Quarterly report pursuant to Section 13 or 15(d)

Debt

v3.22.4
Debt
6 Months Ended
Dec. 31, 2022
Debt Disclosure [Abstract]  
Debt

8. Debt 

 

  Convertible Notes Payable consist of the following at December 31, 2022.

 

Convertible Notes Issued on December 10, 2021

 

On December 10, 2021, the Company entered into a securities purchase agreement (the “Securities Purchase Agreement”) with certain accredited and institutional investors (the “Purchasers”) for the purchase and sale of an aggregate of: (i)$1,086,956.52 in principal amount of Original Issue Discount Senior Secured Convertible Notes (the “Notes”) for $1,000,000 (representing a 8% original issue discount) (“Purchase Price”) and (ii) warrants to purchase up to 4,000,000 shares of the Company’s common stock (the “Warrants”) in a private placement (the “Offering”). Each Note featured an 8% original issue discount, resulting in net proceeds to the Company of $500,000 for each of the two Notes. The Notes have a maturity of December 10, 2022, an interest rate of 8% per annum, and are initially convertible at a fixed price of $0.25 per share, with provisions for conversions at a fixed price of $0.20 per share should the closing trading price of our common stock be below $0.20 per share after June 10, 2022. The conversion price is also subject to further price adjustments in the event of (i) stock splits and dividends, (ii) subsequent rights offerings, (iii) pro-rata distributions, and (iv) certain fundamental transactions, including but not limited to the sale of the Company, business combinations, and reorganizations (v) in the event that the Company issues or sells any additional shares of Common Stock or Common Stock Equivalents at a price per share less than the Exercise Price then in effect or without consideration then the Exercise Price upon each such issuance shall be reduced to the Dilutive Issuance Price, which resulted in an adjustment of the conversion price to $0.0333. These Notes, for as long as they are outstanding, are secured by all assets of the Company and its subsidiaries, senior secured guarantees of the subsidiaries of the Company, and pledges of the common stock of all the subsidiaries of the Company. The Notes have provisions allowing for repayment at any time at 115% of the outstanding principal and interest within the first three months, and 120% of the outstanding principal and interest at any time thereafter. 

 

The Warrants are initially exercisable at $0.25 per share and, are subject to cashless exercise after six months if the shares underlying the Warrants are not subject to an effective resale registration statement. The Warrants are also subject to customary adjustments, including price protections.

 

In connection with Securities Purchase Agreement, the Company issued to the Placement Agent (as defined below), an aggregate of 878,260 Common Stock purchase warrants (“PA Warrants”). The PA Warrants are substantially similar to the Warrants. The fair value of the PA Warrants at issuance was estimated to be $170,210 based on a risk-free interest rate of 1.25%, an expected term of 5 years, an expected volatility of 142.53% and a 0% dividend yield.

 

Spencer Clarke Holdings LLC (“Placement Agent”) acted as the placement agent, in connection with the sale of the securities pursuant to the Securities Purchase Agreement. Pursuant to an engagement agreement entered into by and between the Company and the Placement Agent, the Company agreed to pay the Placement Agent a cash commission of $100,000. Pursuant to the discussion above, the Company also issued an aggregate of 878,260 PA Warrants to the Placement Agent.

 

The gross proceeds received from the Offering were approximately $1,000,000. The cash Placement Agent fees of $100,000 was paid separately. Also, the Company reimbursed the lead Purchaser $15,192 for legal fees, which was deducted from the required subscription amount to be paid.

 

Pursuant to the terms of Note, among other things, the Company was required to pay to the Purchasers on December 10, 2022, as extended to December 29, 2022 (as so extended, the “Maturity Date”) all remaining principal and accrued and unpaid interest on the Maturity Date (the “Owed Amount”) and the failure to so pay the Owed Amount on the Maturity Date is an event of default. The Owed Amount was not paid by the Company in accordance with the terms of the Notes. Subsequent to the December 31, 2022 the Company entered into a forbearance agreement with the Purchasers as disclosed on Form 8K filed on February 8, 2023.

 

The Company evaluated all of the associated financial instruments in accordance with ASC 815 Derivatives and Hedging. Based on this evaluation, the Company has determined that no provisions required derivative accounting.

 

In accordance with ASC 470- Debt, the Company first allocated the cash proceeds to the loan and the warrants on a relative fair value basis, secondly, the proceeds were allocated to the beneficial conversion feature.

