Quarterly report pursuant to Section 13 or 15(d)

NOTES PAYABLE

v3.21.2
NOTES PAYABLE
6 Months Ended
Jun. 30, 2020
Debt Disclosure [Abstract]  
NOTES PAYABLE

NOTE 7 — NOTES PAYABLE

Notes payable consisted of the following at June 30, 2020 and December 31, 2019 (in thousands):

 

Year

Issued

 

Interest Rate

Range

 

 

Term of Notes

 

Conversion

Price

 

 

Principal

Outstanding June 30, 2020

 

 

Discount

Amount June 30, 2020

 

 

Carrying

Amount June 30, 2020

 

 

Shares

Underlying June 30, 2020

 

 

Notes payable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2013

 

10%

 

 

Due on demand

 

 

 

 

$

928

 

 

$

 

 

$

928

 

 

 

 

 

2019

 

11%

 

 

Due on demand - 6 months

 

 

 

 

 

2,839

 

 

 

 

 

 

2,839

 

 

 

 

 

2020

 

1% - 11%

 

 

Due on demand - 2 years

 

 

 

 

 

992

 

 

 

 

 

 

992

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

4,759

 

 

$

 

 

$

4,759

 

 

 

 

 

 

 

 

 

 

 

Current

 

 

 

 

 

$

4,271

 

 

$

 

 

$

4,271

 

 

 

 

 

 

 

 

 

 

 

Non-current

 

 

 

 

 

$

488

 

 

$

 

 

$

488

 

 

 

 

 

Notes payable - related parties

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2016

 

10%

 

 

Due on demand

 

 

 

 

$

20

 

 

$

 

 

$

20

 

 

 

 

 

2019

 

10%

 

 

Due on demand

 

 

 

 

 

14

 

 

 

 

 

 

14

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

34

 

 

$

 

 

$

34

 

 

 

 

 

 

 

 

 

 

 

Current

 

 

 

 

 

$

34

 

 

$

 

 

$

34

 

 

 

 

 

Convertible debentures

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2019

 

10%

 

 

18 months

 

$2.00-$9.52

 

(a)

$

9,200

 

 

$

1,606

 

 

$

7,594

 

 

 

4,638,333

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

9,200

 

 

$

1,606

 

 

$

7,594

 

 

 

4,638,333

 

 

 

 

 

 

 

 

Current

 

 

 

 

 

$

9,200

 

 

$

1,606

 

 

$

7,594

 

 

 

4,638,333

 

 

Convertible notes payable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2020

 

12%

 

 

3 years

 

$

10.00

 

(b)

$

3,150

 

 

$

 

 

$

3,150

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

3,150

 

 

$

 

 

$

3,150

 

 

 

 

 

 

 

 

 

 

 

Non-current

 

 

 

 

 

$

3,150

 

 

$

 

 

$

3,150

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

$

17,143

 

 

$

1,606

 

 

$

15,537

 

 

 

4,638,333

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year

Issued

 

Interest Rate

Range

 

 

Term of Notes

 

Conversion

Price

 

 

Principal

Outstanding

December 31,

2019

 

 

Discount

Amount

December 31,

2019

 

 

Carrying

Amount

December 31,

2019

 

 

Shares

Underlying

Notes

December 31, 2019

 

 

Notes payable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2013

 

10%

 

 

Due on demand

 

 

 

 

$

920

 

 

$

 

 

$

920

 

 

 

 

 

2019

 

11%

 

 

Due on demand - 6 months

 

 

 

 

 

2,829

 

 

 

 

 

 

2,829

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

3,749

 

 

$

 

 

$

3,749

 

 

 

 

 

 

 

 

 

 

 

Current

 

 

 

 

 

 

3,749

 

 

 

 

 

 

3,749

 

 

 

 

 

Notes payable - related parties

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2016

 

10%

 

 

Due on demand

 

 

 

 

$

20

 

 

$

 

 

