Note 4 - Long-Term Debt

On May 14, 2018, the Company issued $40.0 million secured notes (the “Tranche One Secured Notes”). Because the conversion price of $3.08 was less than the Company’s closing stock price on the date of issuance, this gave rise to a beneficial conversion feature valued at $7.9 million. The Company recognized this beneficial conversion feature as a debt discount and additional paid in capital on the closing date. The discount to the Tranche One Secured Notes is being amortized to interest expense until maturity or its earlier repayment or conversion. For the three months ended March 31, 2021, the amount of amortization recorded in accretion expense was $0.7 million (March 31, 2020 - $0.7 million). The terms also contain a financial covenant requiring the Company’s asset value to be 1.75 times the total net debt at each quarter end and maintain a minimum cash balance of $1.0 million while the Tranche One Secured Notes remain outstanding (the “market value test”).

For the three months ended March 31, 2021, interest expense and accretion expense of $1.7 million and $2.3 million, respectively, were recorded in the unaudited interim condensed consolidated statements of operations (March 31, 2020 - $1.4 million and $2.0 million, respectively).

As of March 31, 2020, the Company was not in compliance with the market value test, and therefore in breach of a financial covenant for the Tranche One Secured Notes, Tranche Two Secured Notes (as defined herein), and Tranche Three Secured Notes (as defined herein). Furthermore, the Company was in default on its Secured Notes as of March 31, 2020, and as a result, an event of default occurred on April 4, 2020. This default was triggered on the Company’s long-term debt, which as of March 31, 2021 consisted of $97.5 million and $60.0 million of principal amount and $19.0 million and $6.0 million in accrued interest with respect to the Secured Notes and Unsecured Debentures, respectively. As a result of the default, the Company is classifying the Tranche One Secured Notes, Tranche Two Secured Notes, and Tranche Three Secured Notes as current liabilities on the unaudited interim condensed consolidated balance sheets. As of March 31, 2021, the Company is still in default on the Tranche One Secured Notes, Tranche Two Secured Notes, and Tranche Three Secured Notes. Further details on the default are disclosed in Note 13.

For the three months ended March 31, 2021, interest expense of $0.4 million (March 31, 2020 - $2.2 million) was recorded in relation to the Exit Fee on the unaudited interim condensed consolidated statements of operations. As of March 31, 2021, the Company accrued $14.2 million (as of March 31, 2020 - $12.5 million) related to the Exit Fee, comprised of an aggregate principal amount of $10.3 million and $3.9 million in accrued interest (as of March 31, 2020 – $10.3 million and $2.2 million, respectively). Furthermore, as a result of this default, the Company is classifying the Exit Fee as a current liability on the unaudited interim condensed consolidated balance sheets as of March 31, 2021.

On September 30, 2019, the Company issued an additional $20.0 million of secured notes (the “Tranche Two Secured Notes”). The Tranche Two Secured Notes accrue interest at 13.0% and mature May 14, 2021.

For the three months ended March 31, 2021, interest expense and accretion expense of $0.8 million and $0.5 million, respectively, were recorded in the unaudited interim condensed consolidated statements of operations (March 31, 2020 - $0.7 million and $0.4 million, respectively).

All terms, restrictions and financial covenants applicable to the Tranche One Secured Notes are also applicable to the Tranche Two Secured Notes.

On December 20, 2019, the Company issued an additional $36.2 million of secured notes (the “Tranche Three Secured Notes”). The Tranche Three Secured Notes accrue interest at 13.0% and mature May 14, 2021.

For the three months ended March 31, 2021, interest expense and accretion expense of $1.4 million and $1.1 million, respectively, were recorded in the unaudited interim condensed consolidated statements of operations (March 31, 2020 - $1.2 million and $1.0 million, respectively).

All terms, restrictions and financial covenants applicable to the Tranche One Secured Notes and Tranche Two Secured Notes are also applicable to the Tranche Three Secured Notes.

On July 13, 2020, as part of the Recapitalization Transaction, the Company issued an additional $14.7 million as the Tranche Four Secured Notes. The Tranche Four Secured Notes accrue interest at 8.0% and mature July 13, 2025.

For the three months ended March 31, 2021, interest expense and accretion expense of $0.3 million and $0.1 million, respectively, was recognized in the unaudited interim condensed consolidated statements of operations (March 31, 2020 – $Nil and $Nil, respectively). As of March 31, 2021, the Company no longer had restricted cash in escrow (December 31, 2020 - $0.4 million) from the Tranche Four Secured Notes.

All terms, restrictions, and financial covenants applicable to the Tranche One Secured Notes, Tranche Two Secured Notes, and Tranche Three Secured Notes discussed above, are also applicable to the Tranche Four Secured Notes. The Company remains in default with respect to the Tranche One Secured Notes, Tranche Two Secured Notes and Tranche Three Secured Notes, due to failure to remit applicable interest payments between March 2020 and March 2021. Thus, all amounts owing on the Tranche One Secured Notes, Tranche Two Secured Notes and Tranche Three Secured Notes are classified as current liabilities in the unaudited interim condensed consolidated balance sheets. The Company has not defaulted on the Tranche Four Secured Notes as of March 31, 2021. Therefore, the Tranche Four Secured Notes are classified as long-term liabilities in the unaudited interim condensed consolidated balance sheets.

