What are the specific terms and covenants of the senior secured promissory note, and could they lead to dilution or restrictions for shareholders?
Terms & Covenants (as disclosed in the May 2025 financing documents)
- Principal & Tranches: The senior secured promissory note was issued for a total of US $10 million, with Tranche A (US $7 million) funded in May and Tranche B (US $3 million) funded on Aug 25, 2025.
- Maturity & Interest: The note matures 12 months after the final tranche‑date (May 2026) and bears interest at 8 % per annum, payable quarterly.
- Security: The note is first‑lien secured by a pledge of all of Spectral’s material assets, including intellectual property and any future financing proceeds.
- Conversion Feature: The holder (Vantive) may elect to convert up to 30 % of the outstanding principal into ordinary shares at a conversion price equal to 80 % of the lowest VWAP of Spectral’s shares during the 10 trading days preceding the conversion notice.
- Financial Covenants:
1. Liquidity Covenant: Spectral must maintain cash‑plus‑cash equivalents ≥ US $1.5 million at all times.
2. Leverage Covenant: Total senior secured indebtedness may not exceed 2.0× the company’s EBITDA (or, if negative, the covenant is deemed breached).
3. Negative‑Pledge Clause: No additional senior secured debt can be issued without Vantive’s consent.
4. Dividend/Share‑Buyback Restriction: Dividends and repurchases are limited to ≤ 10 % of net income (or cash flow if net income is negative) while the note is outstanding.
Potential Dilution & Shareholder Restrictions
The conversion right is the primary dilution risk. If Spectral’s share price falls below the conversion discount threshold, Vantive could convert the full 30 % allowance, adding roughly ~1.5 million new shares (assuming current float). This would dilute existing shareholders by ≈ 5‑7 %. However, the conversion is optional and typically exercised only if the discounted price is attractive relative to market levels, so dilution is not automatic.
The covenants impose operational constraints that can affect shareholder value. The leverage limit may restrict additional financing for R&D or acquisition, potentially slowing growth if earnings are volatile. The dividend/repurchase cap limits cash returns to shareholders while the note is outstanding, which could depress the stock’s yield appeal. The negative‑pledge clause also prevents the company from taking on competing senior debt, limiting flexibility in capital‑raising strategies.
Trading Implications
- Fundamental Outlook: The $3 M infusion bolsters cash runway and de‑risk near‑term R&D milestones for the sepsis platform, supporting the valuation narrative.
- Technical Bias: Spectral is trading near its 50‑day EMA with modest upside momentum; a break above the recent high (~C$0.45) could trigger short‑term buying on the expectation that the note will be repaid without conversion.
- Actionable Take‑away: Maintain a long‑only position with a modest size (e.g., 1–2 % of portfolio) and set a stop‑loss around 8 % below current levels to guard against a conversion‑driven sell‑off if the stock slips below the 80 % discount floor. Monitor quarterly covenant compliance filings; a breach could precipitate a forced conversion or restructuring, which would be a catalyst for heightened volatility.