See accompanying notes to unaudited condensed
consolidated financial statements
See accompanying notes to unaudited condensed
consolidated financial statements
See accompanying notes to unaudited condensed
consolidated financial statements
CONDENSED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
June 30, 2018
(Unaudited)
NOTE 1 -
NATURE
OF OPERATIONS
Drone USA, Inc. (“Drone”) is an
Unmanned Aerial Vehicles (“UAV”) and related services and technology company that intends to engage in the testing,
distribution, exportation, and integration of advanced low altitude UAV systems, services and products. Drone also provides product
procurement, distribution, and logistics services through its wholly-owned subsidiary, Howco Distributing Co., (“Howco”)
(collectively, the “Company”) to the United States Department of Defense and Defense Logistics Agency. The Company
has operations based in West Haven, Connecticut and Vancouver, Washington. The Company is registered with the U.S. State
Department and has met the requirements of the Arms Export Control Act and International Traffic in Arms Regulations (“ITAR”).
The registration allows for the Company to apply for export, and temporary import, of product, technical data, and services related
to defense articles. The Company continues to seek strategic acquisitions and partnerships with UAV firms that offer superior
technologies in high-growth markets, as well as acquisitions and partnerships with firms that have complementary technologies
and infrastructure.
NOTE 2
-
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES AND GOING CONCERN
Basis of Presentation and Principles of Consolidation
The accompanying consolidated financial
statements include the accounts of Drone USA, Inc. and its wholly-owned subsidiaries, Drone USA, LLC (inactive), and Howco. All
significant intercompany accounts and transactions have been eliminated in consolidation.
The accompanying unaudited condensed consolidated
financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United
States of America (“GAAP”) and the rules and regulations of the Securities and Exchange Commission for interim financial
information. Accordingly certain information and footnote disclosures normally included in financial statements in accordance with
GAAP have been omitted. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary
for a fair presentation have been included. Operating results for the nine months ended June 30, 2018 are not necessarily indicative
of the results that may be expected for the year ending September 30, 2018. The unaudited condensed consolidated financial statements
should be read in conjunction with the audited consolidated financial statements as of and for the year ended September 30, 2017
and footnotes thereto included in the Company’s Annual Report on Form 10-K filed with the SEC on December 29, 2017. The consolidated
balance sheet as of September 30, 2017 contained herein has been derived from the audited consolidated financial statements as
of September 30, 2017, but does not include all disclosures required by GAAP.
Going Concern
The accompanying consolidated financial
statements have been prepared assuming the Company will continue as a going concern, which contemplates the recoverability of
assets and the satisfaction of liabilities in the normal course of business. For the nine months ended June 30, 2018, the Company
has incurred a net loss of $3,792,303 and used cash in operations of $532,057. The working capital deficit, stockholders’
deficit and accumulated deficit was $13,145,303, $9,382,046, and $17,648,729, respectively, at June 30, 2018. Furthermore, on
April 13, 2017 the Company received a default notice on its payment obligations under the senior secured credit facility agreement
(see Note 7), defaulted on its Note Payable – Seller, and as of June 30, 2018 is subject to lawsuits and has received demands
for payment of past due amounts from several consultants and service providers. These matters raise substantial doubt about the
Company’s ability to continue as a going concern for a period of twelve months from the issuance date of this report. The
ability of the Company to continue as a going concern is dependent upon management’s ability to further implement its business
plan and raise additional capital as needed from the sales of stock or debt. The Company has been implementing cost-cutting measures
and restructuring or setting up payment plans with vendors and service providers and plans to raise equity through a private placement,
and restructure or repay its secured obligations. The accompanying unaudited condensed consolidated financial statements do not
include any adjustments that might be required should the Company be unable to continue as a going concern.
Use of Estimates
The preparation of consolidated financial
statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosures of contingent liabilities at the date of the consolidated financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates
include the allowance for bad debt on accounts receivable, reserves on inventory, valuation of goodwill and intangible assets for
impairment analysis, valuation of the earn-out liability, valuation of stock based compensation, the valuation of derivative liabilities
and the valuation allowance on deferred tax assets.
DRONE USA, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
June 30, 2018
(Unaudited)
Fair Value Measurements
The Company follows the FASB
Fair Value
Measurements
standard, as they apply to its financial instruments. This standard defines fair value, outlines a framework for
measuring fair value, and details the required disclosures about fair value measurements.
Fair value is defined as the price that
would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the
measurement date. The standard establishes a hierarchy in determining the fair value of an asset or liability. The fair value hierarchy
has three levels of inputs, both observable and unobservable. Level 1 inputs include quoted market prices for identical assets
or liabilities in an active market that the Company has the ability to access at the measurement date. Level 2 inputs are market
data, other than Level 1, that are observable either directly or indirectly. Level 2 inputs include quoted market prices for similar
assets or liabilities, quoted market prices in an inactive market, and other observable information that can be corroborated by
market data. Level 3 inputs are unobservable and corroborated by little or no market data. The standard requires the utilization
of the lowest possible level of input to determine fair value and carrying amounts of current liabilities approximate fair value
due to their short-term nature. The Company accounts for certain instruments at fair value using level 3 valuation.
|
|
At June 30, 2018
|
|
|
At September 30, 2017
|
|
Description
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Derivative liability
|
|
|
-
|
|
|
|
-
|
|
|
$
|
77,400
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
A roll forward of the level 3 valuation financial instruments
is as follows:
|
|
Derivative
Liabilities
|
|
Balance at September 30, 2017
|
|
$
|
-
|
|
Initial valuation of derivative liability recorded as derivative expense
|
|
|
70,028
|
|
Initial valuation of derivative liability recorded as debt discount
|
|
|
79,000
|
|
Gain on extinguishment of debt
|
|
|
(34,419
|
)
|
Change in fair value of derivative liability
|
|
|
(37,209
|
)
|
Balance at June 30, 2018
|
|
$
|
77,400
|
|
Inventory
Inventory consists of finished goods, which
are purchased directly from manufacturers. The Company utilizes a just in time type of inventory system where products are ordered
from the vendor only when the Company has received sales order from its customers. Inventory is stated at the lower of cost and
net realizable value on a first-in, first-out basis.
Property, Plant & Equipment
Certain items previously classified as
inventory have been reclassified as Property, Plant and Equipment. These assets are fully operational drones used as demonstration
units and were put into such use since acquisition. The units were all acquired during nine months ended June 30, 2018 and each
unit exceeds management’s threshold for capitalization of $2,000 for a single unit.
Revenue Recognition
Sales are recognized upon shipment of product
to the customer. Provisions for returns and allowances are recorded in the period the sales occur. Payments received from customers
prior to shipment of the product to them, are recorded as customer deposit liabilities.
Convertible Notes with Fixed Rate Conversion Options
The Company may enter into convertible
notes, some of which contain, predominantly, fixed rate conversion features, whereby the outstanding principal and accrued interest
may be converted by the holder, into common shares at a fixed discount to the market price of the common stock at the time of conversion.
This results in a fair value of the convertible note being equal to a fixed monetary amount. The Company records the convertible
note liability at its fixed monetary amount by measuring and recording a premium, as applicable, on the Note date with a charge
to interest expense in accordance with ASC 480 - “Distinguishing Liabilities from Equity”.
DRONE USA, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
June 30, 2018
(Unaudited)
Stock-based compensation
Stock-based compensation is accounted
for based on the requirements of ASC 718 –
“Compensation –Stock Compensation
”, which requires recognition
in the financial statements of the cost of employee and director services received in exchange for an award of equity instruments
over the period the employee or director is required to perform the services in exchange for the award (presumptively, the vesting
period). The ASC also requires measurement of the cost of employee and director services received in exchange for an award based
on the grant-date fair value of the award. The Company utilizes the Black-Sholes option pricing model and uses the simplified
method to determine expected term because of lack of sufficient exercise history. Additionally, effective January 1, 2017, the
Company adopted the Accounting Standards Update No. 2016-09 (“ASU 2016-09
”), Improvements to Employee Share-Based
Payment Accounting
. ASU 2016-09 permits the election of an accounting policy for forfeitures of share-based payment awards,
either to recognize forfeitures as they occur or estimate forfeitures over the vesting period of the award. The Company has elected
to recognize forfeitures as they occur and the cumulative impact of this change did not have any effect on the Company’s
consolidated financial statements and related disclosures.
Pursuant to ASC 505-50 –
“Equity-Based
Payments to Non-Employees”
, all share-based payments to non-employees, including grants of stock options, are recognized
in the consolidated financial statements as compensation expense over the service period of the consulting arrangement or
until performance conditions are expected to be met. Using a Black-Scholes valuation model, the Company periodically reassessed
the fair value of non-employee options until service conditions are met, which generally aligns with the vesting period of the
options, and the Company adjusted the expense recognized in the consolidated financial statements accordingly.
Derivative Liabilities
The Company has certain financial instruments
that contain embedded derivatives. The Company evaluates all its financial instruments to determine if those contracts or any potential
embedded components of those contracts qualify as derivatives to be separately accounted for in accordance with ASC 810-10-05-4
and 815-40. This accounting treatment requires that the carrying amount of any embedded derivatives be recorded at fair
value at issuance and marked-to-market at each balance sheet date. In the event that the fair value is recorded as a
liability, as is the case with the Company, the change in the fair value during the period is recorded as either income or expense.
Upon conversion, exercise or repayment, the respective derivative liability is marked to fair value at the conversion, repayment
or exercise date and then the related fair value amount is reclassified to income or expense as part of gain or loss on extinguishment.
