Note 9 – Debentures

The carrying amount of all outstanding debentures as of December 31, 2018 and 2017 was as follows:

Payment on all outstanding debentures in the amount of $19,034,800 as of December 31, 2018 is due in 2019.

February 2017 Offering

On February 2, 2017, the Company issued $1.6 million aggregate principal amount of Original Issue Discount Convertible Debentures due three months from the date of issuance (the “February Debentures”) and warrants to purchase an aggregate of 13 shares of common stock, which can be exercised at any time after August 17, 2017 at an exercise price of $19,350 per share (the “February Warrants”), to an accredited investor for a purchase price of $1.5 million. On March 21, 2017, the February Debentures were exchanged for $2.5 million of exchange debentures as more fully discussed below.

March 2017 Offerings

On March 21, 2017, the Company issued $10.85 million aggregate principal amount of Senior Secured Original Issue Discount Convertible Debentures originally due March 21, 2019 (the “Convertible Debentures”). The Company received net proceeds from this transaction in the approximate amount of $8.4 million. The Company used $3.8 million of the net proceeds to repay a loan from Mr. Diamantis as more fully discussed in Note 8 and $0.75 million of the net proceeds to make the partial repayment on the TCA Debenture. The remainder of the net proceeds was used for general corporate purposes. In conjunction with the issuance of the Convertible Debentures, the holder of the February Debentures exchanged these debentures for $2.5 million of new debentures (the “Exchange Debentures” and, collectively with the Convertible Debentures, the “March Debentures”) on the same terms as, and pari passu with, the Convertible Debentures and warrants. The Company recorded non-cash interest expense in the amount of $0.4 million as a result of this exchange. Additionally, the holders of an aggregate of $2.2 million stated value of the Company’s Series H Convertible Preferred Stock (the “Series H Preferred Stock”) exchanged such preferred stock into $2.7 million principal amount of Exchange Debentures and warrants. The March Debentures contain a 24% original issue discount, have no regularly scheduled interest payments except in the event of a default and have a maturity date of March 21, 2019. As of December 31, 2018, approximately $2.0 million of the March Debentures were outstanding and were not paid as of March 21, 2019, the maturity date, as more fully discussed in Note 21.

In connection with the March Debentures the Company issued warrants to purchase shares of the Company’s common stock to several accredited investors. At December 31, 2018, these warrants were exercisable into an aggregate of approximately 47.3 billion shares of common stock. The warrants were issued to the investors in three tranches, Series A Warrants, Series B Warrants and Series C Warrants (collectively, the “March Warrants”). At December 31, 2018, the Series A Warrants are exercisable for 17.9 billion shares of the Company’s common stock. They are immediately exercisable and have a term of exercise equal to five years. At December 31, 2018, the Series B Warrants are exercisable for 11.3 billion shares of the Company’s common stock and were initially exercisable for a period of 18 months. During 2018, the Company extended the exercise period twice, once to March 21, 2019 and the second time to June 21, 2019 and recorded an additional discount on the Series B Warrants of approximately $8.6 million as a result of the extensions, $6.4 million of which is included in interest expense in 2018. Subsequent to December 31, 2018, on March 27, 2019, the expiration date of the Series B Warrants was extended 90 days to September 21, 2019 and again on May 10, 2019 to March, 31, 2022. At December 31, 2018, the Series C Warrants are exercisable for 18.2 billion shares of the Company’s common stock and have a term of five years provided such warrants shall only vest if, when and to the extent that the holders exercise the Series B Warrants. At December 31, 2018, the Series A, Series B and Series C Warrants each have an exercise price of $.00102 per share, which reflects adjustments pursuant to their terms. The Series A, Series B and Series C Warrants are subject to “full ratchet” and other customary anti-dilution protections.

The March Debentures are convertible into shares of the Company’s common stock, at a conversion price which has been adjusted pursuant to the terms of the March Debentures to $.00102 per share as of December 31, 2018, due to prices at which the Company has subsequently issued shares of common stock. The Convertible Debentures began to amortize monthly commencing on the 90th day following the closing date. The Exchange Debentures began to amortize monthly on the closing date. On each monthly amortization date, the Company may elect to repay 5% of the original principal amount of the March Debentures in cash or, in lieu thereof, the conversion price of such debentures will thereafter be 85% of the volume weighted average price at the time of conversion. In the event the Company does not elect to pay such amortization amounts in cash, each investor, in their sole discretion, may increase the conversion amount subject to the alternative conversion price by up to four times the amortization amount. The March Debentures contain customary affirmative and negative covenants. The conversion prices are subject to reset in the event of offerings or other issuances of common stock, or rights to purchase common stock, at a price below the then conversion price, as well as other customary anti-dilution protections as more fully described in the debentures.