 

Below is a reconciliation of the convertible notes payable as presented on the Company’s balance sheet as of December 31, 2022:

 

    Principal
($)
   

Stock-

settled Debt

($)

    Debt Discount
($)
    Net Value
($)
 
Balance at June 30, 2021  
-
   
-
   
-
   
-
 
Convertible notes payable issued during fiscal year ended June 30, 2022     1,086,957                       1,086,957  
Debt discount associated with new convertible notes                     (1,018,229 )     (1,018,229 )
Conversion price adjusted from $0.25 to $0.20             217,391       (217,391 )    
-
 
Amortization of debt discount                     275,423       275,423  
Balance at June 30, 2022     1,086,957       217,391       (960,197 )     344,151  
Cash repayment     (362,319 )                     (362,319 )
Gain on extinguish of portion of principal             (72,464 )             (72,464 )
Amortization of debt discount                     960,197       960,197  
Penalty     181,159                       181,159  
Conversion price change             1,843,475               1,843,475  
Balance at December 31, 2022     905,797       1,988,402       -       2,894,199  

 

Amortization expense for the three months ended December 31, 2022 and 2021, totaled $420,627 and $12,218, respectively.

 

Amortization expense for the six months ended December 31, 2022 and 2021, totaled $960,197 and $12,218, respectively.

 

As of December 31, 2022 and June 30, 2022, the unamortized portion of debt discount was $0 and $960,197, respectively.

 

Interest expense for the three months ended December 31, 2022 and 2021, totaled $20,071 and $4,909, respectively.

 

Interest expense for the six months ended December 31, 2022 and 2021, totaled $41,617 and $4,909, respectively.

 

During the six months ended December 31, 2022, the Company paid $39,452 to accrued interest, leaving 6,995 as unpaid interest under accounts payable. (June 30, 2022 - $4,831)

 

Promissory Notes Issued on September 23, 2022

 

On September 23, 2022, the Company entered into a Securities Purchase Agreement and issued and sold to an institutional investor, a Promissory Note (the “Promissory Note”) in the principal sum of $700,000.00, which amount is the $644,000 actual amount of the purchase price plus an original issue discount in the amount of $56,000. In connection with the issuance of the Promissory Note, the Company issued to the investor warrants to purchase 2,800,000 shares of common stock at an exercise price of $0.225, as well as returnable warrants (the “Returnable Warrants”), which may only be exercised in the event that the Company were to default on certain debt obligations, to purchase 7,000,000 shares of common stock at an exercise price of $0.30, in each case subject to adjustment. The Promissory Note may be converted into Company common stock in the event of an event of default under the Promissory Note by the Company.

 

As a result of the transaction, the Purchasers triggered their “most favored nation” clause which resulted in the Company entering into an MFN Amendment Agreement (the “MFN Agreement”) with the Purchasers, pursuant to which the Purchasers exercised their options under the most-favored nation terms contained in their existing transaction documents with the Company. Pursuant to the MFN Agreement, among other things, (a) the Company issued to each of the Purchasers 5,434,783 5-year Returnable Warrants which may only be exercised in the event that the Company were to default on certain debt obligations at an initial Exercise Price per share of $0.30, (b) the events of default set forth in the Notes were amended to include certain of the Events of Default reflected in the Promissory Note, (c) the conversion price of the Notes was amended so that upon an event of default, the conversion price equaled $0.10, and further down to $0.0333 subject to adjustment, (d) the Purchasers are entitled to deduct $1,750 from conversions to cover associated fees, and $750.00 shall be added to each prepayment to reimburse the Purchasers for administrative fees and (e) the definition of Exempt Issuance in the note was modified to remove certain clauses of the definition.

 

As a result of the financing, the Company is required to pay cash fees to its bankers (including the Placement Agent), which amounts are being determined but will not be less than $67,000, and to issue compensatory warrants to the Placement Agents to purchase 280,000 shares of common stock at an exercise price of $0.225, warrants to purchase 119,260 shares of common stock at an exercise price of $0.27, in each case subject to adjustment.

 

The proceeds received by the Company from the Offering, net of the original issue discount, fees and costs including legal fees of $7,000 and commission fees of $32,200 were $604,800. Subsequently, the Company also paid cash Placement Agent fees of $35,000.

 

The Company evaluated all of the associated financial instruments in accordance with ASC 815 Derivatives and Hedging. Based on this evaluation, the Company has determined that no provisions required derivative accounting.

 

The Company first allocated the cash proceeds to the warrants, secondly, the proceeds were allocated to the present value of principal.

 

Below is a reconciliation of the convertible notes payable (including the Promissory Note) as presented on the Company’s balance sheet as of December 31, 2022:

 

   

Principal

$

   

Debt Discount

$

    Net Value
$
 
Balance at June 30, 2022     -       -       -  
Promissory notes payable issued during the three months ended September 30, 2022     700,000               700,000  
Debt discount associated with Promissory notes             (346,070 )     (346,070 )
Amortization of debt discount             69,256       69,256  
Balance at December 31, 2022   $ 700,000     $ (276,814 )   $ 423,186  

 

Amortization expense for the three months ended December 31, 2022 and 2021, totaled $64,280 and $0, respectively. Amortization expense for the six months ended December 31, 2022 and 2021, totaled $69,256  and $0, respectively.

 

As of December 31, 2022 and June 30, 2022, the unamortized portion of debt discount was $276,814 and $0, respectively.

 

Interest expense for the three and six months ended December 31, 2022, totaled $14,311 and $15,711, respectively.