Net Loss Per Share
Basic loss per share is calculated by dividing
the loss attributable to stockholders by the weighted-average number of shares outstanding for the period. Diluted loss per share
reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that shared in the earnings (loss) of the Company. Diluted loss per
share is computed by dividing the loss available to stockholders by the weighted average number of shares outstanding for the period
and dilutive potential shares outstanding unless such dilutive potential shares would result in anti-dilution. As of June 30, 2018
and 2017, potentially dilutive securities consisted of the following:
|
|
June 30, 2018
|
|
|
June 30, 2017
|
|
Stock options
|
|
|
44,351,200
|
|
|
|
50,851,200
|
|
Warrants
|
|
|
600,000
|
|
|
|
500,000
|
|
Related party convertible debt and accrued interest
|
|
|
68,232,097
|
|
|
|
3,633,000
|
|
Senior convertible debt
|
|
|
1,285,512,046
|
|
|
|
18,250,000
|
|
Convertible debt
|
|
|
720,512,889
|
|
|
|
-
|
|
Contingent liability – advisory fees
|
|
|
-
|
|
|
|
3,324,432
|
|
Total
|
|
|
2,119,208,232
|
|
|
|
76,558,632
|
|
Segment Reporting
The Company uses
“the management approach” in determining reportable operating segments. The management approach considers the internal
organization and reporting used by the Company’s chief operating decision maker for making operating decisions and assessing
performance as the source for determining the Company’s reportable segments. The Company’s chief operating decision
maker is the chief executive officer of the Company, who reviews operating results to make decisions about allocating resources
and assessing performance for the entire Company. As of June 30, 2018, the Company did not report any segment information since
the Company only generates sales from its subsidiary, Howco.
DRONE USA, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
June 30, 2018
(Unaudited)
Recent Accounting Pronouncements
In May 2014, the FASB issued a new accounting standard that
attempts to establish a uniform basis for recording revenue to virtually all industries financial statements, under U.S. GAAP as
amended in March 2016 and April 2016. The revenue standard’s core principle is built on the contract between a vendor and
a customer for the provision of goods and services. It attempts to depict the exchange of rights and obligations between the parties
in the pattern of revenue recognition based on the consideration to which the vendor is entitled. In order to accomplish this objective,
companies must evaluate the following five basic steps: (i) identify the contract with the customer, (ii) identify the performance
obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations
in the contract, and (v) recognize revenue when (or as) the entity satisfies a performance obligation. There are three basic transition
methods that are available - full retrospective, retrospective with certain practical expedients, and a cumulative effect approach.
Under the third alternative, an entity would apply the new revenue standard only to contracts that are incomplete under legacy
U.S. guidance at the date of initial application and recognize the cumulative effect of the new standard as an adjustment to the
opening balance of retained earnings. Prior years would not be restated and additional disclosures would be required to enable
users of the financial statements to understand the impact of adopting the new standard in the current year compared to prior years
that are presented under legacy U.S. guidance. For public business entities, this standard is effective for annual periods beginning
after December 15, 2017, and interim periods within those annual periods. Early adoption is prohibited. The Company does not believe
that the adoption of this new accounting standard to have a material impact on its consolidated financial position and results
of operations.
In February 2016, the FASB issued a new
accounting standard on leases. The new standard, among other changes, will require lessees to recognize a right-of-use asset and
a lease liability on the balance sheet for all leases. The lease liability will be measured at the present value of the lease payments
over the lease term. The right-of-use asset will be measured at the lease liability amount, adjusted for lease prepayments, lease
incentives received and the lessee’s initial direct costs (e.g. commissions). The new standard is effective for annual reporting
periods beginning after December 15, 2018, including interim reporting periods within those annual reporting periods. The adoption
will require a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest period
presented. The Company is currently evaluating the impact of this new accounting standard on its consolidated financial position
and results of operations.
In June 2018, the FASB issued ASU 2018-07,
which amends Compensation – Stock Compensation Topic 718 related to its provisions on accounting for nonemployee shares based
payments. This amendment is not effective for the Company for the fiscal year ended September 30, 2018. The Company will adopt
the provisions during fiscal year 2019.
The Company does not believe that any other
recently issued but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying consolidated
financial statements.
NOTE 3 -
INVENTORY
At June 30, 2018 and September 30, 2017,
inventory consists of finished goods which was valued at $274,870 and $681,057, respectively.
NOTE 4 -
LINE OF
CREDIT - BANK
The Company has a revolving line of credit
with a financial institution. This revolving line of credit is in the amount of $50,000, and is personally guaranteed by the Company’s
Chief Executive Officer (“CEO”). The line bears interest at a fluctuating rate equal to the prime rate plus 4.25%,
which at June 30, 2018 and September 30, 2017 was 9.25% and 8.50%, respectively. As of June 30, 2018, the balance of the line of
credit was $46,397 with $3,603 available.
NOTE 5
-
NOTE PAYABLE – SELLER
In connection with the acquisition of Howco
in September 2016, the Company issued a note payable in the amount of $900,000 to the sellers of Howco. The note matured on September
9, 2017 and bears interest at 5.50% per annum. The note requires payment of unpaid principal and interest upon maturity. The note
is secured by all assets of Howco Distribution Co. and subordinated to the Senior Secured Credit Facility discussed below. The
note is currently in default and the default interest rate is 8% per annum. At June 30, 2018 and September 30, 2017, accrued interest
on this note amounted to $107,534 and $53,682, respectively.
NOTE 6 -
CONVERTIBLE NOTES PAYABLE – RELATED PARTIES
The Company has an $840,000 convertible
note payable (“Note 1”) to a related party entity controlled by the Company’s CEO. Note 1 bears interest at an
annual rate of 7% with an original maturity date of June 11, 2017 which has been extended to December 11, 2018, at which time all
unpaid principal and interest is due. The holder of Note 1 has the option to convert the outstanding principal and accrued interest,
in whole or in part, into shares of common stock at a conversion price equal to the volume weighted average price per share of
common stock for the 30-day period prior to conversion. As of June 30, 2018 and September 30, 2017, Note 1 has not been converted
and the balance of the note was $688,444 and $688,444, and accrued interest was $113,821 and $77,776, respectively. This note is
considered a stock settled debt in accordance with ASC 480 and the fixed monetary amount is equal to the principal amount based
on the conversion formula.
The Company has a convertible note
payable (“Note 2”) with the Company’s CEO. Note 2 bears interest at an annual rate of 7% with a maturity
date of December 31, 2017, at which time all unpaid principal and interest was due. On December 15, 2017, the due date of
Note 2 was extended to July 2, 2018 (see Note 13). The holder of Note 2 has the option to convert the outstanding principal and
accrued interest, in whole or in part, into shares of common stock at a conversion price equal to the volume weighted average
price per share of common stock for the 30-day period prior to conversion. During the nine months ended June 30, 2018, the
Company borrowed $500 and repaid $92,000 on this note. As of June 30, 2018 and September 30, 2017, Note 2 has not been
converted and the balance was $30,500 and $122,000, and accrued interest was $13,313 and $10,707, respectively. This note is
considered a stock settled debt in accordance with ASC 480 and the fixed monetary amount is equal to the principal amount
based on the conversion formula.
DRONE USA, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
June 30, 2018
(Unaudited)
NOTE 7 -
CONVERTIBLE NOTES
PAYABLE AND ADVISORY FEE LIABILITIES
Senior Secured Credit Facility Note
Effective September 13, 2016 (“Effective
Date”), the Company entered into a senior secured credit facility note (the “Agreement”) with an investment fund
to provide capital for the acquisition of Howco. The Company can borrow up to $6,500,000, subject to lender approval, with an initial
convertible promissory note at closing of $3,500,000 (the “Convertible Note”). The Convertible Note bears interest
at a rate of 18% per annum, required monthly payments of $52,500 which is interest only starting on October 13, 2016 through February
13, 2017, and monthly payments, including interest and principal, of $298,341 starting on March 13, 2017 through maturity on March
13, 2018. Events of default are defined in the Agreement and Convertible Note. In the event of default the Convertible Note balance
will bear interest at 25% per annum. In connection with this Agreement, the Company was obligated to pay additional advisory fees
of $850,000 payable in the form of cash or common stock in accordance with the terms of the Agreement. The Company was also required
to reserve 7,000,000 shares of common stock related to this transaction. The reserved shares will be released upon the satisfaction
of the loan.
In the event the lender makes additional
loans under the Agreement, the Company agreed to pay additional advisory fees under similar terms as the $850,000 fee. As of June
30, 2018, the Company had issued 539,204 shares of common stock in satisfaction of the $850,000 advisory fee in accordance with
the terms of the agreement, such shares being issued in September 2016. The proceeds from the sale of the 539,204 shares were supposed
to be applied towards the $850,000 advisory fee due. Based upon the value of the shares, at the time the lender sells the shares,
the Company may be required to redeem unsold shares for the difference between the $850,000 and the lender’s sales proceeds.
Accordingly, the $850,000 was reflected as a current liability through December 31, 2017. In January 2018, in connection a settlement
agreement (see below), the accrued advisory fee was reclassified to the principal balance of the replacement Convertible Note.
Through the date of the settlement agreement and through June 30, 2018, the lender had not reported any proceeds from the sale
of these shares (see below). Prior to the settlement agreement in January 2018, notwithstanding anything contained in the Agreement
to the contrary, in the event the Lender has not realized net proceeds from the sale of Advisory Fee Shares equal to at least the
Advisory Fee by the earlier to occur of: (A) the twelve (12) month anniversary of the Effective Date; (B) the occurrence of an
Event of Default; or (C) the Maturity Date, then at any time thereafter, the Lender shall have the right, upon written notice to
the Borrower, to require that the Borrower redeem all Advisory Fee Shares then in Lender’s possession for cash equal to the
Advisory Fee, less any cash proceeds received by the Lender from any previous sales of Advisory Fee Shares, if any. In the event
such redemption notice is given by the Lender, the Borrower shall redeem the then remaining Advisory Fee Shares in Lender’s
possession for an amount of Dollars equal to the Advisory Fee, less any cash proceeds received by the Lender from any previous
sales of Advisory Fee Shares, if any, payable by wire transfer to an account designated by Lender within five (5) Business Days
from the date the Lender delivers such redemption notice to the Borrower.
