Notes
to Financial Statements
March
31, 2018
NOTE
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ORGANIZATION
(A)
Basis of Presentation
PetVivo
Holdings, Inc. (the “Company”) was incorporated in Nevada under a former name in 2009, and entered its current business
in 2014 through a stock exchange reverse merger with PetVivo, Inc., a Minnesota corporation. This merger resulted in Minnesota
PetVivo becoming a wholly-owned subsidiary of the Company.
In
April 2017, the Company acquired another Minnesota corporation, Gel-Del Technologies, Inc., through a statutory merger, which
is also a wholly-owned subsidiary of the Company.
The
accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted
in the United States (“GAAP”) and pursuant to the rules and regulations of the SEC.
The
Company is in the business of distribution of medical devices and biomaterials for the treatment of afflictions and diseases in
animals. The Company’s management, development, and other operations are conducted from its headquarter facilities in suburban
Minneapolis, Minnesota.
(B)
Principles of Consolidation
The
accompanying consolidated financial statements include the accounts of the Company and its two wholly-owned Minnesota corporations.
All intercompany accounts have been eliminated upon consolidation.
The
accounting for the acquisition of Gel-Del Technologies, Inc. began with the Security Exchange Agreement on April 10, 2015 which
was uncompleted, and as adjusted for completion pursuant to the Agreement and Plan of Merger effective April 10, 2017 (the “Merger”).
To complete the Merger, the Company issued 5,450,000 shares valued at market at $0.40 per share, which equaled $2,180,000.
(C)
Use of Estimates
In
preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates
and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements and revenues and expenses during the reported period. Actual results could differ from
those estimates. Significant estimates include estimated useful lives and potential impairment of property and equipment, estimate
of fair value of share-based payments and derivative instruments and recorded debt discount, valuation of deferred tax assets
and valuation of in-kind contribution of services and interest.
(D)
Cash and Cash Equivalents
The
Company considers all highly-liquid, temporary cash investments with an original maturity of three months or less to be cash equivalents.
At March 31, 2018, and March 31, 2017 the Company had no cash equivalents.
(E)
Concentration-Risk
The
Company maintains its cash with various financial institutions, which at times may exceed federally insured limits.
(F)
Property & Equipment
Property
and equipment are recorded at cost. Expenditures for major additions and betterments are capitalized. Maintenance and repairs
are charged to operations as incurred. Depreciation is computed by the straight-line method (after taking into account their respective
estimated residual values) over the assets estimated useful life of (3) years for equipment, (5) years for automobile, and (7)
years for furniture and fixtures.
(G)
Patents and Trademarks
The
Company capitalizes direct costs for the maintenance and advancement of their patents and trademarks and amortizes these costs
over a useful life of 60 months.
(H)
Loss Per Share
Basic
loss per share is computed by dividing net loss by weighted average number of shares of common stock outstanding during each period.
Diluted loss per share is computed by dividing net loss by the weighted average number of shares of common stock, common stock
equivalents and potentially dilutive securities outstanding during the period.
The
Company has 3,486,709 warrants outstanding as of March 31, 2018 with varying exercise prices ranging from $3.50 to $0.30 per share.
The weighted average exercise price for these warrants is $0.59 per share. These warrants are antidilutive and have been excluded
from the weighted average number of shares.
(I)
Revenue Recognition
The
Company will recognize revenue on arrangements in accordance with FASB ASC No. 605, “Revenue Recognition”. In all
cases, revenue is recognized only when the price is fixed and determinable, persuasive evidence of an arrangement exists, the
service is performed and collectability of the resulting receivable is reasonably assured. Revenues consist of Kush™ product
sales to veterinary clinics.
(J)
Research and Development
The
Company expenses research and development costs as incurred.