$

20

 

 

 

 

 

2018

 

11%

 

 

Due on demand

 

 

 

 

 

159

 

 

 

 

 

 

159

 

 

 

 

 

2019

 

10%

 

 

Due on demand

 

 

 

 

 

14

 

 

 

 

 

 

14

 

 

 

 

 

 

 

 

$

193

 

 

$

 

 

$

193

 

 

 

 

 

 

 

 

 

 

 

Current

 

 

 

 

 

$

193

 

 

$

 

 

$

193

 

 

 

 

 

Convertible debentures

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2019

 

10%

 

 

18 months

 

$2.00-$9.52

 

(a)

$

10,200

 

 

$

3,185

 

 

$

7,015

 

 

 

1,080,415

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

10,200

 

 

$

3,185

 

 

$

7,015

 

 

 

1,080,415

 

 

 

 

 

 

 

 

Current

 

 

 

 

 

$

10,200

 

 

$

3,185

 

 

$

7,015

 

 

 

1,080,415

 

 

Convertible notes payable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2018

 

10%

 

 

2 years

 

$

10.00

 

(b)

$

3,000

 

 

$

5

 

 

$

2,995

 

 

 

363,876

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

3,000

 

 

$

5

 

 

$

2,995

 

 

 

363,876

 

 

 

 

 

 

 

 

Current

 

 

 

 

 

$

3,000

 

 

$

5

 

 

$

2,995

 

 

 

363,876

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

$

17,142

 

 

$

3,190

 

 

$

13,952

 

 

 

1,444,291

 

 

(a)

The notes are convertible to Emmaus Life Sciences, Inc. shares.

(b)

The notes are convertible to EMI Holding, Inc. shares.

 

 

 

 

 

The weighted-average stated interest rate of notes payable was 10% as of June 30, 2020 and December 31, 2019. The weighted-average effective annual interest rate of notes payable as of June 30, 2020 and December 31, 2019 was 34% and 66%, respectively, after giving effect to discounts relating to the conversion feature, warrants and deferred financing cost in connection with these notes.

 

As of June 30, 2020, future contractual principal payments due on notes payable were as follows:

 

Year Ending

 

 

 

2020 (six months)

$

9,040

 

2021

 

4,732

 

2022

 

221

 

2023

 

3,150

 

Total

$

17,143

 

 

Immediately prior to the completion of the Merger, all but one of the convertible notes payable were converted into shares of EMI common stock at their respective conversion prices. Upon completion of the Merger, the conversion shares were exchanged for shares of the Company common stock in the same manner as other outstanding shares of common stock of EMI based on the Merger “exchange ratio.” The unconverted convertible note payable is convertible into shares of common stock of EMI at conversion price of $10.00 per share and included in convertible notes payable.

The Company estimates the total fair value of any beneficial conversion feature and any accompanying warrants in allocating the proceeds from the sale of convertible notes payable. The proceeds allocated to the beneficial conversion feature were determined by taking the estimated fair value of shares underlying the convertible notes less the fair value of the number of shares that would be issued if the conversion rate equaled the fair value of common stock as of the date of issuance. In situations where the notes included both a beneficial conversion feature and a warrant, the proceeds are allocated to the beneficial conversion feature and the warrants based on their relative fair values.

The 10% Senior Secured Debentures of EMI were amended and restated immediately prior to the Merger to, among other things, make them convertible into shares of common stock of EMI and to provide for adjustments in the conversion shares issuable upon conversion of the Debentures and the conversion price in the event of a merger, reorganization and similar events. Accordingly, upon completion of the Merger the Amended and Restated 10% Senior Secured Convertible Debentures became convertible into shares of common stock of the Company and included in convertible notes payable.  See Note 8 for additional information regarding this arrangement.