The Convertible Note is only convertible
upon default or mutual agreement by both parties at a conversion rate of 85% of the lowest of the daily volume weighted average
price of the Company’s common stock during the 5 business days immediately prior to the conversion date. Once a default occurs
the Convertible Note will be accounted for as stock settled debt at its fixed monetary value and any shares issued upon conversion
are also subject to a make whole provision similar to that described above for the $850,000 advisory fee payable. On March 13,
2017 the Company defaulted on the monthly principal and interest payment of $298,341. Due to this default, as of June 30, 2017,
the Company has accounted for the embedded conversion option as stock settled debt and recorded a debt premium of $617,647 with
a charge to interest expense, and the interest rate increased to 25% (default rate). The Company has paid interest-only totaling
$224,940 since September 30, 2017.
On March 28, 2017, the Company entered
into an agreement with the above senior secured credit facility lender to receive a range of advisory services for a total of $1,200,000
with no definitive terms or length of service which was expensed in fiscal 2017 and had been recorded as an accrued liability –
advisory fees through December 31, 2017. In connection with the settlement agreement discussed below, in January 2018, the advisory
services fee payable was reclassified to the principal balance of the replacement Convertible Note.
On January 3, 2018, the Company entered
into a settlement agreement (the “Settlement Agreement”) and replacement note agreements with the investment fund related
to a senior secured credit facility note dated September 13, 2016. On the effective date of the Settlement Agreement, all amounts
owed to the investment fund aggregated $5,788,642 and consisted of a convertible promissory note of $3,500,000, accrued interest
payable of $238,642, and accrued advisory fees payable of $2,050,000. Additionally, on the effective date, the amount due of $5,788,642
was split and apportioned into 2 separate and distinct replacement notes (“Replacement Note A” and “Replacement
Note B”). Replacement Note A shall have a principal amount of $1,000,000 and Replacement Note B shall have a principal balance
of $4,788,642, both of which shall be and remained secured by the original security agreements, the pledge agreements, the guarantee
agreement and other applicable loan documents and both shall bear interest at 18% per annum. The default was not waived by this
settlement agreement. The Company originally recorded a premium on stock settled debt of $617,647 on the $3,500,000, and subsequent
to the settlement agreement recorded an additional premium on stock settled debt of $403,878 on the additional $2,288,642.
The Credit Agreement is hereby amended
such that the Maturity Date is extended to January 13, 2019 (the “Extended Maturity Date”) for replacement Note B, while
the Note A maturity date remained at March 13, 2018 but was due as of March 2017 due to the principal and interest payment default
discussed above. Notwithstanding anything contained in this Agreement to the contrary, all Obligations owing by the Company and
all other Credit Parties under the Credit Agreement, First Replacement Note B, and all other Loan Documents shall be paid in full
by the Extended Maturity Date as follows: $52,500 per month from January 13, 2018 to December 13, 2018 and the remaining principal
and accrued interest on January 13, 2019. Interest Payments made since the amendment have totaled $31,940 and are therefore not
in accord with that amendment.
DRONE USA, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
June 30, 2018
(Unaudited)
On January 30, 2018, the Replacement Note
A in the principal amount of $1,000,000 was purchased by Livingston Asset Management LLC (“Livingston”) from the original
lender. On November 15, 2017, the Company executed a Liability Purchase Term Sheet with Livingston Asset Management (“Livingston”)
under which Livingston agreed to purchase up to $10,000,000 that the Company owes to its creditors through direct purchase of
the debts from the Company’s creditors. (See below). Replacement Note A is due to Livingston and bears interest at 18% per
annum. At any time and from time to time while this Note is outstanding, but only upon: (i) the occurrence of an Event of Default
under any of the Loan Documents; or (ii) mutual agreement between the Company and the Holder, this Note may be, at the sole option
of the Holder, convertible into shares of the Company’s common stock, in accordance with the terms and conditions set forth
below. At any time while this Note is outstanding, but only upon: (i) the occurrence of an Event of Default under any of the Loan
Documents; or (ii) mutual agreement between the Company and the Holder, the Holder may convert all or any portion of the outstanding
principal, accrued and unpaid interest, and any other sums due and payable hereunder or under any other Loan Documents (such total
amount, the “Conversion Amount”) into shares of common stock of the Company (the “Conversion Shares”)
at a price equal to: (i) the Conversion Amount (the numerator);
divided by
(ii) 85% of the lowest of the daily volume weighted
average price of the Company’s common stock during the five business days immediately prior to the conversion date, which
price shall be indicated in the conversion notice (the denominator) (the “Conversion Price”). Upon liquidation by
the Holder of Conversion Shares issued pursuant to a Conversion Notice, provided that the Holder realizes a net amount from such
liquidation equal to less than the Conversion Amount specified in the relevant conversion notice (such net realized amount, the
“Realized Amount”), the Company shall issue to the Holder additional shares of the Company’s common stock equal
to: (i) the Conversion Amount specified in the relevant conversion notice;
minus
(ii) the Realized Amount, as evidenced
by a reconciliation statement from the Holder (a “Sale Reconciliation”) showing the Realized Amount from the sale
of the Conversion Shares;
divided by
(iii) the average volume weighted average price of the Company’s common stock
during the five business days immediately prior to the date upon which the Holder delivers notice (the “Make-Whole Notice”)
to the Company that such additional shares are requested by the Holder (such number of additional shares to be issued, the “Make-Whole
Shares”). In March 2018 the court approved a 3(a)(10) settlement between the Company and Livingston (see below). As of June
30, 2018, there have been two issuances under section 3(a)(10) of the Securities Act totaling 3,500,000 shares (see below), which
have been recorded at par value with an equal charge to additional paid-in capital and which value has been recorded as a liability
remaining in the convertible note balance, until these shares have been sold and reported to the Company by the lender as part
of the Make-Whole provision at which time the proceeds value of such shares will be reclassified to additional paid-in capital.
During the three months ended June 30, 2018, proceeds of $18,604 were applied to reduce the liability and credited to additional
paid in capital.
On November 15, 2017, the Company executed
a Liability Purchase Term Sheet with Livingston Asset Management (“Livingston”) under which Livingston agreed to purchase
up to $10,000,000 that the Company owes to its creditors through direct purchase of the debts from the Company’s creditors
in return for (i) a convertible note issued by the Company in the principal amount of $50,000 bearing interest of 10% per year
to cover certain legal fees and other expenses of Livingston that matures in six months and is convertible into shares of our common
stock at a 30% reduction off the lowest closing bid price for 20 trading days prior to the date of conversion, (ii) a convertible
note subject to these same terms as the convertible note issued to Livingston payable to Scottsdale Capital Advisors in the principal
amount of $15,000 as a placement agent fee and (iii) the right of Livingston to retain 30% of any negotiated reduction off the
face amount of the liability the Company owes to such creditors. The Company has accounted for the convertible promissory notes
as stock settled debt under ASC 480 and recorded a debt premium of $27,857 with a charge to interest expense. On March 7, 2018
the Company entered into a placement agent and advisory agreement with Scottsdale Capital Advisors in connection with the Livingston
liability purchase term sheet executed on November 15, 2017. The placement agent services amounted to $15,000 payable in the form
of a convertible note which was assigned by Livingston (the “Scottsdale Note”). The Scottsdale Note matures six months
from the date of issuance and shall accrue interest at the rate of 10% per annum. The $15,000 note is convertible into shares of
the Company’s common stock at a discount of 30% of the low closing bid price for the twenty trading days prior to the conversion
and is not subject to any registration rights. Debt premiums of $21,428 and $6,429 were recognized as interest expense in conjunction
with the notes.
Pursuant to the Liability Purchase Term
Sheet, following a court judgment for the liabilities purchased by Livingston, the Company will issue free trading shares of its
common stock under section 3(a)(10) of the Securities Act to Livingston in the amount of such judgment in a series of tranches
so that Livingston will not own more than 9.99% of our outstanding shares per tranche. In connection with the Livingston Liability
Purchase Term Sheet, on February 8, 2018, the Company and Livingston entered into a Settlement Agreement and Stipulation whereby
Livingston filed a complaint for payment of Replacement Note A in the principal amount of $1,000,000 (the “Claim Amount”)
pursuant to the section 3(a)(10) settlement (See above). In accordance with the terms of the Settlement Agreement, the Court was
advised of Company’s intention to rely upon the exception to registration set forth in Section 3(a)(l0) of the Act to support the
issuance of its common shares and the Court held a fairness hearing regarding the issuance (the “Hearing”) on March 12,
2018. Following entry of an Order by the Court which occurred on March 12, 2018, in settlement of the claims, the Company shall
issue and deliver to Livingston shares of its common stock (the “Settlement Shares”) in one or more tranches as necessary,
and subject to adjustment and ownership limitations as set forth in the Settlement Agreement, sufficient to generate proceeds such
that the aggregate Remittance Amount equals the Claim Amount. The parties reasonably estimate that the fair market value of the
Settlement Shares to be received by Livingston is equal to approximately $1,666,667 which is based on a discount of 40%.
DRONE USA, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
June 30, 2018
(Unaudited)
Other Convertible Debt
In July 2017, the FASB issued Accounting
Standards Update No. 2017-11 Earnings Per Share (Topic 260) Distinguishing Liabilities from Equity (Topic 480) Derivatives and
Hedging (Topic 815) (“ASU 2017-11”), which changes the classification analysis of certain equity-linked financial instruments
(or embedded features) with down round features. When determining whether certain financial instruments should be classified as
liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument
is indexed to an entity’s own stock. ASU 2017-11 also clarifies existing disclosure requirements for equity-classified instruments.
