Notes
to Financial Statements
September
30, 2019
(Unaudited)
NOTE
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ORGANIZATION
(A)
Organization and Description
The
Company is in the business of licensing and commercializing our proprietary 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)
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 September 30, 2019 and for the three and six months ended September 30, 2019 and 2018 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 six months ended September 30, 2019 are not necessarily indicative of the results to be expected for the year
ended March 31, 2020 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, 2019, included in our annual report on Form 10-K filed with the SEC.
(C)
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.
(D)
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.
(E)
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 September 30, 2019, the Company had $20,236 in cash and no cash equivalents. At March 31, 2019, the Company had $6,460 in cash
and no cash equivalents.
(F)
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 September 30, 2019, cash did not exceed the FDIC uninsured balances and management believes the
Company is not exposed to any significant credit risk on cash.
(G)
Property & Equipment
Property
and equipment are recorded at cost less accumulated depreciation. 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.
(H)
Patents and Trademarks
The
Company capitalizes direct costs for the maintenance and advancement of their patents and trademarks and amortizes these costs
over the lesser of a useful life of 60 months or the life of the patent. We evaluate the recoverability of intangible assets periodically
by taking into account events or circumstances that may warrant revised estimates of useful lives or that indicate the asset may
be impaired.
(I)
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 4,183,236 warrants outstanding as of September 30, 2019 with varying exercise prices ranging from $3.50 to $.30/share.
The weighted average exercise price for these warrants is $.49/share. These warrants are excluded from the weighted average number
of shares because they are considered antidilutive.
The
Company had 4,243,236 warrants outstanding as of March 31, 2019 with varying exercise prices ranging from $3.50 to $.33/share.
The weighted average exercise price for these warrants was $.50/share. These warrants are excluded from the weighted average number
of shares because they are considered antidilutive.
The
Company uses the guidance in ASC 260 to determine if-converted loss per share detailed in Note 14. ASC 260 states that convertible
securities should be considered exercised at the later date of the first day of the reporting period’s quarter or the inception
date of the debt instrument. Also, the if-converted method shall not be applied for the purposes of computing diluted EPS if the
effect would be antidilutive.
At
September 30, 2019, the Company had $280,000 in convertible notes outstanding that mature in our fiscal quarter ended June 30,
2021; see Note 8 to these financial statements for more information on these convertible notes. If converted, the $280,000 in
outstanding convertible notes would convert into 430,770 shares of common stock at a rate of $.65 per share. At September 30,
2019 our if-converted weighted average number of shares outstanding was 22,426,915 and our if-converted loss per share for the
six months ending September 30, 2019 remains consistent with our actual loss per share at ($.04).
(J)
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.
(K)
Research and Development
The
Company expenses research and development costs as incurred.
(L)
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 investments – equity securities receivable, notes payable and accrued interest,
notes payable and accrued interest - related party, and convertible notes payable. The carrying amount of the Company’s
financial instruments approximates their fair value as of September 30, 2019 and March 31, 2019, 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 measured its investments – equity securities receivable at fair value at September 30, 2019, see Note 5 to the financial
statements included in this Form 10-Q.
The
Company had no assets and liabilities measured at fair value on a recurring basis at September 30, 2019.
(M)
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.
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.
(N)
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 accounts for income taxes under Accounting Standards Codification (ASC) Topic 740.
As
required by ASC Topic 740, 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. 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.
(O)
Inventory
Inventories
are recorded in accordance with ASC 330 and are stated at the lower of cost and 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. The current marketed shelf
life of our Kush inventory is 2 years. However, management reserves the right to review and adjust this as appropriate.
(P)
Recently Issued and Adopted 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 adopted ASU 2016-02 on April 1, 2019.
In
January 2016, the FASB issued ASU No. 2016-01 Financial Instruments (Subtopic 825) to enhance the reporting model for financial
instruments to provide users of financial statements with more decision-useful information. The amendments in this Update affect
all entities that hold financial assets or owe financial liabilities. The amendments are meant to improve financial reporting
by providing relevant information about an entity’s equity investments and reducing the number of items that are recognized
in other comprehensive income since this Update requires equity securities to be measured at fair value with changes in the fair
value recognized through net income. For public business entities, the amendments in this Update are effective for fiscal years
beginning after December 15, 2017, including interim periods within those fiscal years. The Company adopted ASU 2016-01 on April
1, 2018.
