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Convertible Promissory Notes and Warrant Agreements

6 Months Ended

Mar. 31, 2020

Debt Disclosure [Abstract]

Convertible Promissory Notes and Warrant Agreements

NOTE 7 – Convertible Promissory Notes and Warrant Agreements

		As of March 31, 2020				As of September 30, 2019
Paulson convertible notes, principal		$	3,085,200			$	—
Accrued interest			152,036				—
Fair value adjustments			1,683,840				—
		$	4,921,076			$	—

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 “2019 Paulson Private Placement”), agreed to issue and sell to the investors 13% convertible promissory notes (each, a “2019 Paulson Note” and collectively, the “2019 Paulson Notes”) and warrants (each, a “2019 Paulson Warrant” and collectively, the “2019 Paulson Warrants”) to purchase shares of the Company’s common stock.

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

The 2019 Paulson Notes bear interest at a fixed rate of 13% per annum and originally required the Company to repay the principal and accrued and unpaid interest thereon on May 1, 2020. The 2019 Paulson Notes were amended in April 2020 to extend the maturity date to November 1, 2020. See NOTE 12 – Subsequent Events for amended terms under the 2019 Paulson Notes.

Interest on principal amounted to $100,269 and $154,144 during the three and six month periods ended March 31, 2020, respectively, 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 2019 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 (“VWAP”) of the common stock prior to conversion. In addition, if the Company raises more than $3,000,000 in an equity financing (the “2019 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 2019 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 2019 Qualified Financing or (B) the ten day VWAP of the common stock prior to the first closing of a 2019 Qualified Financing. If a change of control transaction occurs prior to a 2019 Qualified Financing or the maturity date, the 2019 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 2019 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 2019 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 2019 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 during the six month period ended March 31, 2020. Subsequent to issuance, the fair value change of the 2019 Paulson Notes amounted to a reduction of $(31,716) and an increase of $93,858 during the three and six month periods ended March 31, 2020, respectively, and was recorded under the net valuation change of instruments measured at fair value in the condensed statements of operations.

Each 2019 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 2019 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 2019 Paulson Warrants exercisable for 864,913 shares of common stock in connection with all closings of the 2019 Paulson Private Placement. The 2019 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 2019 Paulson warrants were deemed to be a free-standing instrument and were accounted for as equity. Given that the fair value of the 2019 Paulson Notes exceeded the proceeds received at issuance, there was no value attributed to the 2019 Paulson Warrants in the condensed financial statements.

In connection with the 2019 Private Placement, Paulson Investment Company, LLC (“Paulson”) received a cash commission equal to 12% of the gross proceeds from the sale of the 2019 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 six months ended March 31, 2020 in connection with the 2019 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. There were no issuance costs incurred in connection with 2019 Paulson Notes during the three months ended March 31, 2020. The issuance costs were recorded as a component of interest in the accompanying condensed statements of operations.

During the six months ended March 31, 2020, 2019 Paulson Notes with a fair value of $239,522 were converted into 60,847 shares of common stock.

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 “2017 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 2017 Warrants became immediately exercisable for 839,179 shares of common stock. 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 extinguishment in the accompanying condensed statements of operations for the three and six months ended March 31, 2019.

During the three and six month periods ended March 31, 2019, interest on the principal was $20,534 and $51,333, 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 zero and $233,224, respectively. The fair value changes related to the underlying premium conversion derivative and warrant liability amounted to an expense of $116,809 and $129,763 during the three and six month periods ended March 31, 2019, respectively.

As noted above, the 2017 Convertible Notes were converted into shares of common stock and not outstanding during the three and six month periods ended March 31, 2020.