PETV PetVivo Holdings Inc (PK)

Notes to Financial Statements

December 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 condensed consolidated financial statements are unaudited. These unaudited interim 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. Certain information and note disclosures, which are included in annual financial statements, have been omitted pursuant to these rules and regulations. We believe the disclosures made in these interim unaudited financial statements are adequate to make the information not misleading.

Although these interim financial statements at December 31, 2018 and for the three and nine months ended December 31, 2018 and 2017 are unaudited, in the opinion of our management, such statements include all adjustments (consisting of normal recurring entries) necessary to present fairly our financial position, results of operations and cash flows for the periods presented. The results for the three and nine months ended December 31, 2018 are not necessarily indicative of the results to be expected for the year ended March 31, 2019 or for any future period.

These unaudited interim financial statements should be read and considered in conjunction with our audited financial statements and the notes thereto for the year ended March 31, 2018, included in our annual report on Form 10-K filed with the SEC.

The Company is in the business of production, marketing and distribution of medical devices and biomaterials for the treatment of afflictions and diseases in animals, initially for dogs and horses. The Company’s operations are conducted from its headquarter facilities in suburban Minneapolis, Minnesota.

(B) Principles of Consolidation

The accompanying condensed consolidated financial statements include the accounts of the Company and its two wholly-owned subsidiaries, Gel-Del Technologies, Inc. and PetVivo, Inc., both of which are 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 on the date of completion (April 10, 2017).

(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 December 31, 2018, the Company had $186,681 in cash and no cash equivalents.

(E) Concentration-Risk

The Company maintains its cash with various financial institutions, which at times may exceed limits insured by the Federal Deposit Insurance Corporation (FDIC). At December 31, 2018, cash did not exceed the FDIC uninsured balances. The management believes the Company is not exposed to any significant credit risk on cash.

(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 asset’s 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 3,218,236 warrants outstanding as of December 31, 2018 with varying exercise prices ranging from $3.50 to $.30/share. The weighted average exercise price for these warrants is $.59/share. These warrants are excluded from the weighted average number of shares because they are considered anti-dilutive.

(I) Revenue Recognition

The Company will recognize revenue on arrangements in accordance with FASB ASC No. 606, “Revenue From Contracts With Customers”. Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. The Company adopted the guidance on April 1, 2018 using the cumulative catch-up transition method. This change in accounting did not have any material effect on the Company’s financial statements.

(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:

The Company’s financial instruments consist of accounts receivable, accounts payable, accrued expenses, accrued expenses – related party, 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 December 31, 2018 and March 31, 2018, 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 December 31, 2018 and March 31, 2018.

(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 then 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 as well as a 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:

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.

(N) Inventory

Inventories are recorded in accordance with ASC 330 and are stated at the lower of cost or net realizable value. We account for inventories using the first in first out (FIFO) methodology and capitalize costs on a project basis as they occur.

(O) Recent Accounting Pronouncements

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.

The change from revenue recognition according to FASB issued ASC 605 to ASC 606 had no effect on the Company’s financial statements for the year ending March 31, 2018, or the three and nine month periods ending December 31, 2017, and December 31, 2018.

All other newly issued accounting pronouncements but not yet effective have been deemed either immaterial or not applicable.

NOTE 2 - NOTES PAYABLE

At December 31, 2018 the company is obligated for several notes payable and accrued interest in the total amount of $65,000 and $2,774, respectively; on the balance sheet this is shown net of a debt discount of ($5,251). The note terms dictate 12% simple interest, compounding daily based on a 365-day year, paid out 6 months from the date of the note and the issuance of a detachable warrant for purchase of half of the principal amount in shares exercisable at $1.00 per share for a 3-year term.

During the nine months ended December 31, 2018 the Company entered into bridge note agreements with several bridge note holders in the principal amount of $215,000. There were 107,500 detachable warrants issued in conjunction with bridge notes entered into in the nine-month period ending December 31, 2018. Pursuant to ASC 470 the fair value of the warrants attributable to a discount on the debt is ($49,880); this amount is to be amortized to interest expense on a straight-line basis over the term of the loans.

During the nine-month period ended December 31, 2018 and pursuant to bridge note conversion agreements, $150,000 in principal and $4,280 in accrued interest was converted into 514,264 shares of common stock at a rate of $.30 per share. Pursuant to the conversion of the notes, each note-holder who converted their note(s) received a warrant for purchase of half of the outstanding balance in shares exercisable at $.30 per share through December 31, 2018; 77,140 of these warrants were issued.

An additional $33,822 in equity issuance expense was recognized due to a beneficial conversion feature whereby $50,734 in principal and interest was converted at $.30 per share when the stock price on the date of the conversion agreement was $.50 per share.