(K)
Fair Value of Financial Instruments
The
Company applies the accounting guidance under FASB ASC 820-10,
“Fair Value Measurements”
, as well as certain
related FASB staff positions. This guidance defines fair value as the price that would be received from selling an asset or paid
to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair
value measurements for assets and liabilities required to be recorded at fair value, the Company considers the principal or most
advantageous market in which it would transact business and considers assumptions that marketplace participants would use when
pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance.
The
guidance also establishes a fair value hierarchy for measurements of fair value as follows:
|
●
|
Level
1 - quoted market prices in active markets for identical assets or liabilities.
|
|
|
|
|
●
|
Level
2 - inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in active markets
for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active,
or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the
assets or liabilities.
|
|
|
|
|
●
|
Level
3 - unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the
assets or liabilities.
|
The
Company’s financial instruments consist of accounts payable, accrued expenses, notes payable, notes payable - related party,
loan payable - related party and convertible notes payable. The carrying amount of the Company’s financial instruments approximates
their fair value as of March 31, 2018 and March 31, 2017, due to the short-term nature of these instruments.
In
instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy,
the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input
that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular
input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.
The valuation of the Company’s notes recorded at fair value is determined using Level 3 inputs, which consider (i) time
value, (ii) current market and (iii) contractual prices.
The
following table represents the Company’s assets and liabilities by level measured at fair value on a recurring basis at
March 31, 2018 and March 31, 2017:
Date
|
|
Description
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
March
31, 2018
|
|
Notes
payable at fair value
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
March
31, 2017
|
|
Notes
payable at fair value
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
The
following assets and liabilities are measured on the consolidated balance sheets at fair value on a recurring basis utilizing
significant unobservable inputs or Level 3 assumptions in their valuation. The following tables provide a reconciliation of the
beginning and ending balances of the liabilities:
|
|
Fair
Value
April 1, 2016
|
|
|
Change
in Fair Value
|
|
|
New
Convertible Notes
|
|
|
Conversions
|
|
|
Fair
Value
March 31, 2017
|
|
Notes
payable at fair value
|
|
$
|
31,689
|
|
|
$
|
3,311
|
|
|
$
|
-0-
|
|
|
$
|
(35,000
|
)
|
|
$
|
-0-
|
|
|
|
Fair
Value
April 1, 2017
|
|
|
Change
in Fair Value
|
|
|
New
Convertible Notes
|
|
|
Conversions
|
|
|
Fair
Value
March 31, 2018
|
|
Notes
payable at fair value
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
The
Company’s financial instruments consist of accounts receivable, accounts payable, accrued expenses, notes payable, notes
payable - related party, and convertible notes payable. The carrying amount of the Company’s financial instruments approximates
their fair value as of March 31, 2018 and March 31, 2017, due to the short-term nature of these instruments and the Company’s
borrowing rate of interest.
In
instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy,
the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input
that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular
input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.
The valuation of the Company’s notes recorded at fair value is determined using Level 3 inputs, which consider (i) time
value, (ii) current market and (iii) contractual prices.
The
Company had no assets and liabilities measured at fair value on a recurring basis at March 31, 2018 and March 31, 2017.
(L)
Stock-Based Compensation - Non-Employees
Equity
Instruments Issued to Parties Other Than Employees for Acquiring Goods or Services
The
Company accounts for equity instruments issued to parties other than employees for acquiring goods or services under guidance
of Sub-topic 505-50 of the FASB Accounting Standards Codification (“Sub-topic 505-50”).
Pursuant
to ASC Section 505-50-30, all transactions in which goods or services are the consideration received for the issuance of equity
instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument
issued, whichever is more reliably measurable. The measurement date used to determine the fair value of the equity instrument
issued is the earlier of the date on which the performance is complete or the date on which it is probable that performance will
occur. If the Company is a newly formed corporation or shares of the Company are thinly traded the use of share prices established
in the Company’s most recent private placement memorandum (“PPM”), or weekly or monthly price observations would
generally be more appropriate than the use of daily price observations as such shares could be artificially inflated due to a
larger spread between the bid and asked quotes and lack of consistent trading in the market.
The
fair value of share options and similar instruments is estimated on the date of grant using a Black-Scholes option-pricing valuation
model. The ranges of assumptions for inputs are as follows:
|
●
|
Expected
term of share options and similar instruments: Pursuant to Paragraph 718-10-50-2(f)(2)(i) of the FASB Accounting Standards
Codification the expected term of share options and similar instruments represents the period of time the options and similar
instruments are expected to be outstanding taking into consideration of the contractual term of the instruments and holder’s
expected exercise behavior into the fair value (or calculated value) of the instruments. The Company uses historical data
to estimate holder’s expected exercise behavior. If the Company is a newly formed corporation or shares of the Company
are thinly traded the contractual term of the share options and similar instruments is used as the expected term of share
options and similar instruments as the Company does not have sufficient historical exercise data to provide a reasonable basis
upon which to estimate expected term.
|
|
|
|
|
●
|
Expected
volatility of the entity’s shares and the method used to estimate it. Pursuant to ASC Paragraph 718-10-50-2(f)(2)(ii)
a thinly-traded or nonpublic entity that uses the calculated value method shall disclose the reasons why it is not practicable
for the Company to estimate the expected volatility of its share price, the appropriate industry sector index that it has
selected, the reasons for selecting that particular index, and how it has calculated historical volatility using that index.
The Company uses the average historical volatility of the comparable companies over the expected contractual life of the share
options or similar instruments as its expected volatility. If shares of a company are thinly traded the use of weekly or monthly
price observations would generally be more appropriate than the use of daily price observations as the volatility calculation
using daily observations for such shares could be artificially inflated due to a larger spread between the bid and asked quotes
and lack of consistent trading in the market.
|
|
|
|
|
●
|
Expected
annual rate of quarterly dividends. An entity that uses a method that employs different dividend rates during the contractual
term shall disclose the range of expected dividends used and the weighted-average expected dividends. The expected dividend
yield is based on the Company’s current dividend yield as the best estimate of projected dividend yield for periods
within the expected term of the share options and similar instruments.
|
|
|
|
|
●
|
Risk-free
rate(s). An entity that uses a method that employs different risk-free rates shall disclose the range of risk-free rates used.
The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods within the
expected term of the share options and similar instruments.
|
Pursuant
to Paragraphs 505-50-25-8 and 505-50-25-9, an entity may grant fully vested, non-forfeitable equity instruments that are exercisable
by the grantee only after a specified period of time if the terms of the agreement provide for earlier exercisability if the grantee
achieves specified performance conditions. Any measured cost of the transaction shall be recognized in the same period(s) and
in the same manner as if the entity had paid cash for the goods or services or used cash rebates as a sales discount instead of
paying with, or using, the equity instruments. A recognized asset, expense, or sales discount shall not be reversed if a share
option and similar instrument that the counterparty has the right to exercise expires unexercised.
(M)
Income Taxes
The
Company accounts for income taxes under Accounting Standards Codification (ASC) Topic 740. Deferred tax assets and liabilities
are determined based upon differences between financial reporting and tax bases of assets and liabilities and are measured using
the enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is provided
when it is more likely than not that some portion or all of a deferred tax asset will not be realized.
The
Company adopted the provisions of ASC Topic 740, on January 1, 2007. Previously, the Company had accounted for tax contingencies
in accordance with Statement of Financial Accounting Standards No. 5,
Accounting for Contingencies.
As required by ASC
Topic 450, the Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax
authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not
threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood
of being realized upon ultimate settlement with the relevant tax authority. At the adoption date, the Company applied ASC Topic
740 to all tax positions for which the statute of limitations remained open. As a result of the implementation of ASC Topic 740,
the Company did not recognize any change in the liability for unrecognized tax benefits.
The
Company is not currently under examination by any federal or state jurisdiction.
The
Company’s policy is to record tax-related interest and penalties as a component of operating expenses.
