CONVERTIBLE NOTES PAYABLE
|9 Months Ended|
Jun. 30, 2021
|Debt Disclosure [Abstract]|
|CONVERTIBLE NOTES PAYABLE||
NOTE 6 – CONVERTIBLE NOTES PAYABLE
The Company’s convertible promissory notes consisted of the following as of September 30, 2020, and June 30, 2021.
Bridge Financing Notes
Between June and November 2016, the Company issued eleven convertible promissory notes (“Bridge Financing Notes”) with associated warrants in a private placement to accredited investors for total gross proceeds of $837,000, including $222,000 from related parties. These notes and associated warrants had a maturity of one year (which has been extended at maturity to April 30, 2022), an annual interest rate of 8% and can be converted at the option of the holder at a conversion price of $0.025 per share. In addition, the convertible notes will automatically convert if a qualified equity financing of at least $3 million occurs before maturity and such mandatory conversion price will equal the effective price per share paid in the qualified equity financing. The note balances, as of June 30, 2021 and September 30, 2020, were $277,000, with unamortized debt discounts of approximately $72,000 and $11,000, respectively. Debt discount amortization for the three months ended June 30, 2021 and 2020 was approximately $16,000 and $17,000, respectively. Debt discount amortization for the nine months ended June 30, 2021 and 2020 was approximately $26,000 and $103,000, respectively. In consideration for the extension of the notes, the Company extended the term of the related warrants until April 30, 2022, and recognized approximately $87,000 of additional debt discount which represented the incremental value of the modified warrants over the pre-modification warrants.
June 2019 Convertible Debenture
On June 21, 2019, the Company entered into a securities purchase agreement to borrow up to $3,000,000 through the issuance of convertible debentures (“Convertible Debentures”) and associated warrants. On June 21, 2019, approximately $2,100,000 (“Tranche 1”) of Convertible Debentures were purchased with other tranches closing on August 7, 2019 for $400,000 (“Tranche 2”) and November 6, 2019 (“Tranche 3”) for $500,000. All tranches accrue interest at eight percent per annum, and mature one year after each respective closing date, and are convertible at the option of the holder any time after issuance into common stock at a conversion rate of the lesser of: (1) $0.05 per share; or (2) 80% of the lowest volume weighted adjusted price (as reported by Bloomberg, LP) for the ten consecutive trading days immediately preceding conversion, and in the event of default the conversion rate adjusts to 60% of the lowest volume weighted average price in the previous 20 trading days.
In addition, the holder received warrants to purchase an aggregate of 50 million shares of common stock at an exercise price of $0.04 per share (subsequently reduced to an exercise price $0.02 in 2020). Such warrants expire on the fifth anniversary of issuance. In total the offering costs incurred related to this Convertible Debenture were approximately $398,000.
The Company evaluated the conversion feature and concluded that it should be bifurcated and accounted for as a derivative liability due to the variable conversion feature which does not contain an explicit limit on the number of shares that are required to be issued upon conversion. In addition, the Company concluded the warrants required treatment as derivative liabilities as the Company could not assert it has sufficient authorized but unissued shares to settle the warrants upon exercise when taking into account other stock-based commitments including the Convertible Debentures. Accordingly, the embedded conversion feature and warrants were recorded at fair value at issuance and are subsequently re-measured to fair value each reporting period.
In June 2020, the Company extended the maturity dates of Tranche 1 and Tranche2 to August 21, 2020 in exchange for a cash payment of $50,000. The extension was treated as a modification for accounting purposes which resulted in the $50,000 being recognized as an additional debt discount allocated on a pro-rata basis between Tranche 1 and Tranche 2 and will be amortized using the effective interest method over the remaining life of the respective tranches.
On July 27, 2020, the Company and the holder agreed to the following cash payments in full satisfaction of the obligations thereunder: (1) $50,000 on the date of the Agreement; (2) $700,000 on or before August 21, 2020; (3) $750,000 on or before September 30, 2020; and (4) any remaining principal amount outstanding on or before November 30, 2020. As of the date of the agreement, the principal balance outstanding on the Convertible Debenture was $1,900,000, which amount may be reduced in the event that holder elects to convert to equity all or any portion of principal prior to repayment. In connection with the agreement, the holder agreed not to convert more than $300,000 of principal of the Debenture between the date of the agreement and November 30, 2020. Upon the timely payment by the Company of the amounts set forth above, all other amounts due on the Debentures, including any interest or fees accrued or that will accrue or become due or payable on the Debentures, will be extinguished. The Company accounted for this arrangement as a modification of the existing debt.
During the year ended September 30, 2020, the lender converted approximately $1,200,000 of principal of Tranche 1 and approximately $139,000 of accrued interest into common stock. The remaining balance of the convertible debenture at September 30, 2020 was $300,000.
In November 2020, the Company made a $300,000 payment in full to satisfy the remaining balance of the convertible debenture.
The fair value of the embedded conversion feature at September 30, 2020 was determined utilizing a Geometric Brownian Motion Stock Path Based Monte Carlo Simulation that utilized the following key assumptions:
In addition to the fixed exercise price noted above, the model incorporated the variable conversion price which is simulated as 80% of the lowest trading price within the ten consecutive days preceding presumed conversion.
The entire disclosure for long-term debt.
Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef