As of December 31, 2018, the Company's convertible notes payable consist of the following:

 

 

(1)

 

For the three and six months ended December 31, 2018, the Company recognized accrued interest expense of $407,138 and $613,000, respectively, related to its outstanding convertible notes payable. For the three and six months ended December 31, 2018, the Company recognized debt discount accretion expense of $878,542 and $1,581,163, respectively. Accretion expense is a component of interest expense in the accompanying unaudited condensed consolidated statements of operations.

 

In connection with the Series AA financing discussed in Note 11, the Fiscal 2018 Notes converted for an aggregate principal balance of $5,340,000 plus accrued interest of approximately $829,000 as of January 30, 2019, into an aggregate of approximately 771,000 shares of Series AA preferred stock. Pursuant to the terms of the notes, the conversion price was approximately $8.00 per share which was a 20% discount to the terms set forth in the Series AA financing. Due to the issuance of preferred stock to settle the obligations under the convertible notes, the Company classified the principal and the related accrued interest balances as long-term liabilities as of December 31, 2018.

 

 

As of December 31, 2018, the Company had a convertible note outstanding with a balance of $10,000, which consists of notes which were not converted at the time of an equity transaction in 2017. This convertible note bears interest at 8% per annum. As of December 31, 2018, this outstanding convertible note is due on demand, but the holder has not requested payment.

 

On February 26, 2018, the Company issued a convertible promissory note for gross proceeds of $500,000 to a former member of the Company’s board of directors. The note provides for interest at 15% per annum and matures one year from issuance.

 

During the quarter ended March 31, 2018, the Company issued two additional convertible promissory notes for gross proceeds of $700,000, including an additional note for $500,000 to the same former member of the board of directors. These additional notes provided for interest at a rate of 12% per annum and mature one year from issuance or 10 days after the closing of a financing of at least $10 million. These notes included a default interest rate provision, in which the stated interest rate increased to 15% during an event of default. Beginning on July 1, 2018, the interest rate increased to 15% since a default existed due to the failure to make quarterly interest payments. These two notes were modified on April 3, 2018 whereby the notes and accrued interest will automatically convert to common stock at a 20% discount to the terms set forth in an equity financing for at least $15 million (a “Qualified Financing”). In addition, the maturity date on both notes was amended to January 31, 2019.

 

On April 3, 2018 and April 11, 2018, the Company issued promissory notes and warrants for gross proceeds of $4.1 million, before deduction of cash issuance costs of approximately $239,000. The notes bear interest at 12% per annum, with a 15% default interest rate provision, and mature on January 31, 2019.

 

Each of the Fiscal 2018 Notes discussed above contained a mandatory conversion feature that was triggered if the Company completed an equity financing for between $10 million and $20 million, whereby the notes would automatically convert into the securities issued in the financing at a 20% discount. This feature that enables conversion at a 20% discount upon completion of a future equity financing is a contingent beneficial conversion feature (“BCF”) that is not calculated and recorded until the contingent event has occurred. As discussed in Note 11, on January 30, 2019, the Company closed the Series AA Financing which resulted in the conversion of the Fiscal 2018 Notes whereby a BCF was incurred for approximately $5.9 million. This BCF will be recognized as additional interest expense on the Fiscal 2018 Notes for the fiscal quarter ending March 31, 2019.

 

 

The February 26, 2018 promissory note shown in the table above also contains an embedded derivative for the acceleration of the maturity date if the note is paid prior to maturity, whereby a $25,000 penalty plus all unpaid interest to be accrued through the maturity date is due. The initial measurement of this embedded derivative liability of $100,000 was reflected as a debt discount that is being accreted to interest expense using the effective interest method.