NOTE 8—NOTES PAYABLE

Notes payable consisted of the following at December 31, 2019 and 2018 (in thousands except for conversion price and shares):

The average stated interest rate of notes payable was 10% for the years ended December 31, 2019 and 2018. The average effective interest rate of notes payable for the years ended December 31, 2019 and 2018 was 66% and 35%, respectively, after giving effect to discounts relating to beneficial conversion features and deferred financing cost in connection with these notes.

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 of EMI 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 estimated 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 were allocated to the beneficial conversion feature and the warrants based on the pro‑rata fair value.

The 10% Senior Secured Debentures 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 debentures became convertible into shares of common stock of the Company and included in convertible notes payable.

The conversion feature of the amended and restated 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, which is included in the other current liabilities as of December 31, 2019 (in thousands):

The fair value and any changes in fair value of conversion feature liabilities are determined using a binominal 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 December 31, 2019 and as of the Merger date were based upon following assumptions:

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, including $600,000 loaned by him in December 2019. 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. As of December 31, 2019, the outstanding balance under the revolving line of credit agreement of $600,000 was reflected in revolving line of credit, related party on the Consolidated Balance Sheet. With the tax-gross up, the effective interest rate on the outstanding balance as of December 31, 2019 was 10.4%. The revolving line of credit agreement will expire on November 22, 2022. Refer to Note 13 for related party transaction details.