On February 2, 2021, iAnthus New Jersey, LLC (“INJ”) issued an aggregate of $11.0 million of senior secured bridge notes (“Senior Secured Bridge Notes”) which mature on the earlier of (i) February 2, 2023, (ii) the date on which the Company closes a Qualified Financing (as defined below) and (iii) such earlier date that the principal amount may become due and payable pursuant to the terms of such notes. The Senior Secured Bridge Notes accrue interest at a rate of 14.0% per annum (increasing to 25.0% per annum in the event of default and decreasing to 8.0% per annum upon the completion of the Company’s Recapitalization Transaction). “Qualified Financing” means a transaction or series of related transactions resulting in net proceeds to us of not less than $10 million from the subscription of our securities, including, but not limited to, a private placement or rights offering.

The host debt, classified as a liability, was recognized at the fair value of $10.3 million, net of issuance costs $0.7 million.

 

Interest is to be paid in kind by adding the interest accrued on the principal amount on the last day of each fiscal quarter (the first such interest payment date being March 31, 2021), and such amount thereafter becoming part of the principal amount and will accrue interest. Interest paid in kind will be payable on the date that all of the principal amount is due and payable.

For the three months ended March 31, 2021, interest and accretion expense of $0.2 million and $0.1 million, respectively, was recognized in the unaudited interim condensed consolidated statements of operation (March 31, 2020—$Nil and $Nil, respectively). As of March 31, 2021, the Company held $8.4 million (December 31, 2020—$Nil) of restricted cash in escrow from the Senior Secured Bridge Notes. Refer to Note 12(e) for further discussion.

The Senior Secured Bridge Notes are secured by a security interest in certain assets of INJ. The Company provided a guarantee in respect of all of the obligations of INJ under the Senior Secured Bridge Notes. The Company has not defaulted on the Senior Secured Bridge Notes as of March 31, 2021. Therefore, the Senior Secured Bridge Notes are classified as long-term liabilities in the unaudited interim condensed consolidated balance sheets.

 

On March 18, 2019, the Company completed a private placement of $35.0 million of unsecured convertible debentures (the “March 2019 Debentures”) and corresponding warrants to purchase 2,177,291 common shares of the Company at an exercise price of $6.43 per share from the closing date until March 15, 2022. The March 2019 Debentures accrue interest at a rate of 8.0% per annum, payable quarterly on the last business day of each fiscal quarter, beginning on March 31, 2019. Interest is paid in cash, shares, or a combination of cash and shares, up to 50%, at the Company’s election. The March 2019 Debentures mature on March 15, 2023.

For the three months ended March 31, 2021, interest expense and accretion expense of $0.7 million and $0.4 million, respectively, were recorded in the unaudited interim condensed consolidated statements of operations (March 31, 2020 - $0.7 million and $0.3 million, respectively).

As of March 31, 2021, the Company defaulted on its interest obligations to the holders of the Secured Notes. This default triggered a cross-default on its interest obligations to the holders of the March 2019 Debentures. Further, as a result of this default, the Company is classifying the debt as a current liability as the March 2019 Debentures are due on demand. The event of default is applicable to all amounts outstanding under the March 2019 Debentures.

 

On May 2, 2019, the Company completed a private placement of $25.0 million of unsecured convertible debentures (the “May 2019 Debentures”) and corresponding warrants to purchase 1,555,207 common shares of the Company at an exercise price of $6.43 per common share from the closing date until March 15, 2022 . The May 2019 Debentures accrue interest at a rate of 8.0% per annum, payable quarterly on the last business day of each fiscal quarter, beginning on June 30, 2019. Interest is paid in cash, shares, or a combination of cash and shares, up to 50%, at the Company’s election. The May 2019 Debentures mature on March 15, 2023.

For the three months ended March 31, 2021, interest expense and accretion expense of $0.5 million and $0.2 million, respectively, were recorded in the unaudited interim condensed consolidated statements of operations (March 31, 2020—$0.5 million and $0.2 million, respectively).

The terms of the May 2019 Debentures impose certain restrictions on the Company’s operating and financing activities, including certain restrictions on the Company’s ability to incur certain additional indebtedness at the subsidiary level. As of March 31, 2021, the Company defaulted on its interest obligations to the holders of the Secured Notes. This default triggered a cross-default on its interest obligations to the holders of the May 2019 Debentures. Further, as a result of this default, the Company is classifying the debt as a current liability as the May 2019 Debentures are due on demand. The event of default is applicable to all amounts outstanding under the May 2019 Debentures.

 

As part of the acquisition of MPX Bioceutical Corporation (“MPX”) on February 5, 2019 (the “MPX Acquisition”) (Note 5(b)), the Company assumed a long-term note (the “Stavola Trust Note”) of $10.8 million, payable to the Elizabeth Stavola 2016 NV Irrevocable Trust. This trust is for the benefit of a former director and officer of the Company, Elizabeth Stavola, and is therefore a related party balance. The note had a maturity date of January 19, 2020, and an interest rate of 8.0%. Repayment of the note was secured by the assets of certain subsidiaries of the Company. On January 10, 2020, the Stavola Trust Note was paid in full.