Note 8 – Debentures

The carrying amount of all outstanding debentures as of June 30, 2019 (unaudited), and December 31, 2018 is as follows:

Payment on all outstanding debentures of $23.6 million at June 30, 2019 is due in 2019. As of June 30, 2019, $2.0 million of the outstanding debentures were not paid as of March 21, 2019, the maturity date. The Company has accrued penalties and interest in connection with this non-payment in the amount of $0.7 million as of June 30, 2019. See Note 19 for a discussion of additional outstanding debentures that were not paid as of September 19, 2019, the maturity date.

Debentures Issued in the Six Months Ended June 30, 2019

The Company issued debentures on February 24, 2019 in the aggregate principal amount of $300,000 and on March 27, 2019 in the aggregate principal amount of $300,000. Both of these debentures were guaranteed by Mr. Diamantis and were originally due on June 3, 2019. The maturity dates of these debentures were extended to December 31, 2019 and the terms were changed so that commencing on August 17, 2019 the debentures bear interest on the outstanding principal amount at a rate of 2.5% per month (increasing to 5% per month on October 12, 2019), payable quarterly beginning on October 1, 2019. All overdue accrued and unpaid interest shall entail a late fee equal to the lesser of 24% per annum or the maximum rate permitted by applicable law.

The Company issued debentures on May 12, 2019 in the aggregate principal amount of $500,000. These debentures were guaranteed by Mr. Diamantis and were due on June 3, 2019. In addition, the Company issued debentures on June 5, 2019 in the aggregate principal amount of $125,000 and on June 7, 2019 in the aggregate principal amount of $200,000. These debentures were also guaranteed by Mr. Diamantis and were due on July 20, 2019. The maturity dates of these debentures were extended to December 31, 2019 and the terms were changed so that commencing on August 17, 2019 the debentures bear interest on the outstanding principal amount at a rate of 2.5% per month (increasing to 5% per month on October 12, 2019), payable quarterly beginning on October 1, 2019. All overdue accrued and unpaid interest shall entail a late fee equal to the lesser of 24% per annum or the maximum rate permitted by applicable law.

On June 13, 2019, the Company closed an offering of $1,250,000 aggregate principal amount of debentures with certain existing institutional investors pursuant to the terms of a Bridge Debenture Agreement, dated as of June 13, 2019 (the “June 13 Agreement”) and received proceeds of $1,250,000. The June 13 Agreement provided that on or prior to June 30, 2019, at the mutual election of the Company and the investors, the investors could purchase an additional $1,250,000 principal amount on the same terms and conditions as provided in the June 13 Agreement. Under the June 13 Agreement, the maturity date of the debentures issued on February 24, 2019, March 27, 2019, May 12, 2019, June 5, 2019 and June 7, 2019 were extended to December 31, 2019 and the terms were changed such that they have the same interest terms as contained in the June 13, 2019 debentures, as more fully discussed below.

On June 21, 2019, the Company and the investors agreed that the Company would issue, and the investors would purchase, $250,000 principal amount of debentures and on June 24, 2019 the Company and the investors agreed that the Company would issue, and the investors would purchase, an additional $1,020,000 aggregate principal amount of debentures. In connection with the issuances of the June 21, 2019 and June 24, 2019 debentures, the Company received total proceeds of $1,270,000.

The June 13, 2019, June 21, 2019 and June 24, 2019 debentures (collectively, the “June 2019 Debentures”) are secured and guaranteed by the Company’s subsidiaries on the same terms as provided in the Purchase Agreement, dated as of August 31, 2017, which is more fully described in Note 9. At the Company’s option, the June 2019 Debentures may also be exchanged for shares of the Company’s Series I-2 Convertible Preferred Stock under the terms of the previously-announced Exchange Agreement, dated as of October 30, 2017. Commencing on August 17, 2019, the June 2019 Debentures bear interest on the outstanding principal amount at a rate of 2.5% per month (increasing to 5% per month on October 12, 2019), payable quarterly beginning on October 1, 2019. All overdue accrued and unpaid interest entail a late fee equal to the lesser of 24% per annum or the maximum rate permitted by applicable law. Christopher Diamantis is a guarantor of the June 2019 Debentures.

In addition to the debentures issued in the six months ended June 30, 2019, during the years ending December 31, 2017 and 2018, the Company issued convertible debentures, which are more fully described in the Company’s audited consolidated financial statements included in its Annual Report on Form 10-K. Certain of these convertible debentures were issued with warrants to purchase shares of the Company’s common stock. Outstanding warrants are more fully discussed in Note 13.

The debentures issued during the six months ended June 30, 2019 and 2018, were issued at discounts of $0.1 million and $1.3 million, respectively, and accordingly, the Company realized a total of $3.8 million and $5.5 million, respectively, in proceeds from the issuances of the debentures. At June 30, 2019, the unamortized discounts were $1.4 million. These discounts represent original issue discounts, the relative fair value of the warrants issued with the debentures and the relative fair value of the beneficial conversion features of the debentures. During the six months ended June 30, 2019 and 2018, the Company recorded approximately $14.5 million and approximately $7.1 million, respectively, of non-cash interest and amortization of debt discount expense primarily in connection with the debentures and warrants. The expense for the six months ended June 30, 2019 includes $9.5 million of expense due to the modifications of warrants during the period. The modifications are more fully discussed in Notes 11 and 13.

See Note 13 for summarized information related to warrants issued and the activity during the six months ended June 30, 2019.

See Notes 3, 13 and 19 for a discussion of the dilutive effect of the outstanding convertible preferred stock, debentures and warrants as of June 30, 2019.