary but prior the second anniversary of the funding date, and 1% thereafter if prior to the maturity date.

The Lenders may elect at any time 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 $5.0 million in principal amount, into shares of the Company's common stock at a conversion price of $2.2689, subject to customary beneficial ownership limitations.

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. 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. Upon occurrence of an event of default, which includes the failure to maintain solvency, the Company may have to prepay the term loans in an amount equal to the sum of (a) outstanding principal together with accrued interest (b) prepayment fee, and (c) Final Fee.

In connection with entering into the Loan Agreement, the Company also issued to K2HV a warrant to purchase a number of shares of Common Stock equal to the quotient of 2.95% of the aggregate funded term loan amount divided by $1.5126, the exercise price, up to a maximum of 877,627 shares (the "Warrant"). The Warrant expires on April 1, 2032. The Warrant has been classified within equity since it (i) is indexed to the Company’s own equity and (ii) meets the equity classification conditions. As of June 30, 2022, the Warrant is exercisable for 390,056 shares of common stock. The Company allocated the proceeds between the term loan and the Warrant on a relative fair value basis, resulting in a discount on the term loan. The Loan Agreement and the Warrant each provide the Lenders with certain piggyback registration rights with respect to the shares issuable upon conversion under the Loan Agreement or upon exercise of the Warrant.

The Company incurred fees and issuance costs associated with the Loan Agreement of approximately $0.5 million. The Company recorded contractual interest expense related to the Loan Agreement of $0.4 million and additional interest expense related to the amortization of the debt discount and issuance costs and accretion of the Final Fee of $0.2 million in the three and six months ended June 30, 2022. The effective interest rate at June 30, 2022, which includes each of the interest components noted above, was 12.51%.

Future principal debt payments on the Loan Agreement are as follows (in thousands):

	JUNE 30, 2022
2022	$	—
2023		—
2024		6,255
2025		10,127
2026		3,618
Total principal payments		20,000
Final Fee		1,090
Total principal payments and Final Fee		21,090
Less: Unamortized debt discount		(932	)
Less: Unamortized debt issuance costs		(78	)
Less: Unaccreted Final Fee		(1,002	)
Term loan, non-current	$	19,078