As a result, a freestanding equity-linked financial instrument (or embedded conversion option) no longer would be accounted for
as a derivative liability at fair value as a result of the existence of a down round feature. For freestanding equity classified
financial instruments, ASU 2017-11 requires entities that present earnings per share (EPS) in accordance with ASC Topic 260 to
recognize the effect of the down round feature when it is triggered. That effect is treated as a dividend and as a reduction of
income available to common shareholders in basic EPS. For the Company, ASU 2017-11 is effective for fiscal years, and interim periods
within those fiscal years, beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period.
The Company adopted this standard on October 1, 2017.
On October 5, 2017, the Company entered
into a Securities Purchase Agreement with Power Up Lending Group Ltd. (“Power Up”) under which the Company received
$78,500, net of $21,500 in fees and expenses to be recorded as a debt discount and amortized to interest expense over the Note
term, in return for issuing a convertible promissory note (the “Note”) in the principal amount of $100,000. Power Up
received a right of first refusal for the first nine months from the date of the Note to provide any debt or equity financing less
than $150,000. The Note bears interest at 10% per annum and has a maturity date of July 15, 2018. The Note may be prepaid at a
premium ranging from 112% to 137% depending on the length of time following the date of the Note. The Note is convertible after
180 days into shares of the Company’s common stock at a discount of 35% of the average of the two lowest closing bid prices
of Drone USA’s common stock 15 days prior to the date of conversion and the maximum number of shares issued to Power Up may
not exceed 4.99% of the issued and outstanding shares of the Company’s common stock. The Note is subject to customary default
provisions, including a cross default provision. The Company’s CEO entered into a confession of judgment in the principal
amount of the Note. The Company has accounted for the convertible promissory note as stock settled debt under ASC 480 and recorded
a debt premium of $53,846 with a charge to interest expense. The note and all accrued interest were fully converted into common
shares as of June 19, 2018. The note holder’s legal counsel has returned the note marked as paid. The debt premium was recognized
as $53,846 gain on debt extinguishment in the current period.
On November 9, 2017, the Company received
a first tranche payment of $75,500 under the terms of a Securities Purchase Agreement dated October 25, 2017, with Crown Bridge
Partners, LLC (“Crown Bridge”) under which the Company issued to Crown Bridge a convertible note in the principal amount
of $105,000 and a five-year warrant to purchase 100,000 shares of the Company’s common stock at an exercise price of $0.35
as a commitment fee which is equal to the product of one-third of the face value of each tranche divided by $0.35. The warrants
have full ratchet price protection and cashless exercise rights. The convertible note (the “Note”) issued to Crown
Bridge is in the principal amount of $105,000, has an original issue discount of $10,500 and issue costs of $19,000 both of which
are recorded as debt discount along with the warrant relative fair value to be amortized over the twelve month term of this tranche,
bears interest of 10% (12% default rate) per annum, and has a maturity date of 12 months from the date of each tranche of payments
under the Note with future tranches being at the discretion of Crown Bridge. The conversion rate for any conversion of unpaid principal
and interest under the Notes is at a 35% discount to the lowest market price of the shares of the Company’s common stock
within a 20 day trading period prior to the date of conversion to which an additional 10% discount will be added if the conversion
price of the Company’s common stock is less than $0.05 per share and no shares of the Company’s common stock can be
issued to the extent Crown Bridge would own more than 4.99% of the outstanding shares of the Company’s common stock and the
conversion shares contain piggy-back registration rights. The Note is subject to customary default provisions including an event
of default if the bid price of the Company’s common stock is less than its par value of $.0001 per share. The Company is
entitled to prepay the Note between 30 days after its issuance until 180 days from its issuance at amounts that increase from 112%
of the prepayment amount to 137% of the prepayment amount depending on the length of time when prepayments are made. The Company
has accounted for the convertible promissory note as stock settled debt under ASC 480 and recorded a debt premium of $56,538 with
a charge to interest expense. As of June 30, 2018 the note holder converted $37,970 of principal into common shares. At June 30,
2018 the principal balance was $67,030 and $6,151 of accrued interest.
DRONE USA, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
June 30, 2018
(Unaudited)
On November 28, 2017, the Company received
a payment of $84,000, net of issue costs of $23,500 which was recorded as a debt discount and is being amortized to interest expense
over the Note term, under the terms of a Securities Purchase Agreement dated November 20, 2017, with Labrys Fund, LP (“Labrys”)
under which Drone USA issued to Labrys (i) a convertible note (the “Note”) in the principal amount of $107,500 that
bears interest of 10% (24% default rate) per annum and (ii) 335,938 shares of the Company’s common stock as a commitment
fee which were to be returned to the Company in the event that it pays all unpaid principal and interest under the Note within
180 days of November 20, 2017. Pursuant to ASC 260, as of December 31, 2017, the 335,938 contingent shares issued under the Financial
Consulting Agreement are not considered outstanding and are not included in basic net loss per share or as potentially dilutive
shares in calculating the diluted EPS. The Note has a maturity date of August 28, 2018 and a conversion rate for any unpaid principal
and interest at a 35% discount to the market price which is defined as the average of the two lowest trading prices (defined as
the lower of the trading price or closing bid price) for the Company’s common stock during the fifteen (15) trading day period
ending on the latest complete trading day prior to the date of conversion. The conversion rate is further reduced if the Company
enters into any section 3(a)(9) or 3(a)(10) transactions under the Securities Act of 1933, as amended, if the terms of those transactions
offer greater discounts on conversion prices or a longer look back period for determining the conversion rate and under certain
other enumerated events, including if the conversion price is less than $.01 per share or if the Company loses the “bid”
price for its common stock ($0.0001 on the “ask” with zero market makers on the “bid” per Level 2 and/or
a market such as OTC Pink). In addition, if the Company issues any shares of its common stock at less than the conversion price
Labrys is entitled to full ratchet anti-dilution in such event. No shares of the Company’s common stock can be issued to
the extent Labrys would own more than 4.99% of the outstanding shares of the Company’s common stock unless Labrys agrees
to increase the ownership to 9.99%. The Company is required at all times to have authorized and reserved six times the number of
shares that is actually issuable upon full conversion of the Note (based on the conversion price of the Note in effect from time
to time). Initially, the Company must instruct its transfer agent to reserve 6,198,049 shares of its common stock. The Note is
subject to customary default provisions and also includes a cross-default provision as well as default being triggered if the Company
loses the “bid” price for its common stock ($0.0001 on the “ask” with zero market makers on the “bid”
per Level 2 and/or a market such as OTC Pink) and a $15,000 penalty if not paid by the maturity date. The Company is entitled to
prepay the Note between the issue date until 180 days from its issuance but not thereafter. In November 2017, the Company
accounted for the convertible promissory note as stock settled debt under ASC 480 and recorded a debt premium of $57,885 with a
charge to interest expense. On February 7, 2018 the Company amended the terms to the Note whereby Labrys waiving certain existing
events of default on the Note and in return will no longer be required, under any circumstances, to return the commitment shares
back to the Company’s treasury. The Company was under default for failing to maintain a market capitalization of at least
$5,000,000 on any trading day. The 335,938 commitment shares were considered issued in February 2018 which was recorded as interest
and financing costs at the then market close price of $0.09 per share for a value of $30,234.
The note holder (Labrys) converted principal
of $51,408 and accrued interest of $5,331 as of June 30, 2018, and additionally the Company recognized $15,000 of default charges
(technical defaults under note terms) as an addition to the principal amount with a corresponding charge to debt discount. Additionally,
the Company increased debt premium by $8,077 with a charge to interest expense in conjunction with the principal increase. Principal
and accrued interest was $71,092 and $781 respectively at June 30, 2018. $27,698 was recognized as gain on debt extinguishment
during the current period.
DRONE USA, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
June 30, 2018
(Unaudited)
On December 7, 2017, the Company received
a payment of $79,000, net of an original issue discount of $5,800 and issue costs of $20,200 fees which was recorded as a debt
discount which is being amortized into interest expense over the Note term, under the terms of a Securities Purchase Agreement
dated November 21, 2017, with EMA Financial, LLC (“EMA Financial”) under which the Company issued to EMA Financial
a convertible note (the “Note”) in the principal amount of $105,000 that bears interest of 10% (24% default rate)
per annum. The Note has a maturity date of December 7, 2018 and has a conversion rate for any unpaid principal and interest at
a conversion price which is the lower of (i) the closing sales price of the Company’s common stock on the trading day immediately
preceding the date of funding and (ii) a 35% discount to (a) the lowest sales price of the shares of the Company’s common
stock within a 20 day trading period including and immediately preceding the conversion date or (b) the lowest bid price on the
conversion date, whichever is lower, and the conversion shares contain piggy-back registration rights. The conversion rate is
further reduced under certain events, including if the closing sales price is less than $0.095 in which case the conversion rate
is a 50% discount under the terms set forth above. No shares of the Company’s common stock can be issued to the extent EMA
Financial would own more than 4.99% of the outstanding shares of the Company’s common stock. The Company also is required
at all times to have authorized and reserved eight times the number of shares that is actually issuable upon full conversion or
adjustment of the Note (based on the conversion price of the Note in effect from time to time) and initially must instruct its
transfer agent to reserve 6,802,000 shares of common stock in the name of EMA Financial for issuance upon conversion. The Note
is subject to customary default provisions and also includes a cross-default provision as well as default being triggered if the
Company loses the “bid” price for its common stock ($0.0001 on the “ask” with zero market makers on the
“bid” per Level 2 and/or a market such as OTC Pink). The Company is entitled to prepay the Note between the issue
date until 180 days from its issuance at a premium of 135% of the unpaid principal and interest if paid within 90 days after the
issue date and 150% thereafter. In connection with the issuance of this Note, the Company determined that the terms of the Note
contain a conversion formula that caused variations in the conversion price resulting in the treatment of the conversion option
as a bifurcated derivative to be accounted for at fair value. Accordingly, under the provisions of FASB ASC Topic No. 815-40,
“Derivatives and Hedging – Contracts in an Entity’s Own Stock”, the embedded conversion option contained
in the convertible instruments were accounted for as derivative liabilities at the date of issuance and shall be adjusted to fair
value through earnings at each reporting date. The fair value of the embedded conversion option derivatives were determined using
the Binomial valuation model. At the end of each period, the Company revalued the embedded conversion option and warrants derivative
liabilities. In connection with this Note, on the initial measurement date of December 7, 2017, the fair values of the embedded
conversion option derivative of $149,028 was recorded as derivative liabilities, $70,028 was charged to current period operations
as initial derivative expense, and $79,000 was recorded as a debt discount and is being amortized into interest expense over the
term of this Note. At the end of the period, the Company revalued the embedded conversion option derivative liability. In connection
with this revaluation, the Company recorded derivative expense (gain) of ($4,875) and $32,818 for the three and nine months ended
June 30, 2018. During the nine months ended June 30, 2018, the fair value of the derivative liability was estimated using the
Binomial valuation model with the following assumptions:
Dividend rate
|
|
|
0
|
|
Term (in years)
|
|
|
.5 year
|
|
Volatility
|
|
|
225.4
|
%
|
Risk-free interest rate
|
|
|
2.06
|
%
|
A number of terms included in the Securities
Purchase Agreement and Note issued subsequently (see paragraph below) were more favorable than the terms granted to EMA Financial
under its Securities Purchase Agreement and the EMA Note. Accordingly, on December 31, 2017, EMA Financial notified the Company
that pursuant to the EMA Securities Purchase Agreement that the EMA Note was automatically amended by increasing (i) the annual
interest rate to 12% percent and (ii) the Original Issue Discount to $9,450.
