| Convertible Debt | Note
8 – Convertible Debt $2,200,000
Secured Convertible Note On
November 13, 2018 (the "November 13, 2018 Offering"), the Company issued face value $2,200,000 5% Senior Convertible
Notes issued at a 10% original issue discount along with 244,445 warrants for net proceeds of $2,000,000 (the "Notes").
Cash fees paid for financing costs were $336,193. The Notes are secured by all of our assets and accrues interest at 5% per annum,
payable in cash at maturity. However, the principal amount may be converted at the option of the holder at any time during the
term to maturity into shares of our common stock at a conversion price of $9.0 per share subject to adjustment for capital reorganization
events and subsequent sales by the Company of shares of its common stock at a price per share below $9.0. The Notes also contain
certain traditional default provisions that are linked to credit or interest risks, such as bankruptcy proceedings, liquidation
events and corporate existence. The Company has concluded that the Notes contain an embedded conversion option that is indexed
to the Company's stock which contain an optional cash settlement feature. Therefore, the embedded conversion option is subject
to classification in the Company's financial statement in liabilities at fair value both at inception and subsequently pursuant
to ASC 815. In
connection with the issuance of the Note, the Company issued the holders warrants to purchase our common stock. The warrant is
exercisable until November 13, 2021 for 244,445 of shares at a purchase price of $11.25 per share subject to adjustment for capital
reorganization events and subsequent sales by the Company of shares of its common stock at a price per share below $11.25. The
Company has concluded that the Warrants contain an optional cash settlement feature. Therefore, the Warrants are subject to classification
in the Company's financial statement in liabilities at fair value both at inception and subsequently pursuant to ASC 815. Additionally,
the Company issued its placement agents warrants to purchase its common stock. The warrant is exercisable until December 12, 2023
for 48,889 of shares at a purchase price of $11.25 per share subject to adjustment for capital reorganization events and subsequent
sales by the Company of shares of its common stock at a price per share below $11.25. The Company has concluded that the Warrants
contain an optional cash settlement feature. Therefore, the Warrants are subject to classification in the Company's financial
statement in liabilities at fair value both at inception and subsequently pursuant to ASC 815. On
July 17, 2019, the Company and the investors (the "Investors") in its November 13, 2018 Offering entered into Waiver
Agreements (the "Waiver Agreements"). Pursuant to the terms of the Waiver Agreement, the Investors waived the exercise
of remedies with regard to certain breaches of agreements and any and all events of defaults between the Company and the Investors,
including the Notes, Warrants, and Securities Purchase Agreements (the "Transaction Documents"). In
consideration for the Investors entrance into the Waiver Agreements, the Company increased the principal amount of each Note issued
in the November 13, 2018 Offering by 30%, in the form of an Amended and Restated Senior Secured Convertible Promissory Note (the
"Amended and Restated Note"). Additionally, for its role as lead investor, facilitator and negotiating the terms of
the Waiver Agreement, the Company issued to Cavalry Fund I LP warrants to purchase 3,333 shares of Common Stock exercisable on
or after October 1, 2019 for a term of three (3) years from such date at an exercise price of $11.25 per share (the "Cavalry
Warrant"). The Company evaluated the debt modification
for the Amended and Restated Note in accordance with ASC 470-50 and concluded that the debt qualified for debt extinguishment
as the 10% cash flow test was met. As a result, the $2,200,000 Secured Convertible Note was written off and the Amended and Restated
Note was recorded at fair value as of July 17, 2019. On July 17, 2019 the Company wrote off the remaining principal balance of
$2,200,000 and recorded the Amended and Restated Note at fair market value in the amount of $4,476,412. On July 17, 2019, of the
$4,476,412 fair market value, $2,860,000 represents the face amount of the Amended and Restated Note and $1,616,412 represents
the deemed premium paid for the Amended and Restated Note which was recorded as additional debt principal to be amortized over
the remaining life of the Amended and Restated Note. The Company accelerated the remaining amortization of the July 17, 2019 premium
on November 19, 2019. For the six months ended December 31, 2019, the Company recorded a reduction to amortization expense in
the amount of $1,616,412 for the amortization of the deemed premium and a loss on extinguishment of debt in the amount of $2,795,582. On November 19, 2019, the Company and the Investors in its November 13, 2018 Offering have agreed to or entered
into subsequent Waiver Agreements (the "November Waiver Agreements"). Pursuant to the terms of the November Waiver
Agreement, the Investors agreed to waive the exercise of remedies with regard to any and all events of default between the Company
and the Investors, in connection with the Transaction Documents and agreed to extend the maturity of their Notes until February
14, 2020. In connection with the November Waiver Agreement, two investors received partial repayment. In
consideration for the Investors entrance into the Waiver Agreements, the Company has agreed to issue to each Investor an additional
Warrant (the "Additional Warrant") to purchase such number of shares of the Company's Common Stock equal to
5% of the Warrant Shares initially issuable to such Investor under the Warrant issued to such Investor in the November 13, 2018
Offering, as amended. The Additional Warrant shall have an exercise price of $11.25 per share and shall be in form substantially
the same as the Warrants issued in the November 13, 2018 Offering, provided that no cashless provision, ratchet provision or piggyback
registration provisions shall be contained in the Additional Warrants. The Company evaluated the debt modification
for the Amended and Restated Note in accordance with ASC 470-50 and concluded that the debt did not qualify for debt extinguishment
as the 10% cash flow test was not met. As a result, the additional warrants issued in connection with the waiver were fair valued
and recorded as a debt discount, and are being amortized to interest expense over the remaining term of the debt. In addition,
the Company incurred $50,000 of deferred financing fees in connection with the modification and expensed the fees to interest expense
immediately. These notes matured on February 14th and
the Company is in active good faith discussions with the noteholders to extend the maturity date. No defaults have been called. Private
Placement Offerings On
August 14, 2019 and August 29, 2019, the Company consummated the initial closings ("Initial Closings") of a private
placement offering (the "Offerings") whereby the Company entered into those certain securities purchase agreement
(the "August 2019 Purchase Agreements") with seven (7) accredited investors (the "August Investors").
