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Convertible Promissory Notes and Warrant Agreements
 12 Months Ended
Sep. 30, 2021
Debt Disclosure [Abstract]  
Convertible Promissory Notes and Warrant Agreements

NOTE 8 - Convertible Promissory Notes and Warrant Agreements

 

   As of
September 30,		 
   2021   2020 
Paulson convertible notes, principal  $
—
   $546,000 
Accrued interest   
—
    63,458 
Fair value adjustments   
—
    397,748 
   $
—
   $1,007,206 

 

Paulson Convertible Note Offerings

 

2019 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 had a fixed interest rate of 13% per annum and required the Company to repay the principal and accrued and unpaid interest thereon on November 1, 2020 (the “Maturity Date”). Interest on principal amounted to $5,701 and $213,383 during the years ended September 30, 2021 and 2020, respectively, and was recorded under the net valuation change of instruments measured at fair value in the statements of operations. The subscriber, prior to the Second 2019 Paulson Notes Amendment, had 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 of the common stock prior to conversion. In addition, both before and after the Second 2019 Paulson Note Amendment, if the Company raised more than $3,000,000 in an equity financing (the “Qualified Financing”) before the Maturity Date, each subscriber had 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 had occurred prior to a Qualified Financing or the Maturity Date, the 2019 Paulson Notes would have become payable on demand as of the closing date of such transaction. Change of control meant a merger or consolidation with another entity in which the Company’s stockholders did 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 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 statements of operations during the year ended September 30, 2020. Subsequent to issuance, the fair value change of the 2019 Paulson Notes amounted to a benefit of $1,974 and $1,221,480 during the years ended September 30, 2021 and 2020, respectively, and was recorded under the net valuation change of instruments measured at fair value in the statements of operations.

 

Each 2019 Paulson Warrant granted 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 5.61, with an exercise price per share equal to $5.61. As of the final closing on December 3, 2019, the Company issued 2019 Paulson Warrants exercisable for 288,305 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 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 86,498 shares of common stock at an exercise price equal to $5.61 per share (the “Broker Warrants”). The issuance costs incurred during the year ended September 30, 2021 and 2020 in connection with the 2019 Paulson Private Placement were $3,053 and $865,567, respectively. Issuance costs in 2021 related to legal costs. Issuance costs in 2020 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. The issuance costs were recorded as a component of interest in the accompanying statements of operations.

 

On April 24, 2020, the Company and holders of a majority in aggregate principal amount of the 2019 Paulson Notes entered into an amendment to the 2019 Paulson Notes (the “Second 2019 Paulson Notes Amendment”) to, among other things:

 

i.Extended the Maturity Date – The Second 2019 Paulson Notes Amendment extended the maturity date of the 2019 Paulson Notes from May 1, 2020 to November 1, 2020 (in either case, unless a change of control transaction happens prior to such date);

 

ii.Revised Optional Conversion Terms – The Second 2019 Paulson Notes Amendment provided that the amount of shares to be received upon the subscriber’s optional conversion of the 2019 Paulson Notes prior to a 2019 Qualified Financing (as defined in the 2019 Paulson Notes) would have equaled: (1) the Outstanding Balance as defined below of such subscriber’s 2019 Paulson Note elected by the subscriber to be converted divided by (2) an amount equal to 0.6 multiplied by the volume weighted average price of the common stock for the ten (10) trading days immediately preceding the date of conversion; and

 

iii.Revised the Registration Date – The Second 2019 Paulson Notes Amendment provided that promptly following the earlier of (1) May 1, 2020, if the applicable subscriber converted all or a majority of the Outstanding Balance of such subscriber’s 2019 Paulson Note prior to such date; (2) the final closing of a 2019 Qualified Financing; and (3) the maturity date, the Company will enter into a registration rights agreement with the applicable subscriber containing customary and usual terms pursuant to which the Company shall agree to prepare and file with the SEC a registration statement on or prior to the 90th calendar day following the registration date, covering the resale of any common stock received on conversion of such 2019 Paulson Notes, and shares of common stock underlying the Warrants.

 

The Second 2019 Paulson Notes Amendment was accounted for as a note extinguishment for accounting purposes given the substantive change in the optional redemption feature’s conversion formula. The fair value change in the 2019 Paulson Notes associated with the extinguishment was recorded as a loss on notes extinguishment in the accompanying statements of operations in the amount of $2,017,847 during the year ended September 30, 2020. Lastly, in connection with the Second 2019 Paulson Notes Amendment, legal costs in the amount of $1,943 were incurred and recorded as a component of interest in the accompanying statements of operations.

 

During the years ended September 30, 2021 and 2020, the 2019 Paulson Notes were converted into 292,754 and 725,394 shares of common stock, respectively. All of the 2019 Paulson notes were converted into shares of common stock by December 31, 2020.

 

Paulson 2020 Convertible Note Financing 

 

On April 30, 2020, the Company entered into a subscription agreement with certain accredited investors, pursuant to which the Company, in a private placement (the “2020 Paulson Private Placement”), agreed to issue and sell to the investors 13% convertible promissory notes (each, a “2020 Paulson Note” and collectively, the “2020 Paulson Notes”) and warrants (each, a “2020 Paulson Warrant” and collectively, the “2020 Paulson Warrants”) to purchase shares of the Company’s common stock. 