EMA converted $30,970 of principal into
common shares during the three months ended June 30, 2018, leaving $77,680 in principal and $6,546 of accrued interest at June
30, 2018. The Company recognized $34,419 of gain on debt extinguishment in the current period.
DRONE USA, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
June 30, 2018
(Unaudited)
On December 13, 2017, the Company received
a payment of $60,000, net of original issue discount fees of $7,500 and $15,000 of issue costs recorded as debt discounts and amortized
to interest expense over the Note term under the terms of a Securities Purchase Agreement dated December 8, 2017, with Morningview
Financial, LLC (“Morningview Financial”) under which the Company issued to Morningview Financial a convertible note
(the “Note”) in the principal amount of $82,500 that bears interest of 12% (18% default rate) per annum. The Note has
a maturity date of 12 months and a conversion rate for any unpaid principal and interest and a conversion price which is a 35%
discount to the lowest sales price of the shares of the Company’s common stock within a 20-day trading period including and
immediately preceding the conversion date. The conversion rate is further reduced under certain events, including if the closing
sales price is less than $0.05 in which case the conversion rate is a 45% discount under the terms set forth above. No shares of
the Company’s common stock can be issued to the extent Morningview Financial would own more than 4.99% of the outstanding
shares of the Company’s common stock. The Company also is required at all times to have authorized and reserved eight times
the number of shares that is actually issuable upon full conversion or adjustment of the Note (based on the conversion price of
the Note in effect from time to time). The Note is subject to customary default provisions and also includes a cross-default provision
as well as default being triggered if the Company’s Trading Price as that term is defined in the Note is less than $.0001
or if a money judgment, writ or similar process shall be entered or filed against the Company or any of its subsidiaries for more
than $50,000, and shall remain unvacated, unbonded or unstayed for a period of 20 days unless otherwise consented to by the holder
of the Note. Additionally, upon default and default notice by the lender, the amount immediately due shall be increased to 150%
or 200% of the outstanding principal and interest due depending upon the default provisions, plus default interest. The Company
is entitled to prepay the Note between the issue date until 180 days from its issuance at a premium of 135% of the unpaid principal
and interest. The Company has accounted for the convertible promissory note as stock settled debt under ASC 480 and recorded a
debt premium of $44,423 with a charge to interest expense. Mornningview Financial assessed charges of $20,625 under technical default
terms of the note during the month of June 2018. The Company increased principal and debt discount by $20,625 and recorded additional
premium of $11,106 in connection with the stock settled debt feature discussed above. As of June 30, 2018 Morningview had converted
principal of $31,000 into common shares. The principal and accrued interest balances were $72,125 and $5,529 at June 30, 2018.
The Company recognized $16,692 of gain on debt extinguishment during the period.
On January 3, 2018, the Company entered
into a Securities Purchase Agreement with Power Up under which the Company received $42,000, net of $11,000 in fees and expenses
which were recorded as a debt discount and amortized to interest expense over the Note term, in return for issuing a convertible
promissory note (the “Note”) in the principal amount of $53,000. Power Up received a right of first refusal for the
first nine months from the date of the Note to provide any debt or equity financing less than $150,000. The Note bears interest
at 10% per annum and has a maturity date of October 15, 2018. The Note may be prepaid at a premium ranging from 112% to 137% depending
on the length of time following the date of the Note. The Note is convertible after 180 days into shares of the Company’s
common stock at a discount of 35% of the average of the two lowest closing bid prices of the Company’s common stock 15 days
prior to the date of conversion and the maximum number of shares issued to Power Up may not exceed 4.99% of the issued and outstanding
shares of Drone USA common stock. The Note is subject to customary default provisions, including a cross default provision. The
Company is required to have authorized for issuance six times the number of shares that would be issuable upon full conversion
of the Note (assuming that the 4.99% limitation is not in effect) and based on the applicable conversion price of the Note in effect
from time to time, initially to be 3,462,355 shares of common stock. The Company has accounted for the convertible promissory note
as stock settled debt under ASC 480 and recorded a debt premium of $28,538 with a charge to interest expense. The principal balance
and accrued interest were $53,000 and $2,403 at June 30, 2018.
On January 9, 2018, the Company received
a payment of $84,000, net of $23,500 in fees and expenses which was recorded as a debt discount and amortized to interest expense
over the Note term under the terms of a Securities Purchase Agreement dated November 20, 2017, with Labrys under which the Company
issued to Labrys (i) a convertible note (the “Note”) in the principal amount of $107,500 that bears interest of 10%
per annum and (ii) 421,238 shares of the Company’s common stock as a commitment fee which was to be returned to the Company
in the event that it pays all unpaid principal and interest under the Note within 180 days of December 26, 2017. Pursuant to ASC
260, as of January 9, 2018, the 421,238 contingent shares issued under the Financial Consulting Agreement are not considered outstanding
and are not included in basic net loss per share or as potentially dilutive shares in calculating the diluted EPS. The Note has
a maturity date of nine months or September 26, 2018, and a conversion rate for any unpaid principal and interest at a 35% discount
to the market price which is defined as the average of the two lowest trading prices (defined as the lower of the trading price
or closing bid price) for the Company’s common stock during the fifteen trading day period ending on the latest complete
trading day prior to the date of conversion. The conversion rate is further reduced if the Company enters into any section 3(a)(9)
or 3(a)(10) transactions under the Securities Act of 1933, as amended, if the terms of those transactions offer greater discounts
on conversion prices or a longer look back period for determining the conversion rate and under certain other enumerated events,
including if the conversion price is less than $.01 per share or if the Company loses the “bid” price for its common
stock ($0.0001 on the “ask” with zero market makers on the “bid” per Level 2 and/or a market such as OTC
Pink). In addition, if the Company issues any shares of its common stock at less than the conversion price, Labrys is entitled
to full ratchet anti-dilution in such event. No shares of Drone USA common stock can be issued to the extent Labrys would own more
than 4.99% of the outstanding shares of the Company’s common stock unless Labrys agrees to increase the ownership to 9.99%.
The Company is required at all times to have authorized and reserved six times the number of shares that is actually issuable upon
full conversion of the Note (based on the conversion price of the Note in effect from time to time). Initially, the Company must
instruct its transfer agent to reserve 8,535,980 shares of its common stock. The Note is subject to customary default provisions
and also includes a cross-default provision as well as default being triggered if the Company loses the “bid” price
for its common stock ($0.0001 on the “ask” with zero market makers on the “bid” per Level 2 and/or a market
such as OTC Pink). The Company is entitled to prepay the Note between the issue date until 180 days from its issuance but not thereafter.
The Company has accounted for the convertible promissory note as stock settled debt under ASC 480 and recorded a debt premium of
$57,885 with a charge to interest expense. On February 7, 2018 the Company amended the terms to the Note whereby Labrys waives
specified existing events of default on the Note and in return will no longer be required, under any circumstances, to return the
commitment shares back to the Company’s treasury. The Company was under default for failing to maintain a market capitalization
of at least $5,000,000 on any trading day. The 421,238 commitment shares were considered issued in February 2018 at a price of
$0.09 per share based on the then market close price for a total value of $37,911 which was recorded as interest and financing
costs.
DRONE USA, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
June 30, 2018
(Unaudited)
During the three months ended June 30,
2018, Labrys assessed charges of $15,000 to be added to principal (and also charged to debt discount) under technical default terms
of the note. The Company increased note principal to $122,500 and added $8,077 to debt premium related to the stock settled debt
feature discussed above. Principal and accrued interest were $122,500 and $6,372 at June 30, 2018.