(L)
Recent Accounting Pronouncements
The
FASB issued ASC 606 as guidance on the recognition of revenue from contracts with customers in May 2014 with amendments in 2015
and 2016. Revenue recognition will depict the transfer of promised goods or services to customers in an amount that reflects the
consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance also requires disclosures
regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The guidance
permits two methods of adoption: retrospectively to each prior reporting period presented, or retrospectively with the cumulative
effect of initially applying the guidance recognized at the date of initial application (the cumulative catch-up transition method).
The Company will adopt the guidance on April 1, 2018 and apply the cumulative catchup transition method. The transition adjustment
to be recorded to stockholders’ equity upon adoption of the new standard is not expected to be material. The Company does
not expect the adoption on this new standard to have any material effect upon the financial statements.
In
February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) to increase transparency and comparability among organizations
by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements.
Topic 842 affects any entity that enters into a lease, with some specified scope exemptions. The guidance in this ASU supersedes
Topic 840, Leases. The core principle of Topic 842 is that a lessee should recognize the assets and liabilities that arise from
leases. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability)
and a right-of-use (“ROU”) asset representing its right to use the underlying asset for the lease term. For public
companies, the amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods
within those fiscal years. The Company expects to recognize ROU assets and related obligations upon adoption of ASU 2016-02. The
Company does not expect the adoption on this new standard to have any material effect upon the financial statements.
All
other newly issued accounting pronouncements but not yet effective have been deemed either immaterial or not applicable.
NOTE
2 - RELATED PARTY PAYABLE
At
March 31, 2018, the company is obligated for officers’ notes payable, accounts payable and accrued interest in the total
amount of $193,099. The note payable to officer terms are accrual of interest at eight percent annually, with a stipulation including
if the Company receives additional financing in the amount greater than $1,400,000, the Company will immediately pay the officer
the principal amount of the note along with all interest due.
At
March 31, 2017, the Company was obligated for unpaid officer salaries and advances totaling $197,055.
NOTE
3 – NOTES PAYABLE AND LINE OF CREDIT
As
of March 31, 2018 the Company had one outstanding note payable and accrued interest in the amount of $103,872 due to a Director
of the Company, David Masters, and no lines of credit open.
As
of March 31, 2017 the Company was obligated on the following notes:
1.
|
|
Third
Party Individuals
|
|
|
67,826
|
|
2.
|
|
Bank
Credit Line
*
|
|
|
63,421
|
|
|
|
Total
|
|
$
|
131,247
|
|
*As
of November 26, 2017, Gel-Del Technologies, Inc. was delinquent in the monthly payments of the Bank Credit Line and a Bank Credit
Card through the same banking institution. The Company negotiated a settlement with the bank regarding the Bank Credit Line having
an outstanding balance of $50,000 and the Bank Credit Card having an outstanding balance of $10,000; both were originally incurred
by Gel-Del Technologies, Inc. The bank agreed to a settlement payment of $38,000 for the combined balance of $60,000. A payment
plan of $8,000 due on September 29, 2017 to be applied to the Bank Credit Line in the amount of $6,666 and $1,333 applied to the
credit card balance. A payment of $10,000 due on October 15, 2017 to be applied to the Bank Credit Line in the amount of $ 8,333
and $1,666 applied to the credit card balance. A payment of $10,000 due on November 15, 2017 to be applied to the Bank Credit
Line in the amount of $ 8,333 and $1,666 applied to the credit card balance. A final payment of $10,000 due on December 15, 2017
to be applied to the Bank Credit Line in the amount of $8,333 and $1,666 applied to the credit card balance.
At
March 31, 2017 there was $11,579 of unused credit on a bank line of credit of $75,000. Interest was accrued at 6.5%. The payment
plan outlined above was completed in December of 2017.
The
Company was indebted on a note bearing interest at prime plus 5.5% to a bank with a monthly payment of $2,786 and expiring in
January, 2017. All assets of Gel-Del were pledged as collateral. On February 23, 2017, the Company paid this note in full and
received a release of the collateral pledge in all assets of Gel-Del.
