| Convertible Debt | Note 8 – Convertible Debt The Notes and the Bridge (each as defined below)
were mandatorily converted in full on April 16, 2020 upon consummation of the April Offering, as defined in Note 9. $2,200,000 Secured Convertible Note On November 13, 2018 (the “November 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 $9.00 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 $9.00. 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. During the year ended June 30, 2020, the placement agents warrants
were exchanged and replaced with new warrants whereby their derivative feature was removed. Upon replacement, the warrants were
fair valued and the derivative feature was recorded as additional paid in capital in the amount of $221,222. On July 17, 2019, the Company and the investors
(the “Investors”) in its November 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 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 twelve months ended June 30, 2020, 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 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 consideration for the November Waiver Agreements, the Company issued 5,435
shares of common stock and recorded $26,902 as interest expense. As of March 31, 2020, the Investors verbally agreed to extend
the maturity date until the filing of the Company’s registration statement, which was subsequently filed on April 15, 2020. 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 were verbally agreed to be extended
at the maturity date until the April Offering, as defined in Note 9. The Notes were mandatorily converted in full on April 15,
2020 upon the consummation of the Company’s public offering of its securities and simultaneous listing on the Nasdaq Capital
Market. The Company accrued interest at the default interest rate, which was recorded as a gain on extinguishment of debt upon
conversion as no default interest was 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 83,722 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 (i) the Conversion Price and (ii) 80% of the offering price in the Qualified
Offering. The Bridge Notes contain customary events of default (each an “Event of Default”) and mature on August 14,
2020, August 29, 2020, October 16, 2020 and December 6, 2020. If an Event of Default occurs, the outstanding principal amount of
the Bridge Notes, plus accrued but unpaid interest, liquidated damages and other amounts owing with respect to the Bridge Notes
will become, at the holder’s election, immediately due and payable in cash at the “Mandatory Default Amount”.
The Mandatory Default Amount means the sum of 130% of the outstanding principal amount of the Bridge Notes plus accrued and unpaid
interest, including default interest of 18% per year, and all other amounts, costs, expenses and liquidated damages due in respect
of the Bridge Notes. 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. The Bridge Notes were mandatorily converted
in full on April 15, 2020 upon the consummation of the April Offering, as defined in Note 9. 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 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
June 30, 2020 June 30, 2019
Face value of Amended and Restated Note $ - $ 2,200,000
Face value of Bridge Notes - -
Total face value - 2,200,000
Aggregate debt discount (- ) (1,909,280 )
Carrying value $ - $ 290,720 The carrying value of the aggregate secured
convertible notes at June 30, 2020 and 2019 was $0 and $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 $2,841,617 and amortization of debt premium amounted to $1,616,412, which resulted in
expense from net amortization in the amount of $1,225,205 during the year ended June 30, 2020. During the year ended June 30, 2019,
the Company recorded amortization of debt discount in the amount of $290,720. 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 Company’s derivative liability was
extinguished upon conversion of the Company’s convertible notes and exchange of the Company’s warrants issued with
the convertible notes in the April Offering, as defined in Note 9. 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 Note) 244,444 2,398,057
Warrant derivative liabilities (Placement agent Warrants) 48,889 479,611
537,777 $ 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 June 30, 2019.
Amounts at
Fair Value Measurement Using Level 3 Inputs Total
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 years ended June 30, 2020 and 2019:
Amount
Issuances to debt discount $ 2,200,000
Issuances to interest expense 4,975,091
Change in fair value of derivative liabilities (1,659,507 )
Change in fair value of warrant liabilities (860,553
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 2,504,127
Change due to issuance of warrants 1,851,892
Change in fair value of derivative liabilities 2,134,592
Change in fair value of warrant liabilities 297,706
Change due to redemption of convertible debt (196,297 )
Change due to extinguishment of warrant liabilities upon Warrant Exchange (3,583,442 )
Change due to extinguishment of derivative liabilities upon conversion of notes (4,793,462 )
Change due to extinguishment of derivative upon exchange of derivative warrants (221,222 )
Balance at June 30, 2020 $ - 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. |
