6. Loan Payable and Warrant Liability

On June 15, 2022, the Company entered into the Loan Agreement with Hercules, which was subsequently amended on June 7, 2023 and February 28, 2024, for an aggregate principal amount of $150,000 (“Term Loan”). Pursuant to the amended Loan Agreement, the Term Loan is available to the Company in five tranches, subject to certain terms and conditions.

Under the terms of the Loan Agreement, the Company received $10,000 upon closing, $15,000 was borrowed in March 2023 and an additional $10,000 was borrowed in connection with the second amendment on February 28, 2024 (the “Tranche I and Tranche II Commitments”). At the sole discretion of the Company, $30,000 is available to be drawn from June 15, 2024 through June 15, 2025 (“Tranche III Commitment”). Also at the sole discretion of the Company, an additional $35,000 is available to be drawn at the earlier of the full draw of Tranche III or June 15, 2025 through June 15, 2026 (“Tranche IV Commitment”). An additional $50,000 may become available to the Company prior to January 1, 2026, subject to Hercules' approval (“Tranche V Commitment”).

The Term Loan will mature on March 1, 2027 (the “Maturity Date”). The Term Loan bears interest at a variable annual rate equal to the greater of (a) 7.65% and (b) the Prime Rate (as reported in the Wall Street Journal) plus 3.65% (the “Interest Rate”). The Company makes payments of interest only until January 1, 2026 (the “interest-only period”). After the interest-only period, the principal balance and related interest are required to be repaid in equal monthly installments and continuing until the Maturity Date.

The Loan Agreement contains customary closing fees, events of default, and representations, warranties and covenants, including a financial covenant requiring the Company to maintain a minimum cash balance in the future in relation to the outstanding principal balance of the Term Loan. The Loan Agreement is secured by most of the Company’s assets, including its bank and investment accounts. The Loan Agreement provides for a prepayment charge equal to 1% of the outstanding principal balance of the Term Loan. In addition, the Loan Agreement provides for an End of Term Charge equal to the greater of 5.85% of the outstanding principal balance, or $2,048, which is recognized as a debt discount and is being accreted into the amortization of debt issuance costs and discount using the effective interest rate method over the term of the loan payable.

The Company was in compliance with all covenants of the Loan Agreement as of March 31, 2025.

The Loan Agreement requires the Company to issue warrants to Hercules to purchase shares of the Company’s common stock, par value $0.0001 per share (“common stock”). The amount of shares that may be purchased for the warrants will not exceed 1.5% multiplied by the greater of Tranche I and the aggregate original amount of the term loan advances, divided by the exercise price of the warrants. Upon closing, the Company issued to Hercules warrants to

purchase 36,718 shares of Company’s common stock and recognized them at their relative fair value of $227 as of the date of issuance in the shareholders equity category of the balance sheet.

In accordance with Accounting Standards Codification 815-40, additional warrants to purchase shares of the Company’s common stock that the Company is contingently required to issue are recognized at their relative fair value in the noncurrent liabilities category of the balance sheet, given the variable settlement amount of the warrant shares. The fair value of the equity and liability classified warrants are collectively recognized as a debt discount and are being accreted into the amortization of debt issuance costs and discount using the effective interest rate method over the term of the loan. The Company reassesses the fair value of the warrant liability at the end of each reporting period.

On March 10, 2023, the Company issued warrants to purchase 9,180 shares of the Company’s common stock in connection with the $15,000 borrowed from Hercules on that date, and the fair value associated with these warrants of $330 was reclassified from warrant liability to additional paid in capital. On February 28, 2024, the Company issued warrants to purchase 18,359 shares of the Company’s common stock in connection with the $10,000 borrowed from Hercules on that date, and the fair value associated with these warrants of $431 was reclassified from warrant liability to additional paid in capital.

As of March 31, 2025, the Company is contingently liable to issue warrants to purchase up to an additional 211,137 shares of common stock under the Loan Agreement, in connection with future borrowings as they may occur.

Future principal debt payments on the currently outstanding loan payable as of March 31, 2025 and December 31, 2024 are as follows (in thousands):


		March 31, 2025			December 31, 2024
2025	$		—		$	—
2026			27,777			27,777
2027			7,223			7,223
Total principal outstanding			35,000			35,000
End of term charge			2,048			2,048
Total principal outstanding and end of term charge			37,048			37,048
Unamortized discount and issuance costs			(1,573	)		(1,751	)
Loan Payable	$		35,475		$	35,297

Loan Payable - current	$		6,664		$	—
Loan Payable - noncurrent			28,811			35,297
Loan Payable	$		35,475		$	35,297

The Company estimated the fair value of the warrant liability as of March 31, 2025 and 2024 using probability assumptions of achieving the future milestones and using the Black-Scholes model based on the following key assumptions:


	Three Months Ended March 31,
	2025			2024
Expected term (in years)		4.2			5.2
Expected volatility		92.38	%		85.37	%
Risk-free interest rate		3.96	%		4.20	%
Expected dividend yield		0.00	%		0.00	%

Akero Therapeutics, Inc. 10-Q