In
August 2016, the FASB issued ASU No. 2016-15 Statement of Cashflows (Topic 230) to reduce diversity in practice in how certain
cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments in this Update apply
to all entities, including both business entities and not-for-profit entities that are required to present a statement of cash
flows under Topic 230. This Update addresses eight specific cash flow issues and their presentations in the statement of cash
flows. The amendments in this Update are effective for public business entities for fiscal years beginning after December 15,
2017, and interim periods within those fiscal years. The Company adopted ASU 2016-15 on April 1, 2018.
All
other newly issued accounting pronouncements but not yet effective have been deemed either immaterial or not applicable.
NOTE
2 - GOING CONCERN
The
accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United
States of America, which contemplate continuation of the Company as a going concern.
The
Company incurred a net loss of $1,020,060 during the six-month period ended September 30, 2019 and had net cash used in operating
activities of $288,002 for the six-month period ending September 30, 2019. Additionally, the Company has an accumulated deficit
of $53,525,972, stockholders’ deficit of $799,095, and working capital deficit of $918,974 at September 30, 2019. These
conditions raise substantial doubt about the Company’s ability to continue as a going concern for a period of at least twelve
months after the date of issuance on these financial statements. In view of these matters, the Company’s ability to continue
as a going concern is dependent upon the Company’s ability to achieve a level of profitability and/or to obtain adequate
financing through the issuance of debt or equity in order to finance its operations.
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
3 – INVENTORY
As
of March 31, 2019 and September 30, 2019, respectively, the Company had approximately $78,000 and $62,000 of finished goods inventory;
however, reserves of equal amounts for each respective period were taken because of the substantial doubt in the Company’s
ability to utilize this inventory to obtain material sales, primarily due to (among other things) the fact the Company has not
obtained controlled study data detailing the successful use of Kush in animals.
As
of March 31, 2019, all of the Company’s finished goods inventory was in quarantine due to a contamination issue. During
the three months ended September 30, 2019, the Company cleared $16,636 in inventory for release to the public and is utilizing
the product to gather data and establish strategic partner relationships. Of the $16,636, $9,791 is the value of the product before
quarantined that remains reserved for and $3,845 is the expense incurred to clear this product for use during the three-month
period ended September 30, 2019, which has been written down through Cost of Goods Sold. The Company plans to continue to
clear the remainder of our inventory during the fiscal year ended March 31, 2020 and capitalize and take a reserve for certain
expenses incurred, which are estimated to be approximately $9,000.
Total
Inventory is broken out as follows:
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September
30, 2019
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March
31, 2019
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Finished Goods
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$
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62,168
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$
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77,936
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Reserve for Obsolete
Inventory
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(62,168
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)
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(77,936
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)
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Work in Process
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-0-
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-0-
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Manufacturing Supplies
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3,127
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3,127
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Raw Materials
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9,368
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9,368
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Total
Inventory
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$
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12,495
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$
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12,495
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NOTE
4 – LEASE AND COMMITMENTS
Rent
expense for the three and six months ended September 30, 2019 was $13,434 and $24,245, respectively. Rent expense for the three
and six months ended September 30, 2018 was $25,807 and $40,414, respectively.
On July 2nd, 2018 the Company gave
its manufacturing contractor in Rochester, MN a 90-day notice to cancel the lease and agreement, which it had the right to
do so, under which the Company was renting manufacturing and office space; while the Company has yet to recognize any expense
directly related to this lease termination through the date of this filing besides approximately $2,000 in moving and labor costs.