 

Between May 1, 2020 and June 30, 2020, the Company issued 2020 Paulson Notes in an aggregate principal amount of $5,122,700 to the Subscribers. The 2020 Paulson Private Placement was terminated on June 30, 2020.

 

The 2020 Paulson Notes had a fixed interest rate of 13% per annum and require the Company to repay the principal and accrued and unpaid interest thereon on the earlier of December 31, 2020 or a change of control transaction. Interest on principal amounted to $81,613 during the year ended September 30, 2020 and was recorded under the net valuation change of instruments measured at fair value in the statements of operations.

 

If the Company had raised more than $5,000,000 in an equity financing before the maturity date (the “2020 Qualified Financing”), without any action on the part of the Subscribers, all of the outstanding principal and accrued and unpaid interest of the Notes (the “Outstanding Balance”) would have been converted into that number of shares of the securities issued by the Company in the closing on the date a 2020 Qualified Financing occurred equal to: (i) the Outstanding Balance divided by (ii) the lower of 0.6 multiplied by (A) the actual per share price of the securities issued by the Company in the closing on the date a 2020 Qualified Financing occurred and (B) the volume weighted average price of the common stock for ten (10) trading days immediately preceding the 2020 Qualified Financing.

 

If the Company had announced a transaction between the Company and any other company (or an affiliate of any such company) that was included in the S&P 500 Health Care Index as published from time to time by S&P Dow Jones Indices LLC that included an investment or upfront payments resulting in gross proceeds to the Company of at least $2,000,000 upon the execution of such transaction or definitive agreement, and provides for terms of collaboration, manufacturing, distribution, licensing or supply of the Company’s products (a “Strategic Transaction”) before the maturity date, without any action on the part of the subscribers, the Outstanding Balance would be converted into that number of shares of common stock equal to: (i) the Outstanding Balance divided by (ii) the lower of 0.6 multiplied by (A) the VWAP of the common stock for the ten (10) trading days immediately preceding the first announcement of the Strategic Transaction or (B) closing price of the common stock on the day preceding the first announcement by the Company of a Strategic Transaction.

 

At any time, at the sole election of the holder of such 2020 Paulson Note, all or a portion of the Outstanding Balance could have been converted into that number of shares of common stock equal to: (i) the Outstanding Balance elected by the holder to be converted divided by (ii) an amount equal to 0.6 multiplied by the volume weighted average price of the common stock for the ten (10) trading days immediately preceding the date of conversion.

 

If a change of control transaction had occurred prior to the conversion of the 2020 Paulson Notes or the maturity date, the 2020 Paulson Notes would have become payable on demand as of the closing date of such transaction. Change of control meant a merger or consolidation with another entity in which the Company’s stockholders did 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 2020 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 2020 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 redemption provisions. The excess of fair value over proceeds at issuance amounted to $3,784,918 and was recorded to interest expense in the statements of operations during the year ended September 30, 2020. Subsequent to issuance, the fair value change of the 2020 Paulson Notes amounted to an expense of $416,951 during the year ended September 30, 2020 and was recorded under the net valuation change of instruments measured at fair value in the statements of operations.

 

Each 2020 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 2020 Paulson Notes divided by 5.61, with an exercise price per share equal to $5.61. The 2020 Paulson Warrants are immediately exercisable and expire on April 30, 2023. The exercise price is subject to adjustment in the event of any stock dividends or splits, reverse stock split, recapitalization, reorganization or similar transaction. The Company issued 2020 Paulson Warrants exercisable for 456,564 shares of common stock in connection with all closings of the 2020 Paulson Private Placement through June 30, 2020. The 2020 Paulson warrants were deemed to be a free-standing instrument and were accounted for as equity. Given that the fair value of the 2020 Paulson Notes exceeded the proceeds received at issuance, there was no value attributed to the 2020 Paulson Warrants in the financial statements.

 

In connection with the 2020 Paulson Private Placement, Paulson received a cash commission equal to 12% of the gross proceeds from the sale of the 2020 Paulson Notes and received 7-year warrants to purchase an amount of common stock equal to 136,971 (“Broker Warrants”). The Broker Warrants have an exercise price equal to $5.61 per share. The issuance costs incurred during the year ended September 30, 2020 in connection with the 2020 Paulson Private Placement were $1,040,213. Issuance costs included cash commissions equal to $614,725 and legal and third-party fees in the amount of $148,451. In addition, issuance costs included the value of the Broker Warrants in the amount of $277,037. The issuance costs were recorded as a component of interest in the accompanying statements of operations.

 

Between May 4, 2020 and July 22, 2020, certain Subscribers elected to convert $3,590,353 of the outstanding principal and interest of such Subscribers’ 2020 Paulson Notes into 1,337,459 shares of common stock. On July 23, 2020, the remaining outstanding principal and interest balance of the 2020 Paulson Notes in the amount of $1,613,961 was converted into 535,178 shares of common stock upon the announcement of the Zimmer Development Agreement that qualified as a Strategic Transaction.