Each of the warrants issued pursuant to conversion of these notes, if exercised, qualified for 1 additional share of common stock transferred from a founder of the Company for every 3 shares received through exercising of these warrants; 33,351 shares were transferred to these note-holders by a founder. During the nine months ended December 31, 2018 a total of $44,628 in debt discount has been relieved to interest expense due to amortization and the conversions.

NOTE 3 – NOTES PAYABLE – RELATED PARTY

At December 31, 2018, the Company is obligated for a Director note payable and accrued interest in the total amount of $91,193. We are obligated to pay $3,100 per month applied towards accrued interest first, then the principal amount due. The entirety of the outstanding principal and accrued interest due is payable upon sales of equity in excess of $3,500,000 within a two-year period.

During the nine months ended December 31, 2018, the Company entered into bridge note agreements with related parties totaling $70,000 in principal. Upon entering into these bridge note agreements, the note-holders were issued one warrant for every $2.00 in principal loaned to the Company. These warrants were exercisable at $1.00 for a term of three years and vested immediately. Pursuant to ASC 470 the fair value of the warrants attributable to a discount on the debt is $15,677. The note terms dictate 12% simple interest, compounding daily based on a 365-day year, paid out 6 months from the date of the note along with the principal amount loaned to the Company. The entire $70,000 in principal and $1,722 in accrued interest was converted into 239,073 shares of common stock at a rate of $.30 per share pursuant to bridge note conversion agreements.

An additional $13,333 in equity issuance expense was recognized due to a beneficial conversion feature whereby $20,000 in principal was converted at $.30 per share when the stock price on the date of the conversion agreement was $.50 per share.

Also pursuant to the bridge note conversion agreements, for every $2.00 in outstanding balance converted into equity the note-holder received one warrant exercisable at $.30 per share through December 31, 2018; 35,861 of these warrants were issued. The entire balance remaining in debt discount of $15,677 was relieved to interest expense upon conversion of these notes.

NOTE 4 - GOING CONCERN

As reflected in the accompanying condensed consolidated financial statements, the Company had no significant revenue, a 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 the Company’s 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 management 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.

The net loss for the three and nine-month periods ending December 31, 2018 was ($619,943) and ($3,460,408), respectively. Our working capital as of December 31, 2018 was ($1,200,442). Our net cash used in operations for the nine-month period ending December 31, 2018 was ($602,352).

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 nine-month period ended December 31, 2018 the Company issued 2,264,013 shares of common stock including:

i) 478,662 shares were issued to the Company’s President, John Lai, to replace shares he placed into escrow in 2017 valued at $861,592;

ii) 520,749 shares were to reduce debt valued at $296,521, 485,287 of these shares valued at $181,967 were recorded in our financial statements during fiscal year ended March 31, 2018;

iii) 200,000 shares were issued as compensation to the Company’s former CEO, Wesley Hayne, valued at $42,000, these shares were granted and recorded to expense and Additional Paid in Capital during the fiscal year ended March 31, 2018;

iv) 310,000 shares were issued for cash valued at $310,000, 250,000 were from a private offering to one individual in December of 2017 for $250,000, and 60,000 were from a private offering to one individual in September of 2016 for $60,000;

v) 361,816 shares were issued for services valued at $626,951, 324,723 shares valued at $584,500 were issued to the Company’s President, John Lai, to replace shares given up to obtain financing in 2015;

vi) 392,786 shares were issued pursuant to warrant exercises for cash amounting to $226,393, 60,000 warrants were exercised at $1.00 per share and 332,786 warrants were exercised at $.50 per share.

During the nine-month period ended December 31, 2018 the Company entered into agreements to issue 1,587,912 shares of common stock that remain unissued as of the balance sheet date including:

i) 56,333 shares of common stock pursuant to a production agreement with CMDG valued at $56,333;

ii) 678,186 shares of common stock pursuant to discounted warrant exercise agreements in exchange for $203,456 in cash;

iii) 100,054 shares of common stock pursuant to warrant exercises in exchange for $30,016 in cash;

iv) 753,339 shares of common stock pursuant to bridge note conversions in exchange for $220,000 in cash and $6,002 in accrued interest.

During the nine-month period ended December 31, 2018 the Company had 600,000 shares valued at $177,600 returned to the Company’s Treasury; these shares were being held in escrow to be issued to the Company’s former CEO, and upon his termination were immediately returned to Treasury. This entry was booked as an offset to Equity Instrument Expense, which resides in the General & Administrative section of the Company’s Profit and Loss Statement.

During the nine-month period ended December 31, 2018, pursuant to stock transfer agreements and related discounted warrant exercise agreements, the Company’s President, John Lai transferred 259,413 shares of common stock to several warrant-holders as an incentive for early exercise of their warrants; these shares had a value of $77,354 and were booked against APIC.