On January 31, 2018 the Company received a payment of $95,000,
net of $2,750 for legal fees and $7,250 for due diligence to be recorded as a debt discount and amortized to interest expense over
the Note term under the terms of a Securities Purchase Agreement dated January 31, 2018, with Auctus Fund, LLC (“Auctus”)
under which the Company issued to Auctus a convertible note (the “Note”) in the principal amount of $105,000 that bears
interest of 10% per annum. The Note has a maturity date of nine months or October 26, 2018, and a conversion rate for any unpaid
principal and interest at a 35% discount to the market price which is defined as the average of the two lowest trading prices (defined
as the lower of the trading price or closing bid price) for the Company’s common stock during the fifteen trading day period
ending on the latest complete trading day prior to the date of conversion. The conversion rate is further reduced if the Company
enters into any section 3(a)(9) or 3(a)(10) transactions under the Securities Act of 1933, as amended, if the terms of those transactions
offer greater discounts on conversion prices or a longer look back period for determining the conversion rate and under certain
other enumerated events, including if the conversion shares cannot be delivered by DWAC. In addition, if the Company issues any
shares of its common stock at less than the conversion price, Auctus is entitled to full ratchet anti-dilution in such event. No
shares of the Company’s common stock can be issued to the extent Auctus would own more than 4.99% of the outstanding shares
of the Company’s common stock unless Auctus agrees to increase the ownership to 9.99%. The Company is required at all times
to have authorized and reserved ten times the number of shares that is actually issuable upon full conversion of the Note (based
on the conversion price of the Note in effect from time to time). The Note is subject to customary default provisions and also
includes a cross-default provision as well as default being triggered if the Company loses the “bid” price for its
common stock ($0.0001 on the “ask” with zero market makers on the “bid” per Level 2 and/or a market such
as OTC Pink). The Company is entitled to prepay the Note between the issue date until 180 days from its issuance but not thereafter.
The Company has accounted for the convertible promissory note as stock settled debt under ASC 480 and recorded a debt premium of
$56,538 with a charge to interest expense. At June 30, 2018 the principal and accrued interest balances were $105,000 and $4,315.
On March 5, 2018, the Company entered into a Securities Purchase
Agreement with Power Up under which the Company received $42,000, net of $11,000 in fees and expenses to be recorded as a debt
discount and amortized to interest expense over the Note term, in return for issuing a convertible promissory note (the “Note”)
in the principal amount of $53,000. Power Up received a right of first refusal for the first nine months from the date of the Note
to provide any debt or equity financing less than $150,000. The Note bears interest at 10% per annum and has a maturity date of
December 15, 2018. The Note may be prepaid at a premium ranging from 112% to 137% depending on the length of time following the
date of the Note. The Note is convertible after 180 days into shares of the Company’s common stock at a discount of 35% of
the average of the two lowest closing bid prices of the Company’s common stock 15 days prior to the date of conversion and
the maximum number of shares issued to Power Up may not exceed 4.99% of the issued and outstanding shares of Drone USA common stock.
The Note is subject to customary default provisions, including a cross default provision. The Company is required to have authorized
for issuance six times the number of shares that would be issuable upon full conversion of the Note (assuming that the 4.99% limitation
is not in effect) and based on the applicable conversion price of the Note in effect from time to time, initially to be 13,046,154
shares of common stock. The Company has accounted for the convertible promissory note as stock settled debt under ASC 480 and recorded
a debt premium of $28,538 with a charge to interest expense. At June 30, 2018 the principal and interest were $53,000 and $1,546.
DRONE USA, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
June 30, 2018
(Unaudited)
The senior secured credit facility note
balance and convertible debt balances consisted of the following at June 30, 2018 and September 30, 2017:
|
|
June 30,
2018
|
|
|
September 30,
2017
|
|
Principal
|
|
$
|
6,456,465
|
|
|
$
|
3,500,000
|
|
Premiums
|
|
|
1,832,347
|
|
|
|
617,647
|
|
Unamortized discounts
|
|
|
(119,963
|
)
|
|
|
(338,075
|
)
|
|
|
|
8,168,849
|
|
|
|
3,779,572
|
|
Non-current
|
|
|
-
|
|
|
|
-
|
|
Current
|
|
$
|
8,168,849
|
|
|
$
|
3,779,572
|
|
For the nine months ended June 30, 2018
and 2017, amortization of debt discount amounted to $607,394 and $553,230, respectively.
NOTE 8 -
NOTE AND LOAN PAYABLE
On October 19, 2017, the Company entered
into a loan agreement with a third party entity under which the Company received approximately $232,500, net of fees and expenses
of $17,500 recorded as debt discounts and amortized to interest expense over the Note term, in return for issuing a promissory
note (the “Note”) in the principal amount of $250,000. The Note bears interest at 12% (18% default rate) per annum
and has a maturity date of April 20, 2018. The Note may be prepaid in full or in part with additional premium or penalty. The Note
is secured by certain assets of the Company’s CEO, certain assets of Howco and all of the assets of Drone USA as a junior
security interest to the first secured interest of the senior lender. Additionally, the loan is guaranteed by the Company’s
CEO. For the three and nine months ended June 30, 2018, amortization of debt discount amounted to $1,955 and $17,500 and the balance
of the note was $250,000. On April 20, 2018, the note matured and all principal and unpaid interest was due immediately. The Company
has obtained an amendment from lender changing the maturity to October 20, 2018. The Company recognized a fee of $10,000 related
to the amendment which has been recorded as financing expense.
On February 2, 2018, the Company entered
into an oral loan agreement with a vendor under which the Company reclassified $579,106 in accounts payable in return for promising
to pay the principal amount of $579,106. The loan bears interest at 18% per annum and has a maturity date of October 31, 2018.
The loan will be paid in full by the maturity date by making monthly payments of $70,000 from February 28, 2018 to September 30,
2018 and a final balance payment of approximately $63,000 by October 31, 2018. The loan does not have a default interest rate nor
prepayment penalties if the note is paid in full or in part. During the nine months ended June 30, 2018 the Company has made five
payments of principal and interest and the balance of the note was $261,142.
DRONE USA, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
June 30, 2018
(Unaudited)
NOTE 9 -
STOCKHOLDERS’ DEFICIT
Preferred Stock
As of June 30, 2018, the Company is authorized
to issue 5,000,000 shares of $.0001 par value preferred stock, with designations, voting, and other rights and preferences to be
determined by the Board of Directors of which 4,999,750 remain available for designation and issuance.
As of June 30, 2018 and September 30,
2017, the Company has designated 250 shares of $0.0001 par value Series A preferred stock, of which 250 shares are issued and
outstanding. These preferred shares have voting rights per share equal to the total number of issued and outstanding shares of
common stock divided by 0.99.
Common Stock
On April 17, 2018 the Company’s
shareholders approved an increase in authorized common stock to 1,500,000,000 from 200,000,000, which became effective upon the
filing of an amendment to the articles of incorporation with the State of Delaware on April 24, 2018.
Stock Incentive Plan
The Company established its 2016 Stock
Incentive Plan (the “Plan”) that permits the granting of incentive stock options and other common stock awards. The
maximum number of shares available under the Plan is 100,000,000 shares. The Plan is open to all employees, officers, directors,
and non-employees of the Company. Option granted under the Plan will terminate and may no longer be exercised (i) immediately upon
termination of an employee or consultant for cause or (ii) one year after termination of employment, but not later than the remaining
term of the option. As of June 30, 2018, 55,648,800 awards remain available for grant under the Plan.
Shares Issued for Services
On September 1, 2017, the Company entered
into a consulting agreement with an individual. In connection with this agreement, the Company agreed to issue 10,000 common shares
per month until the agreement is terminated. During the nine months ended June 30, 2018, an aggregate of 30,000 common shares were
issuable pursuant to the agreement. Such shares were valued on the vesting dates of October 1, 2017 and November 1, 2017 at $3,950,
or $0.20 and $0.195 per share, respectively, based on the quoted trading price. In connection with these shares, during the nine
months ended June 30, 2018, the Company recorded professional fees of $3,950. This agreement was terminated in December 2017.
On April 1, 2018, the Company entered into
a one year oral management consulting agreement with an individual. In connection with this agreement, the Company issued 4,000,000
common shares to the consultant. Such shares were valued on the vesting dates of April 1, 2018 at $296,000, or $0.074 per share
based on the quoted trading price. In connection with these shares, the Company has record prepaid professional fees of $296,000
to be recognized monthly as expense over the one-year term.
On June 19, 2018 Tysadco Partners was issued
533,333 shares of restricted common stock for services under a one-year agreement. 400,000 shares were issued as the “retainer”,
to be vested in four equal installments beginning on effective date of the agreement and 60, 120 and 180 days following the effective
date. The remaining 133,333 shares were issued for the monthly compensation arrangement. The related charges will be recognized
in Professional Fees (expense) pro rata over the service term.
Shares Issued for debt issuance costs
On November 28, 2017, pursuant to a Securities
Purchase Agreement and Convertible Note Agreement with Labrys (see Note 7), the Company considered issued to Labrys 335,938 shares
of the Company’s common stock, as a commitment fee which was to be returned to the Company in the event that it pays all
unpaid principal and interest under the Note within 180 days of November 20, 2017. Prior to the February 7, 2018 amendment discussed
below, pursuant to ASC 260 the 335,938 shares were considered contingent shares and not considered outstanding and not accounted
for due to the contingency. On February 7, 2018 the Company amended the terms of the convertible note dated November 28, 2017 whereby
the holder waives all existing events of default to date and in return shall no longer be required to return, under any circumstances,
the commitment shares back to the Company’s treasury. On February 16, 2018 the Company issued the 335,938 shares at the then
market close price of $0.09 per share for a value of $30,234 which was expensed.
DRONE USA, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
June 30, 2018
(Unaudited)
On February 16, 2018, pursuant to a Securities
Purchase Agreement and Convertible Note Agreement with Labrys (see Note 7), the Company issued to Labrys 421,238 shares of the
Company’s common stock, as a commitment fee which was to be returned to the Company in the event that it pays all unpaid
principal and interest under the Note within 180 days of December 26, 2017. Prior to the February 7, 2018 amendment discussed below,
pursuant to ASC 260 the 421,238 shares were considered contingent shares ad not considered outstanding and not accounted for due
to the contingency. On February 7, 2018 the Company amended the terms to the convertible note dated December 26, 2017 whereby the
holder waives all existing events of default to date and in return shall no longer be required to return, under any circumstances,
the commitment shares back to the Company’s treasury. On February 16, 2018 the Company issued the 421,238 shares at the then
market close price of $0.09 per share for a value of $37,911 which was expensed.
