Quarterly report pursuant to Section 13 or 15(d)

NOTES PAYABLE

v3.21.2
NOTES PAYABLE
9 Months Ended
Sep. 30, 2021
Debt Disclosure [Abstract]  
NOTES PAYABLE

NOTE 7 — NOTES PAYABLE

Notes payable consisted of the following at September 30, 2021 and December 31, 2020 (in thousands except for number of shares):

 

Year

Issued

 

Interest Rate

Range

 

 

Term of Notes

 

Conversion

Price

 

 

Principal

Outstanding September 30, 2021

 

 

Unamortized Discount September 30, 2021

 

 

Carrying

Amount September 30, 2021

 

 

Underlying Shares

September 30, 2021

 

 

Notes payable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2013

 

10%

 

 

Due on demand

 

 

 

 

$

895

 

 

$

 

 

$

895

 

 

 

 

 

2020

 

1%

 

 

2 years

 

 

 

 

 

798

 

 

 

 

 

 

798

 

 

 

 

 

2021

 

11%

 

 

Due on demand - 2 years

 

 

 

 

 

3,076

 

 

 

 

 

 

3,076

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

4,769

 

 

$

 

 

$

4,769

 

 

 

 

 

 

 

 

 

 

 

Current

 

 

 

 

 

$

3,269

 

 

$

 

 

$

3,269

 

 

 

 

 

 

 

 

 

 

 

Non-current

 

 

 

 

 

$

1,500

 

 

$

 

 

$

1,500

 

 

 

 

 

Notes payable - related parties

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2020

 

12%

 

 

Due on demand

 

 

 

 

 

100

 

 

 

 

 

 

100

 

 

 

 

 

2021

 

12%

 

 

Due on demand

 

 

 

 

 

300

 

 

 

 

 

 

 

300

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

400

 

 

$

 

 

$

400

 

 

 

 

 

 

 

 

 

 

 

Current

 

 

 

 

 

$

400

 

 

$

 

 

$

400

 

 

 

 

 

 

 

 

 

 

 

Non-current

 

 

 

 

 

$

 

 

$

 

 

$

 

 

 

 

 

Convertible notes payable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2020

 

12%

 

 

3 years

 

$

10.00

 

(b)

 

3,150

 

 

 

 

 

 

3,150

 

 

 

316,669

 

 

2021

 

2%

 

 

3 years

 

$

1.48

 

(a)

 

14,490

 

 

 

4,732

 

 

 

9,758

 

 

 

9,806,305

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

17,640

 

 

$

4,732

 

 

$

12,908

 

 

 

10,122,974

 

 

 

 

 

 

 

 

Non-current

 

 

 

 

 

$

17,640

 

 

$

4,732

 

 

$

12,908

 

 

 

10,122,974

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

$

22,809

 

 

$

4,732

 

 

$

18,077

 

 

 

10,122,974

 

 

 

 

Year

Issued

 

Interest Rate

Range

 

 

Term of Notes

 

Conversion

Price

 

 

Principal

Outstanding

December 31,

2020

 

 

Unamortized

Discount

December 31,

2020

 

 

Carrying

Amount

December 31,

2020

 

 

Underlying

Shares

Notes

December 31, 2020

 

 

Notes payable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2013

 

10%

 

 

Due on demand

 

 

 

 

$

969

 

 

$

 

 

$

969

 

 

 

 

 

2019

 

11%

 

 

Due on demand

 

 

 

 

 

2,899

 

 

 

 

 

 

2,899

 

 

 

 

 

2020

 

1%-11%

 

 

Due on demand - 2 years

 

 

 

 

 

942

 

 

 

 

 

 

942

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

4,810

 

 

$

 

 

$

4,810

 

 

$

 

 

 

 

 

 

 

 

Current

 

 

 

 

 

$

4,588

 

 

$

 

 

$

4,588

 

 

 

 

 

 

 

 

 

 

 

Non-current

 

 

 

 

 

$

222

 

 

$

 

 

$

222

 

 

 

 

 

Notes payable - related parties

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2016

 

10%

 

 

Due on demand

 

 

 

 

$

20

 

 

$

 

 

$

20

 

 

 

 

 

2019

 

10%

 

 

Due on demand

 

 

 

 

 

14

 

 

 

 

 

 

14

 

 

 

 

 

2020

 

12%

 

 

Due on demand

 

 

 

 

 

100

 

 

 

 

 

 

100

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

134

 

 

$

 

 

$

134

 

 

 

 

 

 

 

 

 

 

 

Current

 

 

 

 

 

$

134

 

 

$

 

 

$

134

 

 

 

 

 

Convertible debentures

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2019

 

10%

 

 

18 months

 

$2.00-$9.52

 

(a)

$

7,200

 

 

$

1,720

 

 

$

5,480

 

 

 

3,630,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

7,200

 

 

$

1,720

 

 

$

5,480

 

 

 

3,630,000

 

 

 

 

 

 

 

 

Current

 

 

 

 

 

$

7,200

 

 

$

1,720

 

 

$

5,480

 

 

 

3,630,000

 

 

Convertible note payable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2020

 

12%

 

 

3 years

 

$

10.00

 

(b)

$

3,150

 

 

$

 

 

$

3,150

 

 

 

316,723

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

3,150

 

 

$

 

 

$

3,150

 

 

 

316,723

 

 

 

 

 

 

 

 

Current

 

 

 

 

 

$

3,150

 

 

$

 

 

$

3,150

 

 

 

316,723

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

$

15,294

 

 

$

1,720

 

 

$

13,574

 

 

 

3,946,723

 

 

 

 

(a)

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

 

(b)

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

 

The weighted-average stated annual interest rate of notes payable was 5% and 10% as of September 30, 2021 and December 31, 2020, respectively. The weighted-average effective annual interest rate of notes payable as of September 30, 2021 and December 31, 2020 was 14% and 37%, respectively, after giving effect to discounts relating to conversion features, warrants and deferred financing costs relating to the notes.