  

The conversion feature of the Amended and Restated 10% Senior Secured Convertible Debentures was separately accounted for at fair value as derivative liabilities under guidance in ASC 815 that is remeasured at fair value on a recurring basis using Level 3 inputs, with any changes in the fair value of the conversion feature liabilities recorded in earnings. The following table sets forth the fair value of the conversion feature liabilities as of June 30, 2020 and December 31, 2019 (in thousands):

 

 

 

Six Months Ended

 

 

Year ended

 

Conversion feature liabilities - Amended and Restated 10% Senior Convertible Debentures

 

June 30, 2020

 

 

December 31, 2019

 

Balance, beginning of period

 

$

1

 

 

$

 

Fair value at issuance date

 

 

 

 

 

132

 

Fair value at debt modification date

 

 

118

 

 

 

 

Change in fair value included in the statement of comprehensive income (loss)

 

 

(6

)

 

 

(131

)

Balance, end of period

 

$

113

 

 

$

1

 

 

The value and any change in fair value of conversion feature liabilities are determined using a binomial lattice model. The model produces an estimated fair value based on changes in the price of the underlying common stock over successive periods of time.

 

The fair values as of June 30, 2020, the February 21, 2020 modification date and December 31, 2019 were based upon following assumptions:

 

June 30, 2020

 

February 21, 2020

(Modification date)

 

December 31, 2019

 

Stock price

$

1.67

 

$

1.89

 

$

1.97

 

Conversion price

$

2.00

 

$

3.00

 

$

9.52

 

Selected yield

 

15.73

%

 

19.12

%

 

16.77

%

Expected volatility (peer group)

 

100

%

 

65

%

 

50

%

Expected life (in years)

 

0.81

 

 

1.16

 

 

0.81

 

Expected dividend yield

 

 

 

 

 

 

Risk‑free rate

Term structure

 

Term structure

 

Term structure

 

 

See Note 13 for information regarding the prepayment of the Amended and Restated 10% Senior Secured Convertible Debentures.

 

The Company is party to a revolving line of credit agreement with Dr. Niihara, the Company’s Chairman and Chief Executive Officer. Under the agreement, at the Company’s request from time to time, Dr. Niihara may, but is not obligated to, loan or re-loan to the Company up to $1,000,000. Outstanding amounts under the agreement are due and payable upon demand and bear interest, payable monthly, at a variable annual rate equal to the Prime Rate in effect from time to time plus 3%. In addition to the payment of interest, the Company is obligated to pay Dr. Niihara a “tax gross-up” intended to make him whole for federal and state income taxes payable by him with respect to interest paid to him in the previous year. The outstanding balances under the revolving line of credit agreement of $600,000 as of June 30, 2020 and December 31, 2019 were reflected in revolving line of credit, related party on the Consolidated Balance Sheet. With the tax-gross up, the effective annual interest rate on the outstanding balance as of June 30, 2020 was 10.4%. The revolving line of credit agreement will expire on November 22, 2022. Refer to Note 12 for more information regarding this arrangement.  

 

On May 8, 2020, the Company received a loan in the amount of $797,840 under the Small Business Administration Paycheck Protection Program (“PPP”).  The PPP, established as part of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), provides for loans to qualifying businesses for amounts up to 2.5 times of the average monthly payroll expenses of the qualifying business. The loan, which is in the form of a Promissory Note dated April 29, 2020, matures on April 29, 2022 and bears interest at a rate of 1% per annum, payable monthly commencing on December 8, 2020 unless the PPP loan is forgiven prior to the date of the first monthly payment or the loan forgiveness process has commenced. The Note may be prepaid by the Company at any time prior to maturity with no prepayment penalties. The loan and accrued interest are forgivable after a specific period as long as the Company uses the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and maintains its payroll levels. The Company has applied for PPP loan forgiveness on October 30, 2020. There is no assurance that the loan will be forgiven. The amount of loan forgiveness would be reduced if the Company were to terminate employees or reduce salaries during such period. The PPP loan was included in notes payable on the Condensed Consolidated Balance Sheet.