| Notes Payable | 9. Notes Payable
Notes payable, net of related discounts, consists of the
following:
June 30, 2015 December 31,
(in thousands)
Second Amended and Restated Convertible Notes $ 36,420 $ 35,332
Loan Agreement 19,344 8,307
Second Amended and Restated Bridge Notes 217 271
Second Amended and Restated Reimbursement Notes 637 636
Non-current notes payable, net of related discounts $ 56,618 $ 44,546
On August 20, 2014, the Company entered into a series of
agreements (the “Transaction Documents”) with MHR
Capital Partners Master Account LP, MHR Capital Partners
(100) LP, MHR Institutional Partners II LP, and MHR
Institutional Partners IIA LP, (collectively, “MHR” or
the “Lenders”), for a new loan facility (the
“Loan Agreement”), an extension of the Company’s
existing obligations under various promissory notes previously
issued to the Lenders, and for payment by the Company of certain
royalties to MHR (the “Transaction”).
The Loan Agreement provides for, among other things, a commitment
(the “Commitment”) of the Lenders to loan the Company
up to $20 million to finance the development, manufacturing,
marketing and sale of oral Eligen ®
In addition, as described below, if the Company does not have
sufficient cash in excess of the Minimum Cash Balance, as defined
below, to pay any Royalties that become due under the Royalty
Agreement, as described below, such Royalties will be paid as an
additional Loan under the Loan Agreement by increasing the
principal amount outstanding under the Loan Agreement (any such
Loan, “Paid-In-Kind Royalties”). The “Minimum
Cash Balance” generally means cash on hand (plus certain cash
expenditures during such fiscal year that are unrelated to the B12
Product or related products) of at least $10 million (or $15
million, under certain circumstances beginning as early as
October 1, 2015), subject to certain permitted deductions.
Except with respect to Paid-In-Kind Royalties incurred under the
Loan Agreement after all amounts of principal and interest have
previously been paid in full, the Loan will mature on the earlier
of (a) December 31, 2019 and, (b) 30 days after the
end of any fiscal year in which the Company’s cash (plus
certain cash expenditures during such fiscal year that are
unrelated to the B12 Product or related products) as of the end of
such fiscal year (subject to certain permitted deductions) is more
than three times the principal amount of the Loan as of the end of
such fiscal year. Paid-In-Kind Royalties incurred under the Loan
Agreement after all amounts of principal and interest have
previously been paid in full mature one year following the date of
incurrence. The Loan bears interest at a rate of 13% per annum
(the “Interest Rate”), compounded monthly, and will be
payable in kind and in arrears on June 30 and December 31
of each year up to and including the maturity date by increasing
the outstanding principal amount of the Loan by the amount of each
such interest payment. So long as an event of default under the
Loan Agreement (an “Event of Default”) has occurred and
is continuing, at the election of MHR, interest shall accrue on the
Loan at a rate equal to 2% per annum above the Interest Rate
(“Default Rate”). Interest at the Default Rate shall
accrue from the initial date of such Event of Default until that
Event of Default is cured or waived in writing and shall be payable
upon demand and, if not paid when due, shall itself bear interest
at the Default Rate. The Loan must be repaid from time to time
prior to maturity pursuant to (a) a cash sweep of 50% of the
Company’s adjusted consolidated free cash flow, or 75% of the
Company’s adjusted consolidated free cash flow in any year in
which the adjusted consolidated free cash flow exceeds $50 million,
to the extent such cash sweep does not cause the Company’s
cash as of the end of such year to be less than the Minimum Cash
Balance, (b) a cash sweep of 50% of any cash proceeds received
from any third party in connection with the license, distribution
or sale of any of the Company’s products other than the B12
Product or related products (the “Non-B12 Products”),
subject to the priority described below, and (c) a Royalty
Match (as described below), to the extent such Royalty Match does
not cause the Company’s cash as of the end of such year to be
less than the Minimum Cash Balance and subject to the priority
described below. The Loan Agreement provides for certain
representations and warranties, conditions precedent to the
Lenders’ obligation to lend, affirmative and negative
covenants of the Company (including, but not limited to, certain
milestones in the development of its B12 Products) and Events of
Default. If we fail to meet our obligations under the terms of the
Loan Agreement, or fail to meet any of the net sales targets
included in the Loan Agreement, we would be in default under these
notes, which would give MHR the option of foreclosing on
substantially all of our assets. As of June 30, 2015, the
principal balance and accrued interest of the Loan Agreement was
$19.3 million.