Warrants

During the nine-month period ended December 31, 2018 the Company granted warrants to purchase a total of 955,531 shares of common stock including:

i) warrants for 80,000 shares to two advisory board members for service, vested semi-annually over two years, and exercisable over a five-year term at $1.00/share;

ii) warrants for 230,000 shares to John Carruth, the Company’s Acting CFO, in consideration of his employment, vested quarterly over two years, with a strike price of $.30 per share and exercisable over a five-year term; 80,000 of which were originally issued at $1.00 per share, and reissued on December 10, 2018 with a strike price of $.30 per share;

iii) warrants for 30,000 shares to a lawyer for general legal counsel, fully-vested and exercisable over a five-year term at $1.00/share;

iv) warrants for 60,000 shares to various information technology service providers for IT services, vested as billed, exercisable over a five-year term;

v) warrants for 300,000 shares to three new Directors in consideration of their service, vested quarterly over two years, and exercisable over a five-year term at $1.00/share;

vi) warrants for 142,500 shares to several note holders pursuant to their bridge note agreements, vested immediately, and exercisable over a three-year term at $1.00/share;

vii) warrants for 113,031 shares to several note holders pursuant to their conversion of notes into equity, vested immediately, exercisable through December 31, 2018 at $.30 per share.

During the nine-month period ended December 31, 2018 the Company reduced previous grants of warrants to purchase 100,000 shares of common stock including:

i) warrants for 60,000 shares from a service provider due to the termination of a contract;

ii) warrants for 40,000 shares from a former advisory board member due to the termination of a contract.

During the nine-month period ended December 31, 2018 warrants to purchase 332,786 shares of common stock with a strike price of $.50 per share were exercised for $166,393 in cash.

During December, 2018 the Company offered its warrant-holders the option to exercise their warrants at a discounted rate of $.30 per share if exercised within 15 days of the offer date. Pursuant to this discounted warrant exercise agreement (DWEA), warrant-holders are entitled to 1 share issued by way of stock transfer from a founder of the Company for every 3 shares received pursuant to the DWEA. Several warrant-holders entered into such agreements whereby they receive 678,187 shares of newly-issued common stock and 226,062 shares of common stock from a founder of the Company in exchange for $203,456 in cash.

During December 2018, the Company offered its note-holders the option to convert their notes and receive 1 warrant for every $2.00 in outstanding balance of principal and interest converted. There were 113,031 of these warrants issued; 12,977 expired on December 31, 2018 and the remaining 100,054 were exercised in exchange for $30,016 in cash. Pursuant to these exercised warrants, each warrant-holder received 1 share of common stock from a founder, John Lai; the total number of shares transferred by John Lai to these warrant-holders was 33,351 shares.

A summary of warrant activity for the periods ending March 31, 2018 and December 31, 2018 is as follows:

At December 31, 2018, the range of warrant prices for shares under warrants and the weighted-average remaining contractual life is as follows:

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

Rent expense for the three and nine months ended December 31, 2018 were $14,607 and $55,020, respectively. Rent expense for the three and nine months ended December 31, 2017 were $7,065 and $32,249, respectively.

On July 2 ^nd , 2018 the Company gave its manufacturing contractor in Rochester, MN a 90-day notice to cancel the lease and agreement; the financial impact of this cannot be fully measured. Subsequently, the Company entered into an agreement with a 60-day notice clause for 1,000 square feet of manufacturing and office space in White Bear Lake, MN; this is detailed further in the 8-K filed on August 20, 2018 that is incorporated by reference in Exhibit 10.20.

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:

NOTE 8 – OPERATING LOSS

The operating loss of ($3,460,408) for the nine months ended December 31, 2018 is primarily due to ($2,277,119) in expense associated with equity issuances including ($696,826) in warrant expense and ($1,420,453) in stock expense.

NOTE 9 – INVENTORY

On November 1, 2018 the Company and its independent contract quality control organization discovered a possible contamination in vials produced from lots #2 and #3 of three separate lots that were included in inventory. No vials derived from lots #2 and #3 have been distributed to customers. The identified lots and vials were produced by the Company’s former third-party contract manufacturer. On November 5, 2018 we issued a formal Notice of Product Quarantine and Product Monitoring Period whereby we asked for any unused vials to be quarantined while the Company’s scientific team and third-party contract testing organization analyzed whether lot #1 also included contamination. No evidence of contamination of vials distributed from lot #1 has been identified to date. Approximately $47,500 in inventory has been written off in relation to this event to research and development expense attributed to the loss of lots #2 and #3. Approximately $10,000 in inventory has been written off in relation to additional third-party product testing of lot #1.

The $48,162 of total inventory is broken out as follows: