Quarterly report pursuant to Section 13 or 15(d)

Debentures

v3.20.2
Debentures
9 Months Ended
Sep. 30, 2020
Debt Disclosure [Abstract]  
Debentures

Note 8 – Debentures

 

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

 

    September 30, 2020     December 31, 2019  
    (unaudited)        
Debentures   $ 14,341,713     $ 29,873,740  
      14,341,713       29,873,740  
Less current portion     (14,341,713 )     (29,873,740 )
Debentures, long-term   $ -     $ -  

 

The original terms of outstanding debentures at September 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.

 

During the nine months ended September 30, 2019, the Company realized a total of $3.8 million in proceeds from issuances of debentures. No debentures were issued during the nine months ended September 30, 2020. During the three and nine months ended September 30, 2019, the Company recorded approximately $1.4 million and $15.9 million, respectively, of non-cash interest and amortization of debt discount expense primarily in connection with the debentures and warrants. The interest expense for the nine months ended September 30, 2019 included $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. These discounts were fully amortized as of September 30, 2019 and, accordingly, no amortization associated with the debentures was recorded in the three and nine months ended September 30, 2020.

 

In addition to the non-cash interest expense and amortization of debt discount recorded during the three and nine months ended September 30, 2019 discussed in the paragraph above, during the three months ended September 30, 2020 and 2019, the Company accrued interest expense on outstanding debentures of $1.5 million and $0.2 million, respectively, and during the nine months ended September 30, 2020 and 2019, the Company accrued interest expense on outstanding debentures of $5.4 million and $0.4 million, respectively.

 

Payment of all outstanding debentures totaling $14.3 million at September 30, 2020 was past due by the debentures’ original terms and the Company recorded approximately $6.6 million of non-payment penalties, of which $5.7 million was recorded in the nine months ended September 30, 2019, as a result of the payment defaults. 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 on that date plus accrued interest. The Company repaid $0.2 million of the debentures in July 2020.

 

On August 31, 2020, the Company and the debenture holders entered into the Exchange, Redemption and Forbearance Agreements (the “Exchange and Redemption Agreements”) wherein they agreed to:

 

  1) Exchange outstanding Series I-1 Convertible Preferred Stock (the “Series I-1 Preferred Stock”) and Series I-2 Convertible Preferred Stock (the “Series I-2 Preferred Stock” and, collectively, with the Series I-1 Preferred Stock, the “Series I-1 and I-2 Preferred Stock”) for shares of Series N Preferred Stock at the face value of the Series I-1 and I-2 Preferred Stock, which was $6,257,616. The Series I-1 and I-2 Preferred Stock are more fully discussed in Note 13 and the Series N Preferred Stock is more fully discussed in Notes 13 and 14;

  

  2) Exchange on August 31, 2020 outstanding debentures totaling $19.3 million, which included principal and penalties of $16.5 million and accrued interest of $2.8 million for Series N Preferred Stock with a face value (and determined to be fair value) of $24.2 million;
     
  3) Provide for the repayment of outstanding debentures and accrued interest of approximately $9.8 million at August 31, 2020, for a payment of $10.0 million in cash any time on or before November 29, 2020, however, if the payment is not made timely, a “potential exchange premium” of $1.65 million will also become due for these debentures;
     
  4) Provide, if the payment in Number 3 above is made timely, to allow for the exchange of outstanding non-convertible debentures, with a carrying value on Rennova’s books of $4.8 million at August 31, 2020, including penalties at 30% of the original principal balance and penalty interest calculated at 18% per annum, into Series N Preferred Stock with a face value of $4.9 million. Under this provision, the penalty interest is accrued at the rate of 18% per annum and not the original interest terms, which were 5% per month and 24% per annum on late payment of penalty interest, as a concession and to offset the premium paid for the exchange of the debentures noted in Number 2 above. This interest rate concession, which totaled $2.3 million at August 31, 2020, is permanent and will not be reversed in any event, including non-payment of the $10.0 million by November 29, 2020;
     
  5) Provide that if the $10.0 million cash payment is made timely, no interest will accrue or be due under the outstanding debentures for the periods subsequent to August 31, 2020, however, interest will again accrue on these outstanding debentures at a rate of 18% per annum subsequent to August 31, 2020 if the $10.0 million cash payment is not made timely;
     
  6) During the 90-day redemption period (or until the occurrence of certain specified events, if earlier), the investors will forbear from exercising any remedies against the Company or Mr. Diamantis as a result of any existing defaults under the outstanding securities; and
     
  7) Provide that the embedded conversion options of the outstanding debentures noted in Number 3 above have been suspended as of August 31, 2020 and that the conversion terms will only be reinstated to their original terms after November 29, 2020 if the $10.0 million cash payment is not made.

 

During the three and nine months ended September 30, 2020, as a result of the Exchange and Redemption Agreements, the Company recorded (i) a $0.4 million gain on the extinguishment of debt, which included the potential exchange premium of $1.65 million, and a $0.3 million fair value adjustment to the debenture principal, partially offset by the reduction in interest expense of $2.3 million; and (ii) deemed dividends of $3.7 million as a result of the exchange of the debentures and Series I-1 and I-2 Preferred Stock for shares of the Series N Preferred Stock. The Company recorded the $1.65 million potential exchange premium as of September 30, 2020 because its ability to raise sufficient capital to make the $10 million cash payment on or before November 29, 2020 is uncertain at this time.

 

In addition, during the three and nine months ended September 30, 2020, the Company recorded $59.8 million of deemed dividends as a result of the down round provisions of debentures and warrants. See Notes 11 and 13.