Notes
to Financial Statements
June
30, 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 it 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 June 30, 2018 and for the three months ended June 30, 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 months
ended June 30, 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 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 condensed 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 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 June 30, 2018, the Company
had $32,326 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 June
30, 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 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 3,448,923 warrants outstanding as of June 30, 2018 with varying exercise prices ranging from $3.50 to $.30/share.
The weighted average exercise price for these warrants is $.56/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.
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:
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Level 1 - quoted
market prices in active markets for identical assets or liabilities.
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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.
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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.
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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 June 30, 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 June 30, 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 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:
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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.
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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.
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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.
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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.
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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
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 years ending March 31, 2017 and March 31, 2018, or the quarters ending June 30, 2017, and June 30, 2018.
All
other newly issued accounting pronouncements but not yet effective have been deemed either immaterial or not applicable.
NOTE
2
- RELATED PARTY PAYABLE
At
June 30, 2018, the company is obligated for an officer note payable and accrued interest in the total amount of $102,776.
NOTE
3
- GOING CONCERN
As
reflected in the accompanying condensed consolidated financial statements, the Company had no significant revenue and had 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 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
4
- COMMON STOCK AND WARRANTS
Common
Stock
During
the three-month period ended June 30, 2018 the Company issued 1,904,134 shares of common stock including:
i)
478,662 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 $277,431, 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 were issued as compensation to the Company’s 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)
370,000 were issued for cash valued at $370,000, 60,000 of which were due to the exercise of warrants at $1.00 per share, 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)
334,723 were issued for services valued at $599,500, 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.
Warrants
During
the three-month period ended June 30, 2018 the Company granted warrants to purchase a total of 250,000 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 80,000 shares to John Carruth, the Company’s Controller, in consideration of his employment, vested quarterly
over two years, and exercisable over a five-year term at $1.00/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.
During
the three-month period ended June 30, 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 three-month period ended June 30, 2018 warrants to purchase 187,786 shares of common stock with a strike price of $.50 per
share were exercised for $93,893 in cash.
A
summary of warrant activity for the periods ending March 31, 2018 and June 30, 2018 is as follows:
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Number of Warrants
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Weighted-Average Exercise
Price
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Warrants Exercisable
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Weighted-Average Exercisable
Price
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Outstanding, March 31, 2017
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133,250
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2.00
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133,250
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2.00
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Granted
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3,413,459
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.54
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Exercised
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60,000
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1.50
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Outstanding, March 31, 2018
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3,486,709
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.59
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2,433,601
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.57
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Granted
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250,000
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1.00
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Exercised
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187,786
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.50
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Canceled
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100,000
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1.00
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Outstanding, June 30, 2018
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3,448,923
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.61
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2,316,974
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.56
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At
June 30, 2018, the range of warrant prices for shares under warrants and the weighted-average remaining contractual life is as
follows:
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Warrants Outstanding
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Warrants Exercisable
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Range of Warrant Exercise Price
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Number of Warrants
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Weighted-Average Exercise Price
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Weighted-Average Remaining Contractual Life
(Years)
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Number
of Warrants
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Weighted-Average
Exercise Price
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.30-.50
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2,615,673
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.43
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2.76
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2,120,673
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.46
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.51-1.00
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760,000
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1.03
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4.66
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123,051
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1.00
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1.01-3.50
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73,250
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2.82
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2.44
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73,250
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2.82
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NOTE
5
– 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
6
– LEASE AND COMMITMENTS
Rent
expense for the three months ended June 30, 2018 & June 30, 2017 were $14,607 and $13,693, respectively.
In
February of 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 $2,078 per month and the Company is responsible for its proportional
share of common space expenses, property taxes, and building insurance. Future minimum rental commitments are as follows:
Year Ended March 31,
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2019
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$
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18,702
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2020
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$
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24,936
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2021
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$
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24,936
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2022
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$
|
24,936
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2023
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$
|
24,936
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Thereafter
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$
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21,770
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$
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140,216
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NOTE
7
– SUBSEQUENT EVENTS
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 a lease and 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.
On August 14
th
, 2018 the Board
of Directors acted to appoint three new Directors to the Board pending the Company acquire Directors and Officers insurance; these
Directors are Sherry Grisewood, Robert Rudelius, and Joseph Jasper.