As of September 30, 2021, future contractual principal payments due on notes payable were as follows:

 

Year Ending

 

 

 

2021 (three months)

$

3,447

 

2022

 

222

 

2023

 

4,650

 

2024

 

14,490

 

Total

$

22,809

 

 

In March 2021, the Company prepaid in full its outstanding Amended and Restated 10% Senior Secured Convertible Debentures and recognized $1.2 million of loss on debt extinguishment relating to the remaining unamortized discount.

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. Upon prepayment of the Debentures, the outstanding liability was recognized in change in fair value in earnings.

The following table sets forth the fair value of the conversion feature liabilities as of September 30, 2021 and December 31, 2020 (in thousands):

 

 

 

Nine Months Ended

 

 

Year Ended

 

Conversion feature liabilities — Amended and Restated 10% Senior Secured Convertible Debentures

 

September 30, 2021

 

 

December 31, 2020

 

Balance, beginning of period

 

$

7

 

 

$

1

 

Fair value at debt modification date

 

 

 

 

 

118

 

Change in fair value included in the statement of comprehensive loss

 

 

(7

)

 

 

(112

)

Balance, end of period

 

$

 

 

$

7

 

 

The fair 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.

 

The fair value as of December 31, 2020 was based upon following assumptions:

 

 

 

December 31, 2020

 

Stock price

 

$

1.23

 

Conversion price

 

$

2.00

 

Selected yield

 

 

10.48

%

Expected volatility (peer group)

 

 

95

%

Expected life (in years)

 

 

0.67

 

Expected dividend yield

 

 

Risk-free rate

 

Term structure

 

          

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 balance under the revolving line of credit agreement of $600,000 as of September 30, 2021 and December 31, 2020 were reflected in revolving line of credit, related party on the condensed consolidated balance sheets. With the estimated tax-gross up, the effective annual interest rate on the outstanding balance as of September 30, 2021, was 10.4%. The revolving line of credit agreement will expire on November 22, 2022. Refer to Note 12 for related party information.  

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 evidenced by 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 sheets at September 30, 2021 and December 31, 2020.

On February 9, 2021, the Company entered into a securities purchase agreement with an effective date of February 8, 2021 pursuant to which the Company agreed to sell and issue to the purchasers thereunder in a private placement pursuant to Rule 4(a)(2) of the Securities Act of 1933, as amended, and Regulation D thereunder a total of up to $17 million in principal amount of convertible promissory notes of the Company for a purchase price equal to the principal amount thereof. As of September 30, 2021, we had sold approximately $14.5 million of the convertible promissory notes. Of the net proceeds from the sale of the convertible promissory notes, $6.2 million was used to prepay the outstanding Amended and Restated 10% Senior Secured Convertible Debentures as described above.

Commencing one year from the original issue date, the convertible promissory notes will be convertible at the option of the holder into shares of the Company’s common stock at an initial conversion price of $1.48 per share, which equaled the “Average VWAP” (as defined) of the Company’s common stock on the effective date. The initial conversion price will be adjusted as of the end of each three-month period following the original issue date, commencing May 31, 2021, to equal the Average VWAP as of the end of

such three-month period if such Average VWAP is less than the then-conversion price. There is no floor on the conversion price. The conversion price will be subject to further adjustment in the event of a stock split, reverse stock split or certain other events specified in the convertible promissory notes.

The convertible promissory notes bear interest at the rate of 2% per year payable semi-annually on the last business day of August and January of each year and will mature on the 3rd anniversary of the original issue date. The convertible promissory notes will become prepayable in whole or in part at the election of the holders on or after February 28, 2022 if the Company’s common stock shall not have been approved for listing on the NYSE American, the Nasdaq Capital Market or other “Trading Market” (as defined). The Company will be entitled to prepay up to 50% of the principal amount of the convertible promissory notes at any time after the first anniversary and on or before the second anniversary of the original issue date for a prepayment amount equal to the principal amount being prepaid, accrued and unpaid interest thereon and a prepayment premium equal to 50% of such principal amount. The convertible promissory notes are general, unsecured obligations of the Company.

The conversion feature of the convertible promissory notes was separately accounted for at fair value as a derivative liability 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 liability recorded in earnings. The following table sets forth the fair value of the conversion feature liability as of September 30, 2021 (in thousands):

 

Convertible promissory notes

 

September 30, 2021

 

Balance, beginning of period

 

$

 

Fair value at issuance date

 

 

5,594

 

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

 

 

1,139

 

Balance, end of period

 

$

6,733

 

 

The fair value and any change in fair value of conversion feature liability are determined using a convertible bond lattice model. The model produces an estimated fair value based on changes in the price of the underlying common stock.

The fair value as of September 30, 2021 and at issuance date was based upon following assumptions:

Convertible promissory notes

 

September 30, 2021

 

 

Issuance Date

 

Stock price

 

$

1.60

 

 

$

1.41

 

Conversion price

 

$

1.48

 

 

$

1.48

 

Selected yield

 

 

21.62

%

 

 

20.29

%

Expected volatility

 

 

50

%

 

 

50

%

Time until maturity (in years)

 

 

2.41

 

 

 

3.00

 

Dividend yield

 

 

 

 

Risk-free rate

 

 

0.38

%

 

 

0.30

%