In connection with the entry into the Loan Agreement, on
August 20, 2014, the Lenders and the Company further amended
and restated (i) the Convertible Notes issued by the Company
to certain of the Lenders, (ii) the Bridge Notes issued by the
Company to certain of the Lenders, and (iii) the Reimbursement
Notes (and, together with the Convertible Notes and Bridge Notes,
the “MHR Notes”). Also, in connection with the entry
into the Loan Agreement and the amendment and restatement of the
MHR Notes, Institutional Partners IIA and the Company have amended
the Pledge and Security Agreement, dated September 26, 2005,
as amended, by and between the Company and Institutional Partners
IIA to, among other things, secure the Reimbursement Notes and
payments due under the Loan Agreement with substantially all of the
Company’s assets, and secure the payments due under the
Royalty Agreement and Paid-In-Kind Royalties due under the Loan
Agreement with the Company’s intellectual property relating
to the B12 Products and related products.
Convertible Notes.
The Convertible Notes now provide for a new maturity date of
March 31, 2022 (subject to acceleration upon the occurrence of
certain specified events of default, including the failure to meet
certain sales, performance, and manufacturing milestones specified
in the Convertible Notes). The interest rate is 13% per annum,
compounded monthly, which interest will be payable in the form of
additional Convertible Notes. The Convertible Notes are
collateralized by a first priority lien in favor of the Lenders on
substantially all of the Company’s assets. After all
principal and interest under the Loan Agreement and Reimbursement
Notes are repaid, the remaining Convertible Notes must be redeemed
from time to time prior to maturity pursuant to a cash sweep of 50%
of the Company’s adjusted consolidated free cash flow (75% of
the Company’s adjusted consolidated free cash flow in any
year in which the Company’s adjusted consolidated free cash
flow exceeds $50 million) to the extent such cash sweep does not
cause the Company’s cash as of the end of such year to be
less than the Minimum Cash Balance. The Convertible Notes are
convertible, at the option of the holders, at a conversion price of
$1.25 per share of common stock, which conversion price is subject
to adjustment upon the occurrence of specified events, including
stock dividends, stock splits, certain fundamental corporate
transactions, and certain issuances of common stock by the Company.
The Convertible Notes must also be redeemed from time to time prior
to maturity pursuant to (a) a cash sweep of 50% of any cash
proceeds received from any third party in connection with the
license, distribution or sale of any Non-B12 Product, subject to
the priority described below and (b) a Royalty Match (as
described below), to the extent such Royalty Match does not cause
the Company’s cash as of the end of such year to be less than
the Minimum Cash Balance and subject to the priority described
below. If we fail to meet our obligations under the terms of the
Convertible Notes, or fail to meet any of the net sales targets
included in the Convertible Notes, we would be in default under
these notes, which would give MHR the option of foreclosing on
substantially all of our assets. As of June 30, 2015, the
principal balance of the Convertible Notes was $43.6 million; and
the Convertible Notes were convertible into 34,902,557 shares of
our common stock.
Reimbursement Notes.
The Reimbursement Notes provide for a maturity date of the earlier
of (a) March 31, 2022 and (b) immediately prior to
the time that any amounts outstanding under the Loan Agreement are
repaid (subject to acceleration upon the occurrence of certain
events of default specified in the Reimbursement Notes), and bear
interest at the rate of 10% per annum, compounded monthly,
which interest is payable in the form of additional Reimbursement
Notes. The Reimbursement Notes are collateralized by a first
priority lien in favor of the Lenders on substantially all of the
Company’s assets. The Reimbursement Notes are convertible, at
the option of the holders, at a conversion price of $0.50 per share
of common stock, which conversion price is subject to adjustment
upon the occurrence of specified events, including stock dividends,
stock splits, certain fundamental corporate transactions, and
certain issuances of common stock by the Company. The Reimbursement
Notes must also be redeemed from time to time prior to maturity
pursuant to a cash sweep of 50% of any cash proceeds received from
any third party in connection with the license, distribution or
sale of any Non-B12 Product, subject to the priority described
below. As of June 30, 2015, the principal balance of the
Reimbursement Notes was $0.72 million; and the Reimbursement Notes
were convertible into 1,435,717 shares of our common stock.
Bridge Notes.
