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Convertible Promissory Notes and Warrant Agreements

3 Months Ended

Dec. 31, 2019

Debt Disclosure [Abstract]

Convertible Promissory Notes and Warrant Agreements

NOTE 7 – Convertible Promissory Notes and Warrant Agreements

		As of December 31, 2019				As of September 30, 2019
Paulson convertible notes, principal		$	3,234,800			$	—
Accrued interest			53,875				—
Fair value adjustments			1,903,639				—
		$	5,192,314			$	—

Paulson Convertible Note Offering

On November 1, 2019, the Company entered into a subscription agreement with certain accredited investors, pursuant to which the Company, in a private placement (the "Paulson Private Placement"), agreed to issue and sell to the investors 13% convertible promissory notes (each, a "Paulson Note" and collectively, the "Paulson Notes") and warrants (each, a "Paulson Warrant" and collectively, the "Paulson Warrants") to purchase shares of the Company's common stock.

The initial closing of the Paulson Private Placement was consummated on November 1, 2019, and, on that date and through December 3, 2019, the Company issued the Paulson Notes in an aggregate principal amount of $3,234,800 to the subscribers for gross proceeds equaling the principal amount. The Paulson Private Placement terminated on December 3, 2019.

The Paulson Notes bear interest at a fixed rate of 13% per annum and require the Company to repay the principal and accrued and unpaid interest thereon on May 1, 2020 (the "Maturity Date"). Interest on principal amounted to $53,875 during the three month period ended December 31, 2019 and was recorded under the net valuation change of instruments measured at fair value in the condensed statements of operations. The subscriber has the option to convert the outstanding principal and accrued and unpaid interest of such subscriber's Paulson Note (the "Outstanding Balance") into common stock in an amount equal to the Outstanding Balance divided by the ten day volume weighted average closing price of the common stock prior to conversion. In addition, if the Company raises more than $3,000,000 in an equity financing (the "Qualified Financing") before the Maturity Date, each subscriber shall have the option to convert the Outstanding Balance into the securities issued by the Company in such Qualified Financing in an amount equal to (i) the Outstanding Balance divided by (ii) the lower of 0.6 multiplied by (A) the actual per share price of securities issued by the Company in the Qualified Financing or (B) the ten day volume weighted average closing price of the common stock prior to the first closing of a Qualified Financing. If a change of control transaction occurs prior to a Qualified Financing or the Maturity Date, the Paulson Notes would become payable on demand as of the closing date of 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 Company elected to account for the Paulson Notes on a fair value basis under ASC 825 to comprehensively value and streamline the accounting for the embedded conversion options. The fair value of the Paulson Notes was significantly higher than the proceeds received as of each of the respective issuance dates given the significant redemption discount associated with the Qualified Financing provision. The excess of fair value over proceeds at issuance amounted to $1,831,940 and was recorded to interest expense in the condensed statements of operations. Subsequent to issuance, the fair value change of the Paulson Notes amounted to $125,574 during the three months ended December 31, 2019 and was recorded under the net valuation change of instruments measured at fair value in the condensed statements of operations.

Each Paulson Warrant grants the holder the option to purchase the number of shares of common stock equal to (i) 0.5 multiplied by (ii) the principal amount of such subscriber's Paulson Notes divided by 1.87, with an exercise price per share equal to $1.87. As of the final closing on December 3, 2019, the Company issued Paulson Warrants exercisable for 864,913 shares of common stock in connection with all closings of the Paulson Private Placement. The Paulson Warrants are immediately exercisable and expire on November 1, 2022. The exercise price is subject to adjustment in the event of any stock dividends or splits, reverse stock split, recapitalization, reorganization or similar transaction, as described therein. The Paulson warrants were deemed to be a free-standing instrument and were accounted for as equity. Given that the fair value of the Paulson Notes exceeded the proceeds received at issuance, there was no value attributed to the Paulson Warrants in the condensed financial statements.

In connection with the Paulson Private Placement, Paulson Investment Company ("Paulson") received a cash commission equal to 12% of the gross proceeds from the sale of the Paulson Notes, and 10-year warrants to purchase an amount of Common Stock equal to 259,476 shares of common stock at an exercise price equal to $1.87 per share (the "Broker Warrants"). The issuance costs incurred during the three months ended December 31, 2019 in connection with the Paulson Private Placement were $865,567. Issuance costs included cash commissions equal to $388,176 and legal and third party fees in the amount of $57,756. In addition, issuance costs included the value of the Broker Warrants in the amount of $419,635 that were not yet issued as of December 31, 2019. The Broker Warrants were issued on January 21, 2020, see Note 12 – Subsequent Events. The issuance costs were recorded as a component of interest in the accompanying statements of operations.

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").

On February 28, 2019, 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. In addition, the previously issued New Warrants became immediately exercisable for 839,179 shares of common stock.

During the three months ended December 31, 2018, interest on the principal was $30,800 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 $233,223. The fair value changes related to the underlying premium conversion derivative and warrant liability amounted to an expense of $6,265 and $6,689, respectively, during the three month period ended December 31, 2018.

As noted above, the 2017 Convertible Notes were converted into shares of common stock and not outstanding during the three month period ended December 31, 2019.