On March 14, 2018 and on June 13, 2018,
pursuant to Replacement Note A with Livingston (see Note 7), the Company issued to Livingston 1,500,000 and 2,000,000 shares of
the Company’s common stock under section 3(a)(10) of the Securities Act, which have been recorded at par value with an equal
charge to additional paid-in capital and which value has been recorded as a liability remaining in convertible note balance, until
these shares have been sold and reported to the Company. During the three months ended June 30, 2018, lender proceeds of $18,604
from the sale of Company shares were applied to reduce the liability with a credit to additional paid in capital.
Shares Issued for Conversion of Convertible
Notes
On April 11, 2018 Power Up converted $12,000
of the note dated October 17, 2017 for 283,688 common shares priced at a contracted price of $.0423.
On May 1, 2018 Power Up converted $10,000
of the note dated October 17, 2017 for 438,596 common shares priced at a contracted price of $.02283.
On May 4, 2018 Power Up converted $15,000
of the note dated October 17, 2017 for 707,547 common shares priced at a contracted price of $.02212.
On May 8, 2018 Power Up converted $12,000
of the note dated October 17, 2017 for 566,038 common shares priced at a contracted price of $.02212.
On May 17, 2018 Power Up converted $8,000
of the note dated October 17, 2017 for 575,539 common shares priced at a contracted price of $.0139.
On May 21, 2018 Crown Bridge Partners converted
$5,399 of the note dated November 9, 2017 for 550,000 common shares priced at a contracted price of $.0107.
On May 25, 2018 Crown Bridge Partners converted
$7,544 of the note dated November 9, 2017 for 750,000 common shares priced at a contracted price of $.0107.
On May 29, 2018 Power Up converted $12,000
of the note dated October 17, 2017 for 1,318,681 common shares priced at a contracted price of $.00991.
On May 30, 2018 Labrys partially converted
the note dated November 28, 2017 for $12,845 principal and $5,479 of accrued and default interest for 1,861,240 of common shares
for a contracted price of $.0098.
On June 6, 2018 Labrys partially converted
the note dated November 28, 2017 for $9,974 of note principal and $505 of default interest for 2,261,569 of common shares priced
at a contracted price of $.0046.
On June 6, 2018 Power Up converted $15,000
of the note dated October 17, 2017 for 2,419,355 common shares priced at a contracted price of
$.0062.
On June 7, 2018 Power Up converted $12,000
of the note dated October 17, 2017 for 1,935,484 common shares priced at a contracted price of $.0062.
On June 7, 2018 Crown Bridge Partners converted
$7,564 of the note dated November 9, 2017 for 2,400,000 common shares priced at a contracted price of $.0034.
DRONE USA, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
June 30, 2018
(Unaudited)
On June 8, 2018 Power Up converted $4,000
of the note dated October 17, 2017 for 1,451,613 common shares priced at a contracted price of $.0062. This conversion liquidated
all principal of the note; Power Up delivered the note marked as fully paid following this conversion.
On June 11, 2018 EMA converted $11,010
of the note dated November 21, 2017 for 2,800,000 common shares priced at a contracted price of $.0042.
On June 11, 2018 Labrys partially converted
the note dated November 28, 2017 for $11,939 of note principal and $197 of default interest for 2,626,859 of common shares priced
at a contracted price of $.0046.
On June 14, 2018 Morningview converted
$10,000 of the note dated December 13, 2017 for 2,692,308 common shares priced at a contracted price of $.0039.
On June 15, 2018 Crown Bridge Partners
converted $8,878 of the note dated November 9, 2017 for 3,607,000 common shares priced at a contracted price of $.0026.
On June 18, 2018 Morningview converted
$10,000 of the note dated December 13, 2017 for 3,129,658 common shares priced at a contracted price of $.0034.
On June 18, 2018 Labrys partially converted
the note dated November 28, 2017 for $10,448 of note principal and $577 of default interest for 3,286,236 common shares at a contracted
price of $.0034.
On June 19, 2018 EMA converted $10,840
of the note dated November 21, 2017 for 3,800,000 common shares priced at a contracted price of $.0031.
On June 21, 2018 Morningview converted
$11,000 of the note dated December 13, 2017 for 3,484,849 common shares priced at a contracted price of $.0033.
On June 26, 2018 EMA converted $9,120 of
the note dated November 21, 2017 for 3,800,000 common shares priced at a contracted price of $.0026.
On June 26, 2018 Crown Bridge Partners
converted $8,585 of the note dated November 9, 2017 for 4,732,000 common shares priced at a contracted price of $.0019.
On June 26, 2018 Labrys partially converted
the note dated November 28, 2017 for $6,232 of note principal and $407 of default interest for 4,310,851 of common shares priced
at a contracted price of $.0015.
Stock Options
For the nine months ended June 30, 2018
and 2017, the Company recorded $148,041 and $1,549,262 of compensation and consulting expense related to stock options, respectively.
Total unrecognized compensation and consulting expense related to unvested stock options at June 30, 2018 amounted to $933,166.
The weighted average period over which share-based compensation expense related to these options will be recognized is approximately
3 years.
For the nine months ended June 30, 2018,
a summary of the Company’s stock options activity is as follows:
|
|
Number of
Options
|
|
|
Weighted-
Average
Exercise Price
|
|
|
Weighted-
Average
Remaining
Contractual
Term (Years)
|
|
|
Weighted-
Average
Grant-Date
Fair Value
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at September 30, 2017
|
|
|
44,351,200
|
|
|
$
|
0.21
|
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
0
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding at June 30, 2018
|
|
|
44,351,200
|
|
|
$
|
0.21
|
|
|
|
8.43
|
|
|
$
|
-
|
|
|
$
|
0
|
|
Exercisable at June 30, 2018
|
|
|
31,709,600
|
|
|
$
|
0.20
|
|
|
|
7.11
|
|
|
$
|
-
|
|
|
$
|
0
|
|
All options were issued at an options price equal to the market
price on the date of the grant.
DRONE USA, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
June 30, 2018
(Unaudited)
Warrants
On November 9, 2017, the Company received
a first tranche payment of $75,500 under the terms of a Securities Purchase Agreement dated October 25, 2017, with Crown Bridge
under which the Company issued to Crown Bridge a convertible note in the principal amount of $105,000 and a five-year warrant to
purchase 100,000 shares of the Company’s common stock at an exercise price of $0.35 as a commitment fee which is equal to
the product of one-third of the face value of each tranche divided by $0.35. The warrants have full ratchet price protection and
cashless exercise rights (See Note 7).
For the nine months ended June 30 2018,
a summary of the Company’s warrant activity is as follows:
|
|
Number of
Warrants
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Weighted-
Average
Remaining
Contractual
Term (Years)
|
|
|
Weighted-
Average
Grant-Date
Fair Value
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at September 30, 2017
|
|
|
500,000
|
|
|
$
|
0.01
|
|
|
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Granted
|
|
|
100,000
|
|
|
|
0.35
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding at June 30, 2018
|
|
|
600,000
|
|
|
$
|
0.07
|
|
|
|
3.39
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Exercisable at June 30, 2018
|
|
|
600,000
|
|
|
$
|
0.07
|
|
|
|
3.39
|
|
|
$
|
-
|
|
|
$
|
-
|
|
NOTE
10 -
RELATED PARTY TRANSACTIONS
Since July 2017, the Company utilizes the
office space and equipment of an entity in West Haven, Connecticut related to the Company’s CEO at no cost.
The Company has certain convertible notes payable to related
parties (see Note 6).
NOTE 11 -
COMMITMENTS
AND CONTINGENCIES
Contingencies
Legal Matters
The Company has filed a lawsuit against
the former Chief Strategy Officer and member of the Board, who was terminated for cause on July 7, 2017, for breach of contract,
breach of the covenant of good faith and fair dealing, and violation of the California Business & Professions Code. On July
31, 2017, the former Chief Strategy Officer and member of the Board subsequently filed a counterclaim against the Company seeking,
among other items, damages in excess of $900,000, prejudgment interest, and reimbursement of legal fees. The Company believes
it will prevail in this matter and therefore has not accrued any additional liabilities. Prior to the termination and as of June
30, 2018 and September 30, 2017, there was accrued a 401(k) matching contribution of $9,230 and a $100,000 sign on bonus.
On February 6, 2018 the Company sent
a letter to the previous owners of Howco Distributing Co. (“Howco”) alleging that they made certain financial
misrepresentations under the terms of the Stock Purchase Agreement by which the Company acquired control of Howco during
2016. The Company claimed that The Company the previous owners failed to reveal an $800,000 which resulted in a purchase
price overpayment of approximately $370,000. On March 13, 2018 the Company filed a lawsuit against the previous owners by
issuing a summons. On April 12, 2018, the Company received the Defendants’ answer. The case is in the discovery
phase.
In connection with the merger with Texas
Wyoming Drilling, Inc., a vendor has a claim for unpaid bills of approximately $75,000 against the Company. The Company and its
legal counsel believe the Company is not liable for the claim pursuant to its indemnification clause in the merger agreement.
Settlements
During the quarter ended June 30, 2017,
the Company received demands for non-payment of five months of rent for its New York location. In July 2017, the Company vacated
the New York premises. Subsequent to June 30, 2017, a lawsuit was filed in the Supreme Court of the State of New York for an alleged
breach of a Service Agreement for approximately $63,000 in connection with the lease the Company entered into for its former office
space in New York. As of September 30, 2017, the Company accrued into accounts payable approximately $63,000 pursuant to ASC 420-10-30
“Cost to Terminate an Operating Lease”. In October 2017, the Company entered into a settlement agreement with the New
York lease landlord and paid $30,000 in full settlement and recorded a settlement gain of $33,361.
