Convertible Promissory Notes and Warrant Agreements | NOTE 8 – Convertible Promissory Notes and Warrant Agreements As of March 31, As of 2017 convertible promissory notes, net of discounts $ — $ 1,306,776 Accrued interest — 87,028 $ — $ 1,393,804 2016 Convertible Promissory Notes From November 2016 to June 2017, the Company issued convertible promissory notes (the "Convertible Notes") in an aggregate principal amount of $1,625,120 and common stock purchase warrants (the "Warrants") and entered into subscription agreements with subscribers. The Company amended the Convertible Notes in December 2016 and November 2017 and the Warrants in June 2017 and November 2017 to, among other things, change the terms of the underlying Warrants that included the removal of down round pricing protection. On July 2, 2018, the Company entered into debt conversion agreements with each Convertible Note subscriber to (i) convert the Outstanding Balance under the Convertible Notes into shares of the Company's common stock based on the Outstanding Balance divided by $1.80 per share (the "2016 Note Conversion Shares"); (ii) cancel and extinguish the Convertible Notes; and (iii) amend and restate the Warrants to make them immediately exercisable upon the conversion, at a per share exercise price equal to $1.80 per share. As consideration for the early conversion of the Convertible Notes, the Company issued each subscriber an additional new warrant (the "2016 Note Payment Warrants"), exercisable for up to the number of shares of common stock equal to the number of 2016 Note Conversion Shares received by such subscriber; at a per share exercise price of $1.80 per share. The 2016 Note Payment Warrants became exercisable commencing on July 2, 2018 and expire on November 21, 2021. The November 2017 amendment to the notes resulted in a substantial modification to the original Convertible Notes whereby the maturity date was extended and the terms associated with the Warrants were revised. The Company recorded the Convertible Note amendment under the provisions of extinguishment accounting. The fair value of the underlying Convertible Notes was $97,223 lower than the carrying value of the Convertible Notes on the date of the modification. The $97,223 difference was recorded as a discount to the debt with a gain on convertible note extinguishments in the accompanying condensed consolidated statements of operations for the six months ended March 31, 2018. During the three and six months ended March 31, 2018, interest on the principal was $32,502 and $65,005, respectively, and interest related to amortization of discounts related to the bifurcation of premium derivative liability, separation of warrants, revaluation discounts and issuance costs amounted to $34,585 and $296,333, respectively. The fair value changes related to the underlying premium conversion derivative amounted to an expense of $2,666 and a benefit of ($105,976) during the three and six month periods ended March 31, 2018, respectively. The fair value changes relating to the warrant liability amounted to a benefit of ($130,976) and an expense of $141,083 during the three and six month periods ended March 31, 2018, respectively. As noted above, the Convertible Notes were converted into shares of common stock and were not outstanding during the three and six month periods ended March 31, 2019. 2017 Convertible Notes From October 2017 to May 2018, the Company issued convertible notes (the "2017 Convertible Notes") in an aggregate principal amount of $1,540,000 that bear interest at a fixed rate of 8% per annum and warrants to purchase shares of the Company's capital stock (the "New Warrants"). During the three and six months ended March 31, 2019, interest on the principal was $20,534 and $51,333, respectively, and $20,489 and $27,494 during the three and six months ended March 31, 2018, respectively. The Company initially entered into a subscription agreement with certain accredited investors and closed the initial private placement of the 2017 Convertible Notes in October 2017. In December 2017, the Company and holders of a majority in aggregate principal amount of the 2017 Convertible Notes entered into an amended and restated subscription agreement to amend the terms of the 2017 Convertible Notes and New Warrants. On December 31, 2018, the 2017 Convertible Notes were amended again to extend the maturity date from December 31, 2018 to June 30, 2019. The amendment was accounted for as a troubled debt restructuring given the Company's financial condition and given the concession granted by the lenders with regards to pushing out the maturity date to June 30, 2019 with no corresponding compensation paid for the extension. The future undiscounted cash flows of the 2017 Convertible Notes as amended exceeded their carrying value as of December 31, 2018. As such, no gain was recognized on December 31, 2018 and no adjustments were made to the 