At
March 31, 2017 the Company was indebted to Robert Rudelius in the amount of $55,326 which consisted of a convertible note of $50,000
and accrued interest of $5,326; the interest rate on this loan was 8%. This note and its accrued interest totaling $66,231 was
converted into 94,614 shares of common stock in February of 2018 at a conversion price of $.70/share.
At
March 31, 2017 the Company was indebted to Stanley Cruden in the amount of $105,000 which consisted of a convertible note of $105,000
and accrued interest of $-0-; the interest rate on this loan was 12%. This note and its accrued interest totaling $115,736 was
converted in February of 2018 into 330,673 shares of common stock at a conversion price of $.35/share and 330,673 warrants to
purchase shares of common stock at $.50/share with a three-year term.
At
March 31, 2017 the Company was indebted to Scott Johnson in the amount of $7,500; the interest rate on this loan was 6% and a
due date of September 2, 2018. This note and its accrued interest totaling $7,975 was converted into 22,786 shares of common stock
in November of 2017 at a conversion price of $.35/share.
At
March 31, 2017 the Company was indebted to Gary Bryant in the amount of $5,000; the interest rate on this loan was 6% and a due
date of December 14, 2018. This note and its accrued interest totaling $5,234 was converted into 14,955 shares of common stock
in November of 2017 at a conversion price of $.35/share.
NOTE
4 - GOING CONCERN
As
reflected in the accompanying consolidated financial statements, the Company had no significant revenue, negative working capital,
negative equity and recurring material losses. These factors raise substantial doubt about the Company’s ability to continue
as a going concern.
Management
intends to raise additional funds either through a private placement or public offering of its equity securities. Management believes
that the actions presently being taken to further implement its business plan will enable the Company to continue as a going concern.
While the Company believes in its viability to raise additional funds, there can be no assurances to that effect. The ability
of the Company to continue as a going concern is dependent upon the Company’s ability to further implement its business
plan and raise additional funds.
These
financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
NOTE
5 - COMMON STOCK AND WARRANTS
Common
Stock
During
the fiscal year ended March 31, 2018 the Company issued 8,957,769 shares of common stock including:
i)
5,450,000 shares valued at $0.40/share issued pro rata to shareholders of Gel-Del incident to our Gel-Del merger (See Note 5);
ii)
1,418,528 shares issued to executive officers to satisfy accrued salaries of $867,192;
iii)
1,620,000 shares issued to accredited investors for cash of $567,000;
iv)
37,741 shares issued to two individuals to reduce $13,172 of debt;
v)
431,500 shares issued to service providers for business management and financial consulting services valued at $214,825.
Also,
during the year ended March 31, 2018 the Company’s President, John Lai, entered into an escrow agreement with the Company’s
CEO, Wesley Hayne, whereby John transferred via escrow 1,250,000 shares valued at $370,000 of his personally-owned common stock
to Wesley as incentive for performing the tasks of CEO. All 1,250,000 shares were escrowed to be received by Mr. Hayne ratably
during his two-year employment service. This transaction was recorded in fiscal quarter four of the year ended March 31, 2018
as an expense on behalf of the company and recorded against Additional Paid in Capital.
During
the fiscal year ended March 31, 2017 the Company issued 1,389,667 shares of common stock including:
i)
66,500 shares issued to accredited investors for cash of $99,750;
ii)
437,500 shares issued to service providers for services valued at $382,500;
iii) 788,325 shares were issued to debt holders to satisfy debt of $1,575,649;
iv) 97,342 shares were issued to accredited investors for interest valued at $151,476.
