DEBT
Term Loan
On November 10, 2023, the Company entered into a Loan and Security Agreement with K2 HealthVentures LLC (the “Loan Agreement”). The Loan Agreement provided the Company with a term loan facility (the “Term Loan”) in the aggregate principal amount of $50.0 million, of which the Company borrowed $30.0 million in the first tranche upon closing. The remaining $20.0 million is available for borrowing upon the Company’s request based on review of certain information and discretionary approval from the lenders. The principal amount of the Term Loan outstanding under the Loan Agreement bears interest per annum at the greater of (i) 9.65% or (ii) the sum of the prime rate last quoted in The Wall Street Journal plus 1.15% for such interest period. The Term Loan matures on November 1, 2027, and can be extended to November 1, 2028 if the Company achieves certain financing milestones. The Loan Agreement provides for a final payment fee of an additional $1.6 million (the “Final Payment”) due upon repayment of the Term Loan. As security for its obligations under the Loan Agreement, the Company granted the lenders a security interest in substantially all of the Company’s assets (other than intellectual property).
The principal and interest of the Term Loan are to be repaid in equal monthly installments beginning on July 1, 2026 through the maturity of the Loan Agreement. The Loan Agreement allows prepayments of the entire Term Loan or a portion of the Term Loan of more than $5.0 million, provided that any partial prepayment will leave outstanding borrowings of at least $15.0 million.
The lenders can elect to convert up to $2.5 million of the Term Loan (the “Conversion Amount”) into common stock at a conversion price of $2.53 (the “Conversion Option”). If the lenders elect to convert the Conversion Amount upon the Next Qualified Financing, as defined in the Loan Agreement whereby the Company receives aggregate gross proceeds of at least $20.0 million, the conversion price will equal the lowest effective cash price per share of securities issued in such Qualified Financing (the “Share-Settled Redemption”). The Conversion Option and Share-Settled Redemption within the Loan Agreement are required to be bifurcated as a single compound embedded derivative (the “Embedded Derivatives”) at fair value, with subsequent changes in fair value recognized in the statements of operations and comprehensive loss.
In accordance with the Loan Agreement, the Company issued an equity-classified warrant to purchase 730,769 shares of common stock (the “Loan Warrant”), with an initial allocated fair value of $1.1 million. See additional discussion in Note 7. Stockholders’ Equity.
The initial recognition of the direct fees of $0.5 million, the Final Payment of $1.6 million, the fair value of the Embedded Derivatives of $1.2 million and the fair value of the Loan Warrant of $1.1 million for the Loan Agreement resulted in a discount of $4.4 million, which is being amortized to interest expense over the term of the Loan Agreement using the effective interest method.
Outstanding debt consisted of the following (in thousands):
| | | | | | | | | | | |
| December 31, |
| 2024 | | 2023 |
Principal value of Term Loan, including final payment of $1,635 | $ | 31,635 | | | $ | 31,635 | |
| Fair value of bifurcated embedded derivatives | 970 | | | 2,560 | |
| Unamortized debt discount | (3,186) | | | (4,298) | |
| Total debt, long-term | $ | 29,419 | | | $29,897 |
The following table provides the components of interest expense (in thousands): | | | | | | | | | | | |
| Year Ended December 31, |
| 2024 | | 2023 |
| Interest expense based on the coupon interest rate of the outstanding debt | $ | 2,943 | | | $ | 418 | |
| Accretion of debt discount | 1,112 | | | 145 | |
| Total interest expense related to debt | $ | 4,055 | | | $ | 563 | |
For both the years ended December 31, 2024 and 2023, the effective interest rate for the Term Loan was 13.5%.
As of December 31, 2024, the aggregate principal payments due for the Term Loan by year are as follows (in thousands):
| | | | | |
| Year ended December 31, 2026 | $ | 10,104 | |
| Year ended December 31, 2027 | 21,531 | |
| Total principal payment due for Term Loan | $ | 31,635 | |