Pursuant to the August 2019 Purchase Agreements, the Company issued the August Investors those certain convertible promissory
notes (the "August Convertible Promissory Notes") in the aggregate principal amount of $522,500 (including a 10% original
issue discount) and warrants (the "August Investor Warrants") to purchase 58,057 shares of the Company's common
stock for aggregate gross proceeds of $475,000. On
October 11, 2019 and December 16, 2019, Company consummated additional closings of the Offerings whereby the Company entered into
certain securities purchase agreement accredited investors (the "Q2 Closings"). Pursuant to the Q2 Closings, the Company
issued the investors those certain convertible promissory notes (the "Q2 Promissory Notes") in the aggregate principal
amount of $753,500 (including a 10% original issue discount) and to purchase 92,278 shares of the Company's common stock
for aggregate gross proceeds of $685,000. The August Convertible Promissory Notes
and Q2 Promissory Notes, together and in the aggregate the ("Bridge Notes") accrue interest at a rate of 5% per annum
and are initially convertible into shares of the Company's common stock at a conversion price of $9.00 per share, subject
to adjustment (the "Conversion Price"). The Bridge Notes contain a mandatory conversion mechanism whereby unpaid principal
and accrued interest on the Bridge Notes, upon the closing of a Qualified Offering (as defined therein)
converts into the securities offered in such a Qualified Offering at the lower of Pursuant
to the Bridge Notes, each investor was entitled to 100% warrant coverage, such that investor in the Bridge Notes received the
same number of warrants to purchase shares of Common Stock as is the number of shares of Common Stock initially issuable upon
conversion of the Bridge Notes as of the date of issuance. The warrants issued in accordance with the Bridge Notes are exercisable
at a price of $11.25 per share, subject to adjustment from the date of issuance through August 14, 2022, August 29, 2022, October
11, 2022 and December 16, 2022. Joseph Gunnar & Co., LLC (the "Placement
Agent") acted as placement agent for the Offerings and received cash compensation of $85,000 and warrants to purchase 20,778
shares of the Company's common stock, at an initial exercise price of $11.25 per share, subject to adjustment ("Agent
Warrants"). The Agent Warrants may be exercised on a "cashless" basis and expire in August 14, 2024 and August
29, 2024. Accounting
for the Amended and Restated Notes and Convertible Promissory Notes The
Company evaluated the terms and conditions of the Amended and Restated Notes and Convertible Promissory Notes issued in the private
placement offerings under the guidance of ASC 815. Because the economic characteristics and risks of the equity-linked conversion
options are clearly and closely related to a debt-type host and the conversion features contain an optional cash settlement, the
conversion features require classification and measurement as derivative financial instruments. Further, these features individually
were not afforded the exemption normally available to derivatives indexed to a company's own stock. Accordingly, our evaluation
resulted in the conclusion that this compound derivative financial instrument requires bifurcation and liability classification,
at fair value. The compound derivative financial instrument consists of an embedded conversion feature. Current standards contemplate
that the classification of financial instruments requires evaluation at each report date. The
following tables reflect the allocation of the purchase on the financing dates:
Secured Convertible Notes Face Value
December 31, June 30,
Face value of Amended and Restated Note $ 2,755,000 $ 2,200,000
Face value of Bridge Notes 1,276,000 -
Total face value 4,031,000 2,200,000
Aggregate debt discount (674,946 ) (1,919,280 )
Carrying value $ 3,356,054 $ 290,720 The carrying value of the aggregate secured
convertible notes at December 31, 2019 and June 30, 2019 was $3,356,054and $290,720, respectively. Discounts and premiums on the convertible
notes arise from (i) the allocation of basis to other instruments issued in the transaction, (ii) fees paid directly to the creditor
and (iii) initial recognition at fair value, which is greater than face value. Discounts and premiums are amortized through charges
to and reductions to amortization of interest expense using the effective interest rate method over the term of the debt agreement.
