Quarterly report pursuant to Section 13 or 15(d)

NOTES PAYABLE RELATED PARTIES

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NOTES PAYABLE RELATED PARTIES
9 Months Ended
Jun. 30, 2017
Notes to Financial Statements  
NOTE 4. NOTES PAYABLE RELATED PARTIES

A summary of notes payable outstanding is as follows:

 

   

June 30,

2017

   

September 30,

2016

 
Demand notes payable – Leonard Mazur   $ 160,470     $ 160,470  
Demand notes payable – Myron Holubiak     12,500       12,500  
Revolving demand promissory notes – Leonard Mazur           500,000  
Amended and restated convertible promissory note – Leonard Mazur     3,333,333        
May 10, 2017 future advance convertible promissory note – Leonard Mazur     1,500,000        
June 23, 2017 future advance convertible promissory note – Leonard Mazur     410,000        
Notes payable – related parties   $ 5,416,303     $ 672,970  

 

On March 30, 2016, the Company assumed $772,970 of demand notes payable in the acquisition of LMB. The principal balance of the notes payable to our Chairman, Leonard Mazur, was $760,470 and the principal balance of the notes payable to our Chief Executive Officer, Myron Holubiak, was $12,500. Notes with a principal balance of $704,000 accrue interest at the prime rate plus 1.0% per annum and notes with a principal balance of $68,970 accrue interest at 12% per annum. In April 2016, $600,000 of the prime rate plus 1.0% demand notes payable and accrued interest of $1,985 was repaid to Leonard Mazur.

 

The Board of Directors authorized revolving demand promissory notes with Leonard Mazur in an aggregate principal amount of up to $2,500,000. On September 7, 2016, the Company issued a $500,000 demand promissory note. The Company issued $2,000,000 of additional demand promissory notes through the period ended May 10, 2017. As of May 10, 2017, the revolving demand promissory notes of $2,500,000 were converted into a convertible promissory note that matures on June 30, 2018. The principal balance of the note is convertible into shares of the Company’s common stock, at the sole discretion of Mr. Mazur, at a conversion price equal to 75% of the price per share paid by investors in the Company’s securities offering pursuant to an S-1 registration statement filed with the U.S. Securities and Exchange Commission. In connection with the modification of the note, the Company recorded a charge of $833,333 to additional paid-in capital and increased the carrying value of the notes to $3,333,333. The note is convertible to common stock with a fair value of $3,333,333 (see Note 9). These notes accrue interest at the prime rate plus 1%.

 

On May 10, 2017, the Company executed a $1,500,000 future advance convertible promissory note with Leonard Mazur that matures on December 31, 2017. The principal balance of the note is convertible into shares of the Company’s common stock, at the sole discretion of Mr. Mazur, at a conversion price equal to 75% of the price per share paid by investors in the Company’s securities offering pursuant to an S-1 registration statement filed with the U.S. Securities and Exchange Commission. Additionally, in the event the Company enters into a debt financing with a third party on terms better than those of the note while the note remains outstanding, Leonard Mazur may elect to amend the note to incorporate such terms. At June 30, 2017, $1,500,000 of the note was drawn by the Company. This note accrues interest at the prime rate plus 1%.

 

On June 23, 2017, the Company executed a $1,000,000 future advance convertible promissory note with Leonard Mazur that matures on December 31, 2017. The principal balance of the note is convertible into shares of the Company’s common stock, at the sole discretion of Mr. Mazur, at a conversion price equal to 75% of the price per share paid by investors in the Company’s securities offering pursuant to an S-1 registration statement filed with the U.S. Securities and Exchange Commission. Additionally, in the event the Company enters into a debt financing with a third party on terms better than those of the note while the note remains outstanding, Leonard Mazur may elect to amend the note to incorporate such terms. At June 30, 2017, $410,000 of the note was drawn by the Company. This note accrues interest at the prime rate plus 1%.

 

The Company evaluated all terms of the future advance convertible promissory notes, including the Change in Control provision, to identify any embedded features that required bifurcation and recording as derivative instruments. The Company determined that there were no such features requiring separate accounting.

 

The Company initially measured the contingent beneficial conversion feature upon issuance of the future advance convertible promissory notes based on the discounted conversion rate of 75% of the price per share sold at the Company’s securities offering pursuant to an S-1 registration statement filed with the U.S. Securities and Exchange, assuming no changes to the circumstances other than passage of time. Based on this analysis, no beneficial conversion feature was recorded at issuance. Any beneficial conversion feature would be recognized at the time the contingency is resolved (see Note 9).

 

Interest expense on notes payable – related parties was $33,700 and $66,779, respectively, for the three and nine months ended June 30, 2017.