2017 Convertible Note carrying value. The 2017 Convertible Notes required the Company to repay the principal and accrued and unpaid interest thereon on June 30, 2019 (the "2017 Convertible Notes Maturity Date"). If the Company consummated an equity round of financing resulting in more than $3 million in gross proceeds before June 30, 2019 (the "2017 Convertible Notes Qualified Financing"), the outstanding principal and accrued and unpaid interest on the 2017 Convertible Notes would have automatically converted into the securities issued by the Company in the 2017 Convertible Notes Qualified Financing equal to the outstanding principal and accrued interest on the 2017 Convertible Notes divided by 80% of the price per share of the securities issued by the Company in the 2017 Convertible Notes Qualified Financing. The New Warrants also become exercisable upon a 2017 Convertible Notes Qualified Financing for an amount of shares equal to the number of shares received by the holder in the 2017 Convertible Notes Qualified Financing at the same price per share of the securities issued in the 2017 Convertible Notes Qualified Financing. Prior to the December 2017 amendment, if the Company had raised more than $3,000,000 in an equity financing before October 4, 2022, the outstanding principal and accrued and unpaid interest on the 2017 Convertible Notes would have automatically converted into the securities issued by the Company in such financing based on the greater number of such securities resulting from either (i) the outstanding principal and accrued interest on the 2017 Convertible Notes divided by $2.25 or (ii) the outstanding principal and accrued interest on the 2017 Convertible Notes multiplied by 1.25, divided by the price paid per security in such financing. The New Warrants would have also become exercisable in conjunction with the 2017 Convertible Notes Qualified Financing. Lastly, if a change of control transaction occurred prior to the earlier of a 2017 Convertible Notes Qualified Financing or the 2017 Convertible Notes Maturity Date, the 2017 Convertible Notes would have, at the election of the holders of a majority of the outstanding principal of the 2017 Convertible Notes, either become payable on demand as of the closing date of such transaction, or become convertible into shares of common stock immediately prior to such transaction at a price per share equal to the lesser of (i) the per share value of the common stock as determined by the Board as if in connection with the granting of stock based compensation or in a private sale to a third party in an arms-length transaction or (ii) at the per share consideration to be paid in such transaction. Change of control means a merger or consolidation with another entity in which the Company's stockholders do not own more than 50% of the outstanding voting power of the surviving entity or the disposition of all or substantially all of the Company's assets. The New Warrants would have also become exercisable upon a change of control transaction for an amount of shares equal to the number of shares received by the holder upon conversion in connection with such transaction at the same price per share that the 2017 Convertible Notes converted in the change of control transaction. The December 2017 amendment resulted in a substantial modification to the original 2017 Convertible Notes whereby the maturity date was moved up to December 2018 from October 2022 and the terms associated with the embedded features were revised as described above. The Company recorded the 2017 Convertible Note amendment under the provisions of extinguishment accounting. The fair value of the underlying Convertible Notes was $294,615 higher than the carrying value of the Convertible Notes net of unamortized debt discount on the date of the modification. The $294,615 difference as well as legal costs associated with the amendment in the amount of $8,945 were recorded as a loss on convertible notes extinguishment totaling $303,560 in the accompanying condensed consolidated statements of operations for the six months ended March 31, 2018. After the modification, there remained a debt discount of $27,371 of which zero and $6,575 was amortized during the three and six months ended March 31, 2019, respectively, and $6,432 and $7,718 during the three and six months ended March 31, 2018, respectively. The 2017 Convertible Notes contained a conversion discount in the event of a 2017 Convertible Notes Qualified Financing to equal the outstanding principal and accrued interest on the 2017 Convertible Notes divided by 80% of the price per share of the securities issued by the Company in the 2017 Convertible Notes Qualified Financing. The embedded feature qualified as an embedded derivative and was separated from its debt host. The bifurcation of the embedded derivative from its debt host resulted in a discount to the 2017 Convertible Notes in the amount