On October 30, 2017, the Company agreed to amend the March Debentures and March Warrants to remove the floor in the anti-dilution provisions therein. The conversion price of the March Debentures and the exercise price of the March Warrants as of December 31, 2018 stated above reflect the amendment as well as other adjustments for dilutive issuances, which triggered the down round provisions in the March Debentures and March Warrants. The March Debentures are secured by all the Company’s assets and are guaranteed by substantially all of the Company’s subsidiaries. The aggregate principal amount of the March Debentures, which were non-interest bearing, was $16 million. Between March 22, 2017 and December 31, 2018, holders of the March Debentures converted an aggregate of $14.0 million of principal into 4,258,172 shares of common stock.

The exercise prices of the March Warrants issued relating to the March Debentures are subject to reset in the event of offerings or other issuances of common stock, or rights to purchase common stock, at a price below the then exercise price, as well as other customary anti-dilution protections. Because of these provisions, both the March Debentures and the March Warrants were deemed to be not indexed to the Company’s common stock, and the Company recognized derivative liabilities for the embedded conversion feature of the March Debentures and the March Warrants in the original amount of $15.3 million and $41.3 million, respectively. The Company recognized a discount for 100% of the principal value of the March Debentures and non-cash interest expense in the amount of $43.7 million regarding the recognition of these derivative liabilities. Because of the adoption of ASU 2017-11 in the second quarter of 2017, the interest expense and derivative liability originally recognized were adjusted and extinguished during 2017. See Note 2 for the adoption of ASU 2017-11 for the retrospective adjustments made to the Company’s consolidated financial statements with respect to the derivative liabilities associated with these debentures and warrants. For the years ended December 31, 2018 and 2017, reductions in the exercise prices of the March Warrants have given rise to deemed dividends as more fully discussed in Notes 2, 3 and 11.

June 2017 Offerings

In June 2017, the Company issued debentures due three months from the date of issuance in two issuances (collectively, the “June Debentures”) and warrants to purchase an aggregate of 200 shares of common stock (67 warrants in the June 2, 2017 transaction and 133 in the June 22, 2017 transaction), which can be exercised at any time after nine months at an exercise price of $2,925 per share for the June 2, 2017 warrants and $2,850 per share for the June 22, 2017 warrants (collectively the “June Warrants”), to accredited investors for a purchase price of $1,902,700 and proceeds to the Company of $1.5 million. The Company recorded a discount on the debentures of $107,700 which has been fully amortized. As more fully discussed below, on July 17, 2017, the June Debentures were exchanged.

July 2017 Offerings

On July 17, 2017, the Company closed an offering of $4,136,862 aggregate principal amount of Original Issue Discount Debentures due October 17, 2017 (the “July Debentures”) and warrants to purchase an aggregate of 283 shares of common stock (the “July Warrants”) for consideration of $2,000,000 in cash and the exchange of the full $1,902,700 aggregate principal amount of the June Debentures. The July Debentures were guaranteed by substantially all the subsidiaries of the Company pursuant to a Subsidiary Guarantee in favor of the holders of the July Debentures. As more fully discussed below, on September 19, 2017, the July Debentures were exchanged for $6.4 million of exchange debentures. The July Warrants are exercisable into shares of the Company’s common stock at any time from and after six months from the closing date at an exercise price of $2,812.50 per common share (subject to adjustment). The July Warrants will terminate five years after they become exercisable.

September 2017 Offerings

On September 19, 2017, the Company closed an offering of $2,604,000 principal amount of Senior Secured Original Issue Discount Convertible Debentures due September 19, 2019 (the “New Debentures”) and three series of warrants to purchase an aggregate of 69,355 shares of the Company’s common stock (the “Series A Warrants,” the “Series B Warrants,” and the “Series C Warrants,” and collectively, the “September Warrants”). The offering was pursuant to the terms of a Securities Purchase Agreement, dated as of August 31, 2017 (the “Purchase Agreement”), between the Company and certain existing institutional investors of the Company. The Company received proceeds of $2,100,000 from the offering.

Also on September 19, 2017, the Company closed exchanges by which the holders of the Company’s July Debentures exchanged $4,136,862 principal amount of such debentures for $6,412,136 principal number of new debentures on the same items as, and pari passu with, the New Debentures (the “September Exchange Debentures” and, together with the New Debentures, the “September Debentures”). The Company recorded non-cash interest expense in the amount of $1.0 million because of this exchange. All issuance amounts of the September Debentures reflect a 24% original issue discount.