Warrants
During
the fiscal year ended March 31, 2018 the Company granted warrants to purchase a total of 3,413,459 shares of common stock including:
i)
warrants for 353,459 shares to lenders converting outstanding debt to common stock, fully vested, and exercisable over a three-year
term at $0.50/share;
ii)
warrants for 340,000 shares to various service providers for operational consulting and professional advisory services, fully
vested, and exercisable over a five-year term at $1.00/share;
iii)
warrants for 60,000 shares to a law firm for patent services, vested against billing, and exercisable over a three-year term at
$1.00/share;
iv)
warrants for 110,000 shares to key employees as incentive grants, fully vested, and exercisable over a five-year term at $1.00/share;
v)
warrants for 1,500,000 shares to accredited investors who purchased units in a private placement, fully vested, and exercisable
over a three-year term at $0.50/share;
vi)
warrants with five-year terms for 300,000 shares to three independent directors (100,000 apiece) for their agreements to become
a member of the Board of Directors, vesting quarterly over a two-year period, with 200,000 shares exercisable at $0.35/share and
100,000 shares exercisable at $1.00/share, this resulted in compensation expense valued using the Black-Scholes pricing model
of $60,987 during the year ended March 31, 2018; and
vii)
warrants for 750,000 shares to the President of the Company for past management services, vesting quarterly over a two-year period,
and each quarterly vested portion exercisable at $0.30 per share for a three-year term from its vesting date, this resulted in
compensation expense valued using the Black-Scholes pricing model of $84,962 during the year ended March 31, 2018.
During
the fiscal year ended March 31, 2017 the Company granted warrants to purchase a total of 93,250 shares of common stock including:
i)
warrants for 93,250 shares to accredited investors as part of their subscription agreements, fully vested, and exercisable over
a three-year term at $0.50/share;
A
summary of warrant activity for fiscal years ending March 31, 2017 and 2018 is as follows:
|
|
Number
of Warrants
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Warrants
Exercisable
|
|
|
Weighted-
Average
Exercisable
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding,
March 31, 2016
|
|
|
40,000
|
|
|
|
3.50
|
|
|
|
40,000
|
|
|
|
3.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
93,250
|
|
|
|
1.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding,
March 31, 2017
|
|
|
133,250
|
|
|
|
2.00
|
|
|
|
133,250
|
|
|
|
2.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
3,413,459
|
|
|
|
.54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
60,000
|
|
|
|
1.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding,
March 31, 2018
|
|
|
3,486,709
|
|
|
|
.59
|
|
|
|
2,433,601
|
|
|
|
.57
|
|
At
March 31, 2018, the range of warrant prices for shares under warrants and the weighted-average remaining contractual life is as
follows:
|
|
Warrants
Outstanding
|
|
|
Warrants
Exercisable
|
|
Range
of Warrant Exercise Price
|
|
Number
of Warrants
|
|
|
Weighted-Average
Exercise Price
|
|
|
Weighted-Average
Remaining Contractual Life
(Years)
|
|
|
Number
of Warrants
|
|
|
Weighted-Average
Exercise Price
|
|
.30-.50
|
|
|
2,803,459
|
|
|
|
.44
|
|
|
|
2.92
|
|
|
|
2,204,709
|
|
|
|
.47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
.51-1.00
|
|
|
610,000
|
|
|
|
1.03
|
|
|
|
4.75
|
|
|
|
145,642
|
|
|
|
1.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.01-3.50
|
|
|
73,250
|
|
|
|
2.82
|
|
|
|
2.69
|
|
|
|
73,250
|
|
|
|
2.82
|
|
NOTE
6 – MERGER AGREEMENT WITH GEL-DEL
On
November 21, 2014, the respective Boards of Directors and executive officers of our company and of Gel-Del Technologies, Inc.,
a Minnesota corporation (“Gel-Del”), entered into and agreed to a merger between our company and Gel-Del, subject
to approval by our shareholders and the shareholders of Gel-Del. Approval of our shareholders of this initial merger was obtained
by us on April 10, 2015 through a Written Consent pursuant to Nevada corporate statutes, and approval of Gel-Del shareholders
was obtained through a meeting of its shareholders duly held on March 25, 2015 pursuant to Minnesota corporate statutes. Concurrent
with obtaining full shareholder approval, we also appointed the directors of Gel-Del as directors of our company.