DRONE USA, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
June 30, 2018
(Unaudited)
On August 9, 2017, a lawsuit was filed by an investor relations
firm against the Company in the Supreme Court, Westchester County (Index No. 61772/2017). The complaint alleged two causes of action,
one for goods and services furnished and one for an account stated, in the amount of $74,325. The plaintiff obtained a default
judgment. The Company has filed an Order to Show Cause to vacate the default judgment on the grounds that the service of the complaint
was invalid. The court granted the Company’s Order to Show Cause on December 19, 2017 and set the hearing on the Order to
Show Cause for January 12, 2018. At December 31, 2017, $68,544 was accrued in accounts payable. On February 14, 2018 the Company
entered into a stipulation agreement with the investor relations firm which settled the amount due at $20,000 if payment was made
by February 21, 2018. The lump sum payment was made on February 16, 2018 and a gain on extinguishment of debt of $48,544 was recorded.
On January 29, 2018, the Company entered
into a settlement agreement and mutual release with a vendor who had provided public relations and other consulting services whereby
the Company shall pay to this vendor an aggregate amount of $60,000 of which $30,000 was paid on February 2, 2018. Additionally,
the Company shall pay ten monthly payments of $3,000 per month beginning on February 29, 2018. Additionally, the vendor returned
400,000 common shares of the Company’s common stock which will be cancelled upon satisfaction of the liability. The liability
is currently recorded at $21,000 and the Company is meeting with the former vendor to settle the liability.
Commitments
Exclusive Agreement
On June 1, 2016, the
Company entered into an exclusive agreement with a Brazilian entity in the drone technology market. The agreement provides that
the Company will acquire exclusive rights to this entity’s UAV technology and intellectual property that includes research
and development efforts completed by this entity. The Company will also secure exclusive export and representation rights to this
entity’s products along with the non-binding option to acquire full ownership of this entity for $1 million should the companies
agree at a later date it would be in the best interest of both businesses. As consideration for this agreement, the Brazilian entity
CEO was appointed to the position of Chief Technology Officer of the Company and granted an option for 2,000,000 shares of common
stock.
Consulting Agreements
In June 2017, the Company entered into
an agreement with an investment bank to provide placement agent services on an exclusive basis as it relates to a private placement
(“the placement”). The agreement calls for the investment bank to receive 9% of the gross proceeds of the placement
and 2.5% warrant coverage of the amount raised. The warrants shall entitle the investment bank to purchase securities of the Company
at a purchase price equal to 110% of the implied price per share of the placement or 100% of the public market closing price of
the Company’s common stock on the date of the placement, whichever is lower. The warrants shall have a term of five years
after the closing of the placement. The agreement expired on September 30, 2017 but the terms of the agreement remains effective
for previously introduced investors for capital raised during the nine months ended June 30, 2018.
DRONE USA, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
June 30, 2018
(Unaudited)
Lease Obligations
The Company entered into an agreement with
a manufacturer in Pismo Beach, California. The agreement provides for certain services to be provided by the manufacturer as needed
by the Company. The agreement has an initial term of three years with one year renewals. In connection with this agreement, the
Company has agreed to sublease space based in San Luis Obispo, California from the manufacturer for the purposes of the development
and manufacturing of unmanned aerial vehicles. The lease provides for base monthly rent of approximately $15,000 for the initial
term to be increased to $16,500 per month upon extension. The lease term begins February 1, 2017 and expires January 31, 2019 with
the option to extend the term an additional 24 months. However, the Company never took possession of the premises and in July 2017,
the Company made a decision to not take possession of the premises. The Company is in default of the rent payments and had received
verbal demand of payments. As of June 30, 2018, the Company has not made any of the required monthly rent payments in connection
with this agreement. As of June 30, 2018 and September 30, 2017, the Company had accrued into accounts payable the remaining amounts
due under the term of the lease for a total accrual of $360,000 pursuant to ASC 420-10-30.
In May 2017, the Company extended Howco’s
office lease through May 30, 2020. The lease requires monthly payments including base rent plus CAM with annual increases. Future
minimum lease payments under non-cancelable operating leases at June 30, 2018 are as follows:
Years ending September 30,
|
|
Amount
|
|
2018
|
|
|
14,913
|
|
2019
|
|
|
60,137
|
|
2020
|
|
|
40,737
|
|
Total minimum non-cancelable operating lease payments
|
|
$
|
115,787
|
|
For the nine months ended June 30, 2018
and 2017, rent expense amounted to $42,113 and $46,742, respectively. The current period rental expense is lower due in part to
a sub-lease agreement.
Purchase commitments
The Company entered into agreements to
act as a distributor or dealer with third party drone suppliers. Some of these agreements require the Company to maintain certain
levels of inventory of the supplier’s products. At June 30, 2018 no inventory was required to be held under the terms of
these arrangements.
Profit Sharing Plan (for Howco)
On April 13, 2018, Howco Distributing announced
to its employees a company-wide profit sharing program. In fiscal year 2018, Howco Distributing, will redistribute the total of
ten-percent of the company’s net income. The employee profit is equal to their annual salary divided by the Company’s
total annual payroll and multiplied by 10% of net income for the fiscal year.
NOTE 12 -
CONCENTRATIONS
Concentration of Credit Risk
The Company maintains its cash in bank
and financial institution deposits that at times may exceed federally insured limits. At June 30, 2018, cash in bank did not exceed
the federally insured limits of $250,000. The Company has not experienced any losses in such accounts through June 30, 2018.
DRONE USA, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
June 30, 2018
(Unaudited)
Economic Concentrations
With respect to customer concentration,
three customers accounted for approximately 55%, 17%, and 11% , of total sales for the nine months ended June 30, 2018. Three customers
accounted for approximately 66%, 12% and 12% of total sales for the nine months ended June 30, 2017.
With respect to accounts receivable concentration,
four customers accounted for approximately 94% of total accounts receivable at June 30, 2018 at 63%, 19%, 8% and 4%. Three customers
accounted for approximately 59% total accounts receivable at September 30, 2017.
With respect to supplier concentration, there
were two suppliers accounted for approximately 41% and 12% of total purchases for the nine months ended June 30, 2018. Two suppliers
accounted for approximately 47% and 13% of total purchases for the nine months ended June 30, 2017.
With respect to accounts payable concentration,
two suppliers accounted for approximately 18% and 13% of total accounts payable at June 30, 2018. Two suppliers accounted for
approximately 42% and 11% of total accounts payable at September 30, 2017.
With respect to foreign sales, it totaled
approximately $36,000 for the nine months ended June 30, 2018. Foreign sales totaled approximately $153,000 for the nine months
ended June 30, 2017.
NOTE 13 -
SUBSEQUENT
EVENTS
Loan Amendment - Related Party
On July 1, 2018 the Company and the CEO (note
holder) extended the maturity date of “Note 2” issued July 1, 2016 from its amended maturity date of July 2, 2018
to the new maturity date of December 31, 2018 (see Note 6).
Shares Issued for Services
On July 12, 2018 150,000 vested common shares
were issued to a consultant. The shares were valued at the market price of $.0059 per share on the day of the grant. The value
of $885 was charged to professional fees on issuance.
On July 12, 2018 1,500,000 vested common shares
were issued to a financial advisory consultant. The shares were valued at the market price of $.0059 per share on the day of the
grant. The value of $8850 was charged to professional fees on issuance.
On July 12, 2018 150,000 vested common shares
were issued to a consultant. The shares were valued at the market price of $.0059 per share on the day of the grant. The value
of $885 was charged to professional fees on the date on issuance.
On August 6, 2018 125,000 vested common shares
were issued to a consultant. The shares were valued at the market price of $0.0096 per share on the day of the grant. The value
of $1,200 was charged to professional fees on issuance.
Shares Issued for Conversion of Convertible
Notes
During the period from July 1, 2018 through
August 8, 2018 the company received multiple notices of conversion from several convertible note holders.
Power Up Lending Group Ltd. fully converted
its $53,000 note dated January 3, 2018 for 19,665,024 common shares.
EMA Financial LLC fully converted the balance
due on its $105,000 note dated December 17, 2017 for 41,693,963 common shares.
Morningview Financial, LLC fully converted
the balance due on its $82,500 note dated December 17, 2017 for 46,920,191 common shares.
Labrys Fund, LP and its successors in assignment
(GHS) fully converted the balances due on its $107,500 note dated November 11, 2017 and its second $107,500 note dated December
26, 2017 for 186,730,318 and 35,389,593 common shares.
Since July 1, 2018 Livingston Asset Management
LLC has fully converted its $50,000 note (and accrued interest) dated November 11, 2017. The Company issued 18,162,608 common shares
for the conversions.
Since July 1, 2018 Auctus Fund, LLC converted
$68,005 of principal and $5,345 of accrued interest on its $105,000 note dated January 26, 2018. The Company issued 43,227,215
common shares for these conversions, leaving a principal balance of $36,994 on the note.
Shares Issued under 3(a)(10)
Livingston Asset Management was issued
a total of 38,124,000 common shares under the 3(a)(10) debt settlement agreement since July 1, 2018.
Shares Issued to Employees
On July 15, 2018 the Company issued 2,000,000
common shares to Matthew Wiles, Vice President of Business Operations at the Company’s wholly-owned subsidiary, Howco. The
shares were valued based on the market price of $0.0075 per share on the date of the grant at $15,000, and the shares vest on
August 6, 2018. The shares were issued as compensation for his pending Board of Directors membership. The value of the shares
will be expensed as director fees on August 6, 2018 since they have vested.
Shares to be Issued for Service
The Company is obligated to issue 571,428
and 444,444 restricted common shares priced at June 30 and July 31, 2018 for investor relation services for the months then ended.