The September Debentures contain customary affirmative and negative covenants. The conversion price is subject to “full ratchet” and other customary anti-dilution protections as more fully described in the debentures. The September Debentures may be converted at any time into shares of the Company’s common stock. Originally, the September Debentures begin to amortize monthly commencing on October 1, 2017, and for the first three amortization dates, the amortization amount was $100,000. On October 19, 2017, the September Debentures were amended so that they began to amortize immediately. On each monthly amortization date, the Company may elect to repay 5% of the original principal amount of September Debentures in cash or, in lieu thereof, the conversion price of such September Debentures shall thereafter be 85% of the volume weighted average price at the time of conversion, but not less than the floor of $390.00 per share. In the event the Company does not elect to pay such amortization amounts in cash, each investor, in their sole discretion, may increase the conversion amount subject to the alternative conversion price by up to four times the amortization amount. The September Debentures were not paid on September 19, 2019, the maturity date, as more fully discussed in Note 21.

On October 30, 2017, the Company entered into exchange agreements (“Exchange Agreements”) with the holders of the September Debentures to provide that the holders may, from time to time, exchange their September Debentures for shares of a newly-authorized Series I-2 Convertible Preferred Stock of the Company (the “Series I-2 Preferred Stock”) (See Note 13.). On February 8, 2018, $1,384,556 of the September Debentures were exchanged for 1,730.1 shares of Series I-2 Preferred Stock and the Company recorded a loss on the exchange of $651,562. On July 16, 2018, $1,741,580 of the September Debentures were exchanged for 2,176.9 shares of Series I-2 Preferred Stock and the Company recorded a loss on the exchange of $819,561. The Series I-2 Preferred Stock is more fully discussed in Note 13.

At December 31, 2018, the Series A Warrants are exercisable for an aggregate of 23,118 shares of the Company’s common stock. They are immediately exercisable and have a term of exercise equal to five years. At December 31, 2018, the Series B Warrants are exercisable for an aggregate of 23,119 shares of the Company’s common stock and were initially exercisable for a period of 18 months commencing immediately. During 2018, the exercise period of the Series B Warrants was extended to June 19, 2019, which resulted in a de minimus additional discount. Subsequent to December 31, 2018, on March 27, 2019, the expiration date of these Series B Warrants was extended 90 days to September 21, 2019 and again on May 10, 2019 the expiration date was extended to March, 31, 2022. At December 31, 2018, the Series C Warrants are exercisable for an aggregate of 23,118 shares of the Company’s common stock, and have a term of five years provided such Series C Warrants shall only vest if, when and to the extent that the holders exercise the Series B Warrants. The September Warrants exercise price is subject to a floor of $390.00 per share. At December 31, 2018, the September Warrants exercise price was $390.00 per share. The September Warrants contain down round provisions, subject to a floor of $390.00 per share. The September Warrants are subject to “full ratchet” and other customary anti-dilution protections.

The Company’s obligations under the September Debentures are secured by a security interest in all of the Company’s and its subsidiaries’ assets, pursuant to the terms of the Security Agreement, dated as of March 20, 2017.

2018 Offerings

On March 5, 2018, May 14, 2018, May 21, 2018 and June 28, 2018, the Company closed offerings of $6,810,000 aggregate principal amount of Senior Secured Original Issue Discount Convertible Debentures due September 19, 2019. The Company received proceeds of $5.5 million in the offerings net of the original issue discount of $1,310,000. On July 16, 2018, August 2, 2018, September 6, 2018 and November 8, 2018, the Company entered into Additional Issuance Agreements (the “Issuance Agreements”), with two existing institutional investors of the Company. Under the Issuance Agreements, the Company issued $4.3 million aggregate principal amount of Senior Secured Original Issue Discount Convertible Debentures due September 19, 2019 and received proceeds of $3.5 million. The conversion terms of these debentures are the same as those issued in September 2017 under the Purchase Agreement, dated as of August 31, 2017, as more fully described above, with the exception of the floor conversion price, which is $.052 per share. These debentures may also be exchanged for shares of the Company’s Series I-2 Preferred Stock under the terms of the Exchange Agreements. These debentures were not paid on September 19, 2019, the maturity date, as more fully discussed in Note 21.

During the years ended December 31, 2018 and 2017, the Company realized a total of $24.7 million in proceeds from the issuances of the debentures and warrants. At December 31, 2018, the unamortized discounts were $6.2 million. These discounts represent original issue discounts, the relative fair value of the warrants issued with the debentures, including the modifications thereof, and the relative fair value of the beneficial conversion features of the debentures. During the years ended December 31, 2018 and 2017, the Company recorded approximately $17.6 million and approximately $19.0 million, respectively, of non-cash interest and amortization of debt discount expense primarily in connection with the debentures and warrants.

See Note 14 for summarized information related to warrants issued and the activity during the years ended December 31, 2018 and 2017.

See Notes 3 and 11 for a discussion of the dilutive effect of the outstanding debentures and warrants as of December 31, 2018.