Subsequently, the Company entered into an one-year agreement on July 13, 2018 with a 60-day notice of termination clause for 1,000
square feet of manufacturing and office space in White Bear Lake, 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 $2,078 per month and the Company is responsible for its proportional
share of common space expenses, property taxes, and building insurance. This lease is terminable by the landlord if damage causes
the property to no longer be utilized as an integrated whole and by the Company if damage causes the facility to be unusable for
a period of 45 days.
The
following is a maturity analysis of the annual undiscounted cash flows of the operating lease liabilities as of September 30,
2019:
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Year
Ended March 31,
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2020
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$
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12,468
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2021
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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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2024
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10,390
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$
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97,666
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In
compliance with ASC 842 the Company adopted new guidance in relation to lease accounting on April 1, 2019 whereby we recognized
operating lease right-to-use assets and corresponding and equal operating lease liabilities. As of September 30, 2019, planned
future base rent lease payments total $97,666, which has been discounted to $95,063 using the 52-week treasury bill coupon equivalent
discount rate of 2.18% and a present value model. As of September 30, 2019, the Company only had one operating lease so that the
weighted average remaining lease term and weighted average discount rate are approximately 4 years and 2.18%, respectively.
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September
30, 2019
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Present value of future
base rent lease payments
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$
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95,063
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Base rent
payments included in prepaid expenses
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-
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Present value of future base rent
lease payments – net
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$
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95,063
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As
of September 30, 2019, the present value of future base rent lease payments – net is classified between current and non-current
assets and liabilities as follows:
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September
30, 2019
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Operating
lease right-of-use asset
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$
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95,063
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Total operating lease assets
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95,063
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Operating lease current liability
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24,655
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Operating
lease other liability
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70,408
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Total operating lease liabilities
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$
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95,063
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Pursuant
to a lease wherein our subsidiary, Gel-Del Technologies, Inc., was the lessee until the lease’s termination in 2017, the
Company owes approximately $330,000 to the lessor as of September 30, 2019; this amount is included in accounts payable.
NOTE
5 – INVESTMENTS – EQUITY SECURITIES
On
June 28, 2019, the Company entered into a purchase agreement with a third-party to purchase 1,500,000 shares of Emerald Organic
Products, Inc. (OTC Pink: “EMOR”) common stock for consideration of $1,500. The Company applied guidance from ASU
No. 2016-01 Financial Instruments – Overall – Recognition and Measurement of Financial Assets and Financial Liabilities
and ASC 820 to arrive at a fair value at September 30, 2019, of $1,500. The Company took into account many factors when determining
the stock’s fair value including, but not limited to, the nature and duration of the restriction on the stock, the extent
to which potential buyers would be limited by the restriction, and qualitative and quantitative factors specific to both the instrument
and the issuer.
NOTE
6 – PROPERTY AND EQUIPMENT
The
components of property and equipment were as follows:
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September
30, 2019
|
|
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March
31, 2019
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Leasehold improvements
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|
$
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4,602
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$
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4,602
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Furniture and office equipment
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|
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10,130
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|
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10,130
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Production equipment
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108,882
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|
|
|
108,882
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R&D equipment
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|
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25,184
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|
|
|
26,188
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|
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Total, at cost
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|
|
148,798
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|
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|
149,802
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Accumulated
depreciation
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(121,872
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)
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|
|
(112,453
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)
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Total,
net
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|
$
|
26,926
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|
|
$
|
37,349
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During
the three and six months ended September 30, 2019, depreciation expense was $3,442 and $10,423, respectively. During the three
and six months ended September 30, 2018, depreciation expense was $2,174 and $3,826, respectively.
During
the three months ended June 30, 2019, we recorded a gain on sale of asset in the amount of $450 wherein we sold an asset that
was fully depreciated and originally purchased for $1,004 for $450.
NOTE
7 – INTANGIBLE ASSETS
The
components of intangible assets, all of which are finite-lived, were as follows:
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September
30, 2019
|
|
|
March
31, 2019
|
|
|
Patents
|
|
$
|
3,844,092
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|
|
$
|
3,820,374
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|
|
Trademarks
|
|
|
24,098
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|
|
|
22,829
|
|
|
Total, at cost
|
|
|
3,868,190
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|
|
|
3,843,203
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|
|
Accumulated
Amortization
|
|
|
(3,528,093
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)
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|
|
(3,253,386
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)
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Total,
net
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|
$
|
340,097
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|
|
$
|
589,817
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|
During
the three and six-month periods ended September 30, 2019, amortization expense was $137,598 and $274,707, respectively. During
the three and six-month periods ended September 30, 2018, amortization expense was $159,448 and $318,915, respectively.
