Loan and Security Agreement

3 Months Ended

Mar. 31, 2023

Debt Disclosure [Abstract]

Loan and Security Agreement

Loan and Security Agreement

Horizon Technology Finance Corporation Loan and Security Agreement

In December 2022, we entered into a loan agreement with Horizon (the "Loan Agreement"), as lender and collateral agent (the “Lender”), pursuant to which the Lender agreed to make term loans in an aggregate principal amount of up to $45.0 million, available to us on the closing date and we borrowed $45.0 million. Borrowings under the Loan Agreement are collateralized by substantially all of our personal property, excluding intellectual property, and we pledged our equity interests in our subsidiaries, subject to certain limitations with respect to our foreign subsidiaries (the "Collateral").

Interest on the outstanding loan balance will accrue at a variable annual rate equal to the greater of (i) 11% and (ii) rate of interest noted in The Wall Street Journal, Money Rates section, as the “Prime Rate” plus the “Loan Rate Spread” as defined in the loan agreement. We are required to make interest-only payments on the loans on the stub period date (January 1, 2023) and for the first thirty-six monthly payment dates prior to when the loans are scheduled to begin amortizing on February 1, 2026 (the “Amortization Date”). Beginning on February 1, 2026, we must pay twenty-four equal consecutive monthly installment payments repaying $35.0 million of the principal, plus interest on all outstanding balance until the loans mature on January 1, 2028 (the “Maturity Date”). The remaining $10.0 million of principal is due and payable on the Maturity Date. At our option, we may prepay the loans in whole, subject to a prepayment fee of 3% of the amount prepaid if prepaid on or before the Amortization Date, or if the prepayment occurs after less than 12 months after Amortization Date, 2% of the amount prepaid, and if more than 12 months after the Amortization Date but before the Maturity Date, 1%. A final payment equal to 4.25% of the principal borrowed on the closing date is due on the Maturity Date (or upon repayment in full of principal, if earlier).

Upon the entry into the Loan Agreement, we were required to pay Horizon a commitment fee of $0.5 million, as well as other customary fees and expenses. The Loan Agreement contains customary representations, warranties and covenants and also includes customary events of default, including payment defaults, breaches of covenants, change of control and occurrence of a material adverse effect. Upon the occurrence and continuation of an event of default, a default interest rate of an additional 5% per annum may be applied to the outstanding loan balances, and Horizon may declare all outstanding obligations immediately due and payable and exercise all of their rights and remedies as set forth in the loan agreement and under applicable law. Our subsidiary, Evelo Biosciences Security Corporation, may maintain cash or cash equivalents so long as we satisfy certain liquidity requirements. As of March 31, 2023, we believe we were in compliance with all covenants under the Loan Agreement.

In connection with the entry into the Loan Agreement, we also issued to Horizon warrants to purchase up to an aggregate 463,915 shares of our common stock, with an exercise price of $1.94 per share. The warrants are exercisable immediately and expire on December 15, 2032, provided that, under certain circumstances, the warrants may terminate and expire earlier in connection with the closing of certain acquisition transactions involving us. The warrants provide that Horizon may elect to exercise the warrant on a net “cashless” basis at any time prior to the expiration thereof. The fair market value of one share of our common stock in connection with any cashless exercise shall be the closing price or last sale price per share of our common stock on a nationally recognized

securities exchange, inter-dealer quotation system or over-the-counter market on which our common stock is traded on the business day immediately prior to the date the holder elects to exercise the warrants on a cashless basis.

The warrants were deemed to be a freestanding financial instrument as it is legally detachable and separately exercisable from the debt obligations. We evaluated the terms and conditions of the warrants and concluded it met the criteria to be classified as a liability. As such, we recorded the warrants as a noncurrent liability at its issuance date.

We have the following minimum aggregate future loan payments as of March 31, 2023 related to the Loan Agreement (in thousands):

	Amount
2024	$	—
2025	—
2026	16,042
2027	17,500
Thereafter	11,458
Total minimum payments	45,000
Debt discount	(1,226)
Total Debt as of March 31, 2023	$	43,774

The Loan Agreement contains a subjective acceleration clause which allows Horizon to accelerate the maturity of the principal payments under certain circumstances. Based upon our significant operating losses and going concern assessment as of March 31, 2023, we determined that we should classify our loan facility with Horizon, which would otherwise be classified as long-term debt, as a current liability on our consolidated balance sheet as of March 31, 2023.

For the three months ended March 31, 2023 and 2022, interest expense was approximately $1.5 million and $1.0 million.