of $91,298 and $219,823 for the convertible debt issued during the three and six months ended March 31, 2018, respectively; there were no issuances of 2017 Convertible Notes during the three and six months ended March 31, 2019. The discount was being amortized to interest expense over the term of the 2017 Convertible Notes through December 31, 2018 using the straight-line method which approximates the effective interest method. The amortization expense was zero and $62,158 for the three and six months ended March 31, 2019, respectively, and $27,021 and $30,836 for the three and six months ended March 31, 2018, respectively. The embedded derivative is accounted for separately on a fair market value basis. The Company recorded the fair value changes of the premium debt conversion derivative associated with all of the 2017 Convertible Notes in the condensed consolidated statements of operations which amounted to an expense of $104,930 and $111,195 for the three and six months ended March 31, 2019, respectively, and $1,323 and $1,790 for the three and six months ended March 31, 2018, respectively. The New Warrants were deemed to be free-standing instruments and were accounted initially as a liability given the variable number of shares issuable in connection with a change of control conversion event and ultimately as equity upon conversion of the 2017 Convertible Notes on February 28, 2019 discussed further below. A Monte Carlo simulation model was used to estimate the aggregate fair value of the New Warrants up to the conversion date of the 2017 Convertible Notes. Input assumptions used were as follows: risk-free interest rate of 2.52% and 2.94% as of February 28, 2019 and September 30, 2018, respectively; expected volatility of 50% as of February 28, 2019 and September 30, 2018; expected life of 5.0 and 5.21 years as of February 28, 2019 and September 30, 2018, respectively; and expected dividend yield of 0% as of February 28, 2019 and September 30, 2018. The underlying stock price used in the analysis was on a non-marketable basis and was according to the market approach, considering the traded price, forward multiples from guideline public companies and recent private placement transactions, using allocation and marketability-discount methodologies. The 2017 Convertible Note proceeds assigned to the New Warrants were $238,864 and $575,435 during the three and six month period ended March 31, 2018, respectively, and recorded as a warrant liability. There were no proceeds assigned to warrants in connection with issuances of 2017 Convertible Notes during the three and six month period ended March 31, 2019. The discount was amortized to interest expense over the term of the 2017 Convertible Notes through December 31, 2018 using the straight-line method which approximated the effective interest method. The amortization expense was zero and $163,060 for the three and six month periods ended March 31, 2019, respectively, and $70,505 and $80,477 for the three and six month periods ended March 31, 2018, respectively. The Company also recorded the fair value changes of the warrant liability associated with all of the 2017 Convertible Notes in the condensed consolidated statements of operations which amounted to an expense of $11,879 and $18,568 for the three and six months ended March 31, 2019, respectively, and amounted to an expense of $9,354 and $8,017 for the three and six months ended March 31, 2018, respectively. In connection with the 2017 Convertible Notes, the Company incurred original issuance costs in the amount of $8,133 which consisted of legal costs and were recorded as issuance cost discounts to the 2017 Convertible Notes, of which zero and $1,431 was amortized to interest expense during the three and six months ended March 31, 2019, respectively, and $376 and $533 was amortized to interest expense during the three and six months ended March 31, 2018, respectively. On February 28, 2019 following the 2017 Convertible Notes Qualified Financing, the outstanding principal and interest on the 2017 Convertible Notes were converted into 839,179 shares of common stock and 839,179 common stock purchase warrants with an exercise term of approximately 4.8 years and an exercise price $3.00 per share. The conversion was accounted for as a debt extinguishment given the bifurcation of the embedded premium debt conversion feature. The fair value of the newly issued common shares and warrants associated with the 2017 Convertible Notes conversion relative to the carrying value of the debt and fair value of warrant liability and premium derivative liability on the conversion date was $553,447 and was recorded as a loss on note extinguishments in the accompanying condensed consolidated statements of operations for the three and six months ended March 31, 2019. In addition, the previously issued New Warrants became immediately exercisable for 839,179 shares of common stock. |