The Bridge Notes provide for a maturity date of March 31, 2022
(subject to acceleration upon the occurrence of certain events of
default specified) and bear interest at 13% per year,
compounded monthly and payable in the form of additional Bridge
Notes. The Bridge Notes are collateralized by a first priority lien
in favor of the Lenders on substantially all of the Company’s
assets. The Bridge Notes are convertible, at the option of the
holders, at a conversion price of $0.50 per share of common stock,
which conversion price is subject to adjustment upon the occurrence
of specified events, including stock dividends, stock splits,
certain fundamental corporate transactions, and certain issuances
of common stock by the Company. The Bridge Notes must also be
redeemed from time to time prior to maturity pursuant to (a) a
cash sweep of 50% of any cash proceeds received from any third
party in connection with the license, distribution or sale of any
Non-B12 Product, subject to the priority described below and
(b) a Royalty Match (as described below), to the extent such
Royalty Match does not cause the Company’s cash as of the end
of such year to be less than the Minimum Cash Balance and subject
to the priority described below. As of June 30, 2015, the
principal balance of the Bridge Notes was $1.98 million; and the
Reimbursement Notes were convertible into 3,959,358 shares of our
common stock.
The priority of the cash sweep for Non-B12 Products is as follows:
(i) to redeem the Reimbursement Notes, (ii) to prepay
principal and interest outstanding under the Loan Agreement;
(ii) to reduce the Commitment; (iv) to redeem the
Convertible Notes; and (v) to redeem the Bridge Notes.
As a condition to MHR entering into the Loan Agreement and amending
and restating the MHR Notes, the Company and MHR entered into a
Royalty Agreement (the “Royalty Agreement”) on
August 20, 2014 pursuant to which the Company agreed to pay to
MHR, subject to specified terms and conditions, royalties in
perpetuity (the “Royalties”), commencing as of the date
of the Royalty Agreement, in an amount equal to: twenty percent
(20%) of all Net Product Sales (as defined in the Royalty
Agreement) and any third party payments arising in connection with
the sale of the B12 Product and related products, during any fiscal
year; provided that, from and after October 1, 2015, if no
amount of indebtedness is outstanding under the Loan Agreement (the
“Indebtedness Repayment Condition”), such amount shall
be reduced to (i) five percent (5%) of all Net Sales and
third party payments commencing with the first quarter immediately
following the quarter in which the Indebtedness Repayment Condition
is satisfied, or (ii) two and one half percent (2.5%) of
all Net Sales commencing with the quarter immediately following the
quarter in which the Indebtedness Repayment Condition is satisfied,
but only with respect to the Net Sales made in any country in which
there was not a Valid Patent Claim (as defined in the Royalty
Agreement) and where generic entry of a competitive product not by
the Company or its affiliates that does not infringe a Valid Patent
Claim in such country has occurred, in each case as of the last day
of such Fiscal Quarter. Once the royalty rate has been reduced to
5%, the rate shall not be reinstated to 20% even if amounts become
outstanding under the Loan Agreement as a result of Paid-In-Kind
Royalties. Payments of Royalties shall be made in cash to the
extent such Royalties do not cause the Company’s cash as of
the end of any year to be less than the Minimum Cash Balance, and
otherwise shall be paid as Paid-In-Kind Royalties.
If any Royalties become due under the Royalty Agreement when the
royalty rate is 5% or 2.5%, the amount outstanding under the Loan
Agreement, Convertible Notes and Bridge Notes shall be reduced in
an amount equal to such royalty payment, to the extent such payment
does not cause the Company’s cash as of the end of such year
to be less than the Minimum Cash Balance (the “Royalty
Match”), in the following priority: (i) first, to prepay
the Loan; (ii) second, to redeem the Convertible Notes; and
(iii) finally, to redeem the Bridge Notes. For the six months
ended June 30, 2015, the Company recorded $53,742 royalty
expense.
Additional fees paid by Emisphere in connection with the Loan
Agreement, MHR Notes and the Royalty Agreement included the
reimbursement of $225 thousand of MHR’s professional fees
associated with the transaction, which was recorded as interest
expense during the third quarter of 2014.
We accounted for the modifications to the Company’s
obligations to MHR evidenced by the MHR Notes as a troubled debt
restructuring under FASB ASC 470-60. As there was only a
modification of terms to the existing debt and we did not transfer
any assets or equity in a settlement to MHR no gain or loss was
recorded on the transaction. The change in cash outflows resulting
from the modification of terms are accounted for on a prospective
basis.
The carrying value of the MHR Notes is comprised of the
following:
June 30, 2015 December 31, 2014
(unaudited)
(in thousands)
Amended and Restated Convertible Notes $ 43,628 $ 40,897
Loan Agreement 19,344 8,307
Amended and Restated Reimbursement Notes 718 683
Amended and Restated Bridge Notes 1,980 1,855
Unamortized discounts (9,052 ) (7,196 )
$ 56,618 $ 44,546 |