We
then controlled Gel-Del, combined all Gel-Del operations with ours, and became responsible to provide future funding for Gel-Del.
Accordingly, we concluded that Gel-Del was a VIE entity for which we were the primary beneficiary and that for accounting purposes,
we would consolidate our financial statements with those of Gel-Del. As required by US GAAP accounting, our initial consolidation
of this VIE was accounted for similar to a business combination with the assets and liabilities of Gel-Del stated at their fair
value. In light of the pending merger, we determined the fair value of Gel-Del based on the agreed consideration of 4,150,000
common shares using the $4.02 per share trading price of our common stock at April 10, 2015. The assets of Gel-Del equaled $295,716
and its liabilities were $2,295,462 for a difference of $1,999,746 that resulted in a total purchase consideration of $18,978,462.
We allocated $13,407,693 to goodwill and $5,570,769 to patents and trademarks. We recorded a non-controlling interest of $16,683,000.
We
were unable to consummate the initial merger agreement with Gel-Del due primarily to a substantial public market decline in the
trading value of our common stock. In order to complete our Gel-Del merger, in early 2017 we agreed to provide Gel-Del an additional
31.3% of our common shares than was provided for in the initial merger agreement. Accordingly, pursuant to an Agreement of Merger
dated March 20, 2017, our management and Gel-Del management revised the structure and terms of the Gel-Del merger to provide for
the issuance of these additional shares to Gel-Del and to effect the transaction through a statutory triangular merger. The revised
merger was then completed under Minnesota Statutes whereby Gel-Del and a wholly-owned subsidiary of ours (which was incorporated
in Minnesota expressly for this transaction) completed this triangular merger (the “Merger”). Pursuant to the Merger,
Gel-Del was the surviving entity and concurrently became our wholly-owned subsidiary, resulting in our obtaining full ownership
of Gel-Del. Our primary reason to effect the Merger was to obtain 100% ownership and control of Gel-Del and its patented bioscience
technology, including ownership of Gel-Del’s Cosmeta subsidiary. The effective date for the Merger was April 10, 2017 when
the Merger was filed officially with the Secretary of State of Minnesota.
Pursuant
to the Merger, we issued a total of 5,450,000 shares of our common stock pro rata to the pre-merger shareholders of Gel-Del, resulting
in each outstanding common share of Gel-Del being converted into 0.788 common share of our company. Gel-Del did not have any outstanding
options, warrants, convertible debt, or other rights convertible into equity. The 5,450,000 shares represented approximately 30%
of our total post-merger outstanding common shares and were valued at the closing price of our common shares on the effective
date of the Merger of $0.40 per share, resulting in total consideration of $2,180,000. Incident to completion of the Merger, we
recorded an impairment loss of approximately $14,700,000 including $13,407,693 in goodwill and approximately $1,292,307 in patents
and trademarks, in order to account for the decline in our initial valuation of Gel-Del. In accordance with authoritative guidance,
the non-controlling interest associated with Gel-Del was reclassified to additional paid-in capital, including the difference
between the non-controlling interest and the consideration paid.
NOTE
7 – LEASE AND COMMITMENTS
During
the three months ended March 31, 2018 the Company entered into a lease with a 90-day notice clause for 500 square feet of manufacturing
and office space in Rochester, MN.
The
Company entered into an eighty-four month lease for 3,577 square feet of newly constructed office, laboratory and warehouse space
located in Edina, Minnesota on May 3, 2017. The base rent is $2,078 per month and the Company is responsible for its proportional
share of common space expenses, property taxes, and building insurance. Future minimum rental commitments are as follows:
Year
Ended March 31,
|
|
|
|
|
2018
|
|
$
|
24,932
|
|
2019
|
|
$
|
24,932
|
|
2020
|
|
$
|
24,932
|
|
2021
|
|
$
|
24,932
|
|
2022
|
|
$
|
46,706
|
|
There
after
|
|
$
|
171,366
|
|
NOTE
8 – INCOME TAXES
The
following table presents the current and deferred income tax provision (benefit) for federal and state income taxes:
|
|
2018
|
|
|
2017
|
|
Current
tax provision:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
–
|
|
|
$
|
–
|
|
State
|
|
|
–
|
|
|
|
–
|
|
Deferred
tax provision (benefit):
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(2,897,981
|
)
|
|
|
(4,986,791
|
)
|
State
|
|
|
(1,352,391
|
)
|
|
|
(948,664
|
)
|
Valuation
allowance
|
|
|
4,250,372
|
|
|
|
5,935,455
|
|
Total
provision for income tax
|
|
$
|
–
|
|
|
$
|
–
|
|
Current
income taxes are based upon the year’s income taxable for federal and state tax reporting purposes. Deferred income taxes
(benefits) are provided for certain income and expenses, which are recognized in different periods for tax and financial reporting
purposes.
Deferred
tax assets and liabilities are computed for differences between the financial statements and tax bases of assets and liabilities
that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the period in
which the differences are expected to affect taxable income. The Company’s deferred income taxes arise from the temporary
differences between financial statement and income tax recognition of net operating losses. These loss carryovers would be limited
under the Internal Revenue Code should a significant change in ownership occur within a three-year period. There were no depreciation
differences.
At
March 31, 2018 and 2017, the Company had net operating loss carryforwards of approximately $13,799,909 and $16,762,992. The deferred
tax assets arising from the net operating loss carryforwards are approximately $4,250,372, and $5,935,455 as of March 31, 2018
and 2017, respectively. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income
during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred
tax liabilities, the projected future taxable income and tax planning strategies in making this assessment. Based on management’s
analysis, they concluded not to retain a deferred tax asset since it is uncertain whether the Company can utilize this asset in
future periods. Therefore, they have established a full reserve against this asset. The change in the valuation allowance in 2018
and 2017 was approximately ($1,685,083) and $5,519,204 respectively.
A
reconciliation of the expected tax computed at the U.S. statutory federal income tax rate to the total benefit for income taxes
at March 31, 2018, 2017 is as follows:
|
|
2018
|
|
|
2017
|
|
Expected
tax at 21% and 9.8%
|
|
$
|
(4,250,372
|
)
|
|
$
|
(5,935,455
|
)
|
Valuation
allowance
|
|
|
4,250,372
|
|
|
|
5,935,455
|
|
Provision
for income taxes
|
|
$
|
–
|
|
|
$
|
–
|
|
The
Company’s continuing practice is to recognize interest and/or penalties related to income tax matters in income tax expense.
As of March 31, 2018 and 2017, the Company had no accrued interest and penalties related to uncertain tax positions.
The
Company is subject to taxation in the U.S. and Minnesota. Our tax years for 2014 and forward are subject to examination by tax
authorities. The Company is not currently under examination by any tax authority.
Management
has evaluated tax positions in accordance with FASB ASC 740, and has not identified any tax positions, other than those discussed
above, that require disclosure.
NOTE
9 – SUBSEQUENT EVENTS
In
May 2018, the Company issued John Lai, our President/CFO, a total of 803,385 shares of our common stock, including 324,723 shares
to replace common shares he had surrendered in 2016 to obtain past significant financing, and 478,662 shares to restore escrowed
shares he had surrendered under an escrow agreement, provided that Mr. Lai still satisfies certain financing requirements of the
escrow agreement.
In
May 2018 the Company also granted five-year warrants for the aggregate purchase of 190,000 shares of its common stock at an exercise
price of $1.00 per share, including warrants for 80,000 shares granted to an employee, warrants for 80,000 shares granted to two
advisors for advisory services, and warrants for 30,000 shares granted to an attorney for legal services.