Amortization of debt discounts amounted to $2,166,670 and amortization of debt premium amounted to $1,616,411, which resulted in
expense from net amortization in the amount of $550,259 during the six months ended December 31, 2019. During the six months ended
December 31, 2018, the Company recorded amortization of debt discount in the amount of $55,621. Derivative
Liabilities The
carrying value of the compound embedded derivative and warrant derivative liabilities are on the balance sheet, with changes in
the carrying value being recorded as a change in fair market value of derivative liabilities on the statements of operations and
comprehensive loss. The
components of the compound embedded derivative and warrant derivative liabilities as of December 31, 2019 are as follows:
Our financing giving rise to derivative financial instruments Indexed Shares Fair Values
Compound embedded derivatives:
$4,031,000 face value secured convertible notes 447,889 $ 1,958,893
Warrant derivative liabilities (Issued with Notes) 310,496 3,079,230
Warrant derivative liabilities (Placement agent Warrants) 73,000 552,417
831,385 $ 5,590,540 The
components of the compound embedded derivative and warrant derivative liabilities as of June 30, 2019 are as follows:
Our financing giving rise to derivative financial instruments Indexed Shares Fair Values
Compound embedded derivatives:
$2,200,000 face value secured convertible notes 244,444 $ 1,777,363
Warrant derivative liabilities (Issued with Notes) 244,445 2,398,057
Warrant derivative liabilities (Placement agent Warrants) 48,889 479,611
537,778 $ 4,655,031 Fair
Value Considerations GAAP
establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. As presented
in the tables below, this hierarchy consists of three broad levels: Level
1 valuations Level
2 valuations Level
3 valuations Fair
Value of Financial Assets and Liabilities Measured on a Recurring Basis Financial
liabilities measured at fair value on a recurring basis are summarized below and disclosed on the consolidated balance sheet as
of December 31, 2019.
Amounts at Fair Value Measurement
Liabilities Fair Value Level 1 Level 2 Level 3
Derivative liability – conversion feature $ 1,958,893 $ - $ - $ 1,958,893
Derivative liability – warrants 3,631,647 - - 3,631,647
Total $ 5,590,540 $ - $ - $ 5,590,540 Financial
liabilities measured at fair value on a recurring basis are summarized below and disclosed on the consolidated balance sheet as
of June 30, 2019.
Amounts at Fair Value Measurement
Liabilities Fair Value Level 1 Level 2 Level 3
Derivative liability – conversion feature $ 1,777,363 $ - $ - $ 1,777,363
Derivative liability – warrants 2,877,668 - - 2,877,668
Total $ 4,655,031 $ - $ - $ 4,655,031 The
table below provides a summary of the changes in fair value, including net transfers in and/or out of all financial liabilities
measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the six months ended December
31, 2019:
Amount
Balance at June 30, 2019 $ 4,655,031
Change due to warrant exercise (1,222,602 )
Change due to extinguishment of debt (1,426,323 )
Change due to acquired amended and restated note 3,513,920
Change due to issuance of warrants 2,210,550
Change in fair value of derivative liabilities (1,863,171 )
Change in fair value of warrant liabilities (233,969 )
Change due to redemption of convertible debt (42,896 )
$ 5,590,540 The
fair value of the derivative conversion features and warrant liabilities as of December 31, 2019 were calculated using a Monte-Carlo
option model valued with the following assumptions:
December 31,
Dividend yield 0%
Expected volatility 171.4%
- 244.6%
Risk free interest rate 1.9%
- 2.3%
Contractual term (in years) 0.12
– 5.02
Conversion/Exercise price $4.20
- $12.00 Changes
in the observable input values would likely cause material changes in the fair value of the Company's Level 3 financial
instruments. The
features embedded in the secured convertible notes and the warrants were valued using a Monte Carlo based valuation model. The
Monte Carlo valuation technique was utilized because it embodies all of the requisite assumptions (including the underlying price,
exercise price, term, volatility, and risk-free interest-rate) that are necessary to fair value these instruments. For forward
contracts that contingently require net-cash settlement as the principal means of settlement, the Company projects and discounts
future cash flows applying probability-weighted to multiple possible outcomes. Estimating fair values of derivative financial
instruments requires the development of significant and subjective estimates that may, and are likely to, change over the duration
of the instrument with related changes in internal and external market factors. In addition, option-based techniques are highly
volatile and sensitive to changes in the trading market price of the Company's common stock. Because derivative financial
instruments are initially and subsequently carried at fair values, the Company's income will reflect the volatility in these
estimate and assumption changes. |
