Note 9 – Debentures

The carrying amount of all outstanding debentures as of December 31, 2020 and 2019 was as follows:

Payment of all outstanding debentures totaling $12.7 million, including late-payment penalties, at December 31, 2020 was past due by the debentures’ original terms and the Company recorded approximately $6.9 million of non-payment penalties during the year ended December 31, 2019, as a result of the payment defaults.

Two million dollars ($2.0 million) of principal balance of outstanding debentures issued in March 2017 (the “March 2017 Debentures”) were not paid as of March 21, 2019, the maturity date, $5.9 million of principal balance of outstanding debentures issued in September 2017 (the “September 2017 Debentures”) were not paid as of September 19, 2019, the maturity date, $11.2 million of principal balance of debentures issued during 2018 (“the 2018 Debentures”) were not paid as of September 19, 2019, the maturity date, and $3.9 million of principal balance of debentures issued during 2019 (“the 2019 Debentures”) were not paid as of December 31, 2019, the maturity date. The Company has incurred penalties in connection with these non-payments in the amount of $6.9 million as of December 31, 2020. In addition, the Company has accrued penalty interest at the rate of 18% per annum, or $7.4 million, as of December 31, 2020 as a result of the non-payments. On August 31, 2020, the Company and the debenture holders entered into the Exchange, Redemption and Forbearance Agreement (the “Exchange and Redemption Agreement”) as more fully discussed below.

March 2017 Debentures

The outstanding March 2017 Debentures totaling $2.6 million, including late-payment penalties, 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 2017 Debentures to $0.0118 per share on December 31, 2020, due to prices at which the Company has subsequently issued shares of common stock. The March 2017 Debentures contain customary affirmative and negative covenants. The conversion price is 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. The conversion price of the March 2017 Debentures on December 31, 2020 stated above, reflects an amendment to remove a floor in the conversion price of the debentures as well as other adjustments for dilutive issuances, which triggered the down round provisions in the March 2017 Debentures. The March 2017 Debentures are secured by all of the Company’s assets and they are guaranteed by several of the Company’s subsidiaries. Between March 22, 2017 and December 31, 2020, holders of the March Debentures converted an aggregate of $14.0 million of these debentures into 426 shares of common stock.

September 2017 Debentures

The September 2017 Debentures contain customary affirmative and negative covenants. The Company’s obligations under the September 2017 Debentures were secured by a security interest in all of the Company’s and its subsidiaries’ assets. On October 30, 2017, the Company entered into exchange agreements (“Exchange Agreements”) with the holders of the September 2017 Debentures to provide that the holders could, from time to time, exchange, at the Company’s option, their September 2017 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). As of December 31, 2020, a total of $3.1 million of September 2017 Debentures were converted into 3916.67 shares of Series I-2 Preferred Stock. On August 31, 2020, the Company and the debenture holders entered into the Exchange and Redemption Agreement, which is more fully discussed below, wherein the remaining principal balance of September 2017 Debentures on that date of $7.7 million, including late-payment penalties, were exchanged for shares of Series N Preferred Stock.

The 2018 Debentures

On March 5, 2018, May 14, 2018, May 21, 2018 and June 28, 2018, the Company closed offerings of $6.8 million 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 $1.3 million. 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 in the March 2017 Debentures, as more fully described above, with the exception of the conversion price, which is $0.052 at December 31, 2020 and is subject to a floor of $.052 per share. On August 31, 2020, the Company and the debenture holders entered into the Exchange and Redemption Agreement, which is more fully discussed below, wherein $8.9 million of principal balance, including late-payment penalties, of the 2018 Debentures were exchanged for shares of a newly-authorized Series N Preferred Stock.

Debentures Issued in 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 bore 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 entailed 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 entailed 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. Commencing on August 17, 2019, the June 2019 Debentures bore 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 entailed 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.

The debentures issued in 2019 were not paid on December 31, 2019, the maturity date. During the year ended December 31, 2019, the Company accrued $1.2 million of late-payment penalties as a result of the non-payments.

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.

As a result of the Exchange and Redemption Agreement discussed below, the interest rate on all of the debentures issued in 2019 was reduced to a rate of 18% per annum, and accordingly as of December 31, 2020, the Company has recorded interest expense associated with these debentures of $0.9 million.

Exchange, Redemption and Forbearance Agreement

On August 31, 2020, the Company and the debenture holders entered into the Exchange and Redemption Agreement wherein they agreed to:

During the year ended December 31, 2020, as a result of the Exchange and Redemption Agreement, the Company recorded (i) a $2.0 million gain on the extinguishment of debt, 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 into shares of the Series N Preferred Stock. The redemption right was not exercised and all such additional amounts have become due and payable.

The debentures issued during the year ended December 31, 2019 were issued at a discount of $0.1 million and accordingly, the Company realized a total of $3.8 million in proceeds from the issuances of debentures during 2019. The debentures issued in 2017 and 2018 were also issued with discounts. These discounts represented original issue discounts, the relative fair value of the warrants issued with the debentures, the value of the modifications of certain of these warrants, and the relative fair value of the beneficial conversion features of the debentures. During the year ended December 31, 2019, the Company recorded approximately $16.2 million of such amortization of debt discount expense in connection with the debentures and warrants. These amounts included debt discount amortization that resulted from the modification of warrants as more fully discussed in Notes 12 and 14. All of the discounts associated with the debentures were fully amortized as of December 31, 2019. In addition to the amortization of discounts, during the years ended December 31, 2020 and 2019, the Company incurred interest expense on debentures of $6.0 million and $2.1 million, respectively.

The March 2017 Debentures and the September 2017 Debentures were issued with warrants to purchase shares of the Company’s common stock. Outstanding warrants are more fully discussed in Note 14.

See Notes 3, 14 and 20 for a discussion of the dilutive effect of the outstanding convertible debentures, warrants and convertible preferred stock as of December 31, 2020 and March 31, 2021. During the years ended December 31, 2020 and 2019, the Company recorded $256.4 million and $123.9 million of deemed dividends as a result of the down round provision of debentures and warrants. See Notes 2 and 12.