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Notes Payable | 6 Months Ended
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Jun. 30, 2021
Debt Disclosure [Abstract] |
Notes Payable | 5. Notes Payable On September 30, 2019 (the Effective Date), the Company entered into a Loan and Security Agreement (the Loan Agreement) with two lenders (the Lenders) whereby the Company could borrow up to $20.0 million in a series of term loans. Upon entering into the Loan Agreement, the Company borrowed $10.0 million from the Lenders (Term A Loan). Under the terms of the Loan Agreement, the Company may, at its sole discretion, borrow from the Lenders (i) up to an additional $5.0 million (Term B Loan) upon the Company’s achievement of positive topline data in either the Company’s (a) Phase 1b aGVHD trial of itolizumab (EQ001) or (b) Phase 1b asthma trial of itolizumab (EQ001), supporting a formal decision to advance into Phase 2 development, and as confirmed by the Company’s Board of Directors (the Term B Milestone) and (ii) up to an additional $5.0 million (Term C Loan and together with Term A Loan and Term B Loan, the Term Loans) upon the Company’s achievement of positive topline data in both the Company’s Phase 1b aGVHD trial of itolizumab (EQ001) and the Company’s Phase 1b asthma trial of itolizumab (EQ001), supporting a formal decision to advance into Phase 2 development, and as confirmed by the Company’s Board of Directors (the Term C Milestone). The Company may draw the Term B Loan during the period commencing on the date of the occurrence of the Term B Milestone and ending on the earliest of (i) December 31, 2020, (ii) 60 days after achieving the Term B Milestone, and (iii) the occurrence of an event of default. The Company may draw the Term C Loan during the period commencing on the date of the occurrence of the Term C Milestone and ending on the earliest of (i) December 31, 2020, (ii) 60 days after achieving the Term C Milestone, and (iii) the occurrence of an event of default. As of December 31, 2020, the Company did not achieve the Term B or Term C Milestone and is not eligible to receive the additional funding up to $10.0 million under the Loan Agreement. All of the Term Loans mature on June 1, 2024 (the Maturity Date) and are repaid through interest-only payments through June 30, 2021, followed by 36 equal monthly principal payments and interest. The Term Loans bear interest at a floating per annum rate equal to the greater of (i) 8.25% and (ii) the sum of (a) the prime rate reported in The Wall Street Journal on the last business day of the month that immediately precedes the month in which the interest will accrue, plus (b) 3.00%. On December 18, 2020, the Company entered into the First Amendment to the Loan Agreement (the First Amendment) with the Lenders whereby if the Company achieves the Term B Milestone on or prior to June 30, 2021, the interest-only payments will be automatically extended through December 31, 2021. On April 23, 2021, the Company entered into the Second Amendment to the Loan Agreement (the Second Amendment) which added two new milestones: (i) the Company achieving positive data in the Company's Phase 1b aGVHD trial of itolizumab (EQ001) supporting a formal decision to advance into Phase 2 or Phase 3 development, and as confirmed by the Company's Board of Directors in written board minutes (the Interest-Only Extension Milestone) and (ii) the Company initiating a pivotal Phase 3 aGVHD trial (the Interest-Only Extension II Milestone). If the Company achieves the Interest-Only Extension Milestone on or prior to June 30, 2021, then interest-only payments will be automatically extended through June 30, 2022. If the Company achieves the Interest-Only Extension II Milestone on or prior to June 30, 2022, then interest-only payments will be automatically extended through September 30, 2022. The Second Amendment also amended the final payment percentage from 4.5% to 5.0%. In May 2021, the Company achieved the Interest-Only Extension Milestone. Due to the achievement of the Interest-Only Extension Milestone, the interest-only payments have been extended through June 30, 2022, followed by 24 equal monthly principal payments and interest. The Company has not achieved the Interest-Only Extension II Milestone as of June 30, 2021 and through the date of the filing of this Quarterly Report on Form 10-Q. The Company will be required to make a final payment of 5.00% of the original principal amount of the Term Loans drawn payable on the earlier of (i) the Maturity Date, (ii) the acceleration of any Term Loans, or (iii) the prepayment of the Term Loans (the Final Payment). The Company may prepay all, but not