Note 8 – Debentures

The carrying amount of all outstanding debentures as of June 30, 2020 (unaudited), and December 31, 2019 is as follows:

The outstanding debentures at June 30, 2020 and December 31, 2019, which were issued during the years ending December 31, 2017, 2018 and 2019, are more fully described in Note 9 to the Company’s audited consolidated financial statements included in its Annual Report on Form 10-K for the year ended December 31, 2019. Certain of these debentures were issued with warrants to purchase shares of the Company’s common stock. Outstanding warrants are more fully discussed in Note 13.

Payment on all outstanding debentures of $29.2 million at June 30, 2020, which included non-payment penalties of $6.9 million, is past due. Approximately $0.6 million of the non-payment penalties was recorded in the six months ended June 30, 2019 and the remaining $6.0 million was recorded in the second half of 2019. In January 2020, the Company and Mr. Diamantis entered into a Forbearance Agreement with certain debenture holders under which Mr. Diamantis paid the debenture holders $50,000 for legal fees and $220,000 in principal payments on debentures that were issued in February 2019. In addition, Mr. Diamantis, who had guaranteed certain of the debentures, agreed to grant the debenture holders security interests in certain potential legal settlements funds that may become due to Mr. Diamantis. The Forbearance Agreement, which terminated on March 15, 2020, required the Company and Mr. Diamantis to repay the debenture holders a total of $4.9 million on or before the termination date, of which $4.7 million was not repaid. During May 2020, the Company repaid $0.5 million of the debentures. On June 30, 2020, the Company received a formal notice of default and demand for full payment of the $29.2 million of outstanding debentures plus accrued interest. Accrued interest on the debentures totaled $6.0 million at June 30, 2020.

During the six months ended June 30, 2019, the Company realized a total of $3.8 million in proceeds from the issuances of debentures. No debentures were issued during the six months ended June 30, 2020. At June 30, 2019, unamortized discounts were $1.4 million. These discounts represented original issue discounts, the relative fair value of the warrants issued with the debentures (and the modifications thereof) and the relative fair value of the beneficial conversion features of the debentures. During the three and six months ended June 30, 2019, the Company recorded approximately $1.5 million and $14.5 million of non-cash interest and amortization of debt discount expense primarily in connection with the debentures and warrants. The interest expense for the three and six months ended June 30, 2019 included $5.4 million and $9.5 million, respectively, of expense due to the modifications of warrants during the periods. The modifications are more fully discussed in Notes 11 and 13. These discounts were fully amortized as of December 31, 2019 and, accordingly, no amortization associated with the debentures was recorded in the three and six months ended June 30, 2020.

In addition to the non-cash interest expense and amortization of debt discount recorded during the three and six months ended June 30, 2019 discussed in the paragraph above, during the three months ended June 30, 2020 and 2019, the Company accrued interest expense on outstanding debentures of $1.9 million and $0.1 million, respectively, and during the six months ended June 30, 2020 and 2019, the Company accrued interest expense on outstanding debentures of $3.9 million and $0.1 million, respectively.

On June 30, 2020, as adjusted for the Reverse Stock Split, $2.6 million of principal amount of outstanding debentures were convertible into 1,517,788 shares of the Company’s common stock at a price of $1.70 per share. The remaining outstanding debentures were convertible on that date into 27,902 shares of the Company’s common stock.

See Notes 3 and 13 for a discussion of the dilutive effect of the outstanding debentures and warrants as of June 30, 2020.