less than all, of the Term Loans upon 30 days’ advance written notice to the Lenders, provided that the Company will be obligated to pay a prepayment fee equal to (i) 3.00% of the principal amount of the applicable Term Loan prepaid on or before the first anniversary of the applicable funding date, (ii) 2.00% of the principal amount of the applicable Term Loan prepaid between the first and second anniversary of the applicable funding date, and (iii) 1.00% of the principal amount of the applicable Term Loan prepaid thereafter, and prior to the Maturity Date (each, a Prepayment Fee). In connection with entering into the Loan Agreement, the Company issued to the Lenders warrants exercisable for 80,428 shares of the Company’s common stock (the Warrants). The Warrants are exercisable in whole or in part, immediately, and have a per share exercise price of $3.73, which was the closing price of the Company’s common stock reported on the Nasdaq Global Market on the day prior to the Effective Date. The Warrants will terminate on the earlier of September 30, 2029 or the closing of certain merger or consolidation transactions. The Company recorded the Warrants as a debt discount, which is classified as a contra-liability against long-term notes payable on the condensed consolidated balance sheet, and is amortizing the balance over the life of the underlying debt. The offset to the contra-liability is recorded in additional paid-in capital in the Company’s condensed consolidated balance sheet as the Warrants were determined to be an equity instrument. The Company determined the fair value of the Warrants at the date of issuance was $0.3 million using the Black-Scholes option pricing model based on significant unobservable inputs (Level 3) with an expected term of 10 years, volatility of 92.78%, risk free rate of 1.68% and expected dividend of 0%. The costs incurred to issue the Term Loans of $0.1 million were deferred and are included in the discount to the carrying value of the Term Loans in the accompanying condensed consolidated balance sheet. The deferred costs and the Final Payment fee are amortized to interest expense over the expected term of the Term Loans using the effective interest method with an effective interest rate of 10.97%. Under authoritative guidance, the Second Amendment does not meet the criteria to be accounted for as a troubled debt restructuring. In addition, the Company performed a quantitative analysis and determined that the terms of the new debt and original debt instrument are not substantially different. Accordingly, the Second Amendment is accounted for as a debt modification. A new effective interest rate that equates the revised cash flows to the carrying amount of the original debt was computed and applied prospectively. The new effective interest rate is 10.58%. The aggregate carrying amounts of the Term Loans are comprised of the following (in thousands):
|  | June 30, |  |  | December 31, |
|  | 2021 |  |  | 2020 |
Principal |  | $ | 10,000 |  |  | $ | 10,000 |
Add: accreted liability for Final Payment fee |  |  | 244 |  |  |  | 176 |
Less: unamortized discount |  |  | (177 | ) |  |  | (235 | )
Total |  | $ | 10,067 |  |  | $ | 9,941 |
Upon the occurrence of certain events, including but not limited to the Company’s failure to satisfy its payment obligations under the Loan Agreement, the breach of certain of its other covenants under the Loan Agreement, or the occurrence of a material adverse change, cross defaults to other indebtedness or material agreements, judgment defaults and defaults related to failure to maintain governmental approvals failure of which to maintain could result in a material adverse effect, the Lenders will have the right, among other remedies, to declare all principal and interest immediately due and payable, to exercise secured party remedies, to receive the Final Payment and, if the payment of principal and interest is due prior to the Maturity Date, to receive the applicable Prepayment Fee. At June 30, 2021, the Company was in compliance with the covenants contained in the Loan Agreement. Future maturities of the Term Loans, including the Final Payment fee, as of June 30, 2021 are as follows (in thousands):
|  | June 30, |
|  | 2021 |
Remainder of 2021 |  | $ | - |
Year ending December 31, 2022 |  |  | 2,500 |
Year ending December 31, 2023 |  |  | 5,000 |
Year ending December 31, 2024 |  |  | 3,000 |
|  |  | 10,500 |
Unaccreted balance for Final Payment fee on Term Loans |  |  | (256 | )
Unamortized discounts |  |  | (177 | )
|  |  | 10,067 |
Less current portion |  |  | - |
Noncurrent portion |  | $ | 10,067 |

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