NOTE
8 – CONVERTIBLE NOTES
At September 30, 2019, the Company is obligated
for several convertible notes payable in the total amount of $280,000. The Company entered into these convertible notes during
the quarter ended June 30, 2019. All of these convertible notes mature during the quarter ended June 30, 2021, two years from
their inception dates. These convertible notes accrue interest at a rate of 10%. Accrued interest is due and payable each calendar
quarter in cash; during the three and six months ended September 30, 2019, the Company paid out $6,118 and $11,479, respectively,
in accrued interest to these convertible note holders. These convertible notes automatically convert into shares of common stock
at a rate of $.65 per share at the earlier of the maturity date or an uplift to a national securities exchange (e.g. NASDAQ or
New York Stock Exchange) provided that the Company’s stock price is at least $.78 at the time of the uplift. The convertible
note holders have the right to convert their outstanding principal and interest into shares of the Company’s common stock
at any time during their note’s term at $.65 per share. No note holders have converted their notes through the date of this
10-Q filing. As of September 30, 2019, these convertible notes did not include a beneficial conversion feature.
NOTE
9 – NOTES PAYABLE – RELATED PARTY
At
September 30, 2019 and March 31, 2019 the Company was obligated for a related party note payable and accrued interest in the total
amount of $68,090 and $85,752, respectively; the maturity date of this note is April 30, 2020. The related party note payable
terms are accrual of interest at 8% annually with payments of $3,100 per month, which are applied to interest first, then principal.
The terms also include a stipulation that if the Company receives additional financing during any 24-month period from the date
of the note in the amount greater than $3,500,000, the Company will immediately pay the officer the principal amount of the note
along with all interest due.
NOTE
10 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES
At
September 30, 2019 and March 31, 2019, the Company is obligated to pay $739,329 and $854,990, respectively, in accounts payable
and accrued expenses. Of the total at September 30, 2019 of $739,329, $499,660 is made up of accounts payable, while the $239,669
in accrued expenses is made up of past employee’s accrued salaries and related payroll taxes payable. Of the total at March
31, 2019 of $854,990, $524,273 is made up of accounts payable, while the $330,717 in accrued expenses is made up of past employee’s
accrued salaries and related payroll taxes payable. The Company has not paid the payroll taxes relating to the accrued salaries,
consisting primarily of Social Security and Medicare taxes. At September 30, 2019 and March 31, 2019, respectively, we had accrued
$22,464 and $21,482 in payroll taxes payable.
NOTE
11 – ACCRUED EXPENSES – RELATED PARTY
At
September 30, 2019, the Company is obligated to pay $264,737 in accrued expenses due to related parties. Of the total, $18,569
is made up of payroll taxes payable.
At
March 31, 2019, the Company was obligated to pay $576,393 in accrued expenses due to related parties. Of the total, $89,186 is
made up of accounts payable, while $487,207 is made up of accrued salaries and payroll taxes payable.
NOTE
12 - COMMON STOCK AND WARRANTS
Common
Stock
During
the six months ended September 30, 2019, the Company issued 1,959,851 shares of common stock as follows:
i)
386,666 shares to John Lai pursuant to a Settlement Agreement whereby Mr. Lai agreed to release the Company of all claims through
the date of the agreement, September 11, 2019, including accrued compensation he had earned in the amount of $116,000 and hold
the shares for a period of at least 3 years;
ii)
639,786 shares to Randall Meyer pursuant to a Settlement Agreement whereby Mr. Meyer agreed to release the Company of all claims
through the date of the agreement, September 11, 2019, including accrued compensation he had earned in the amount of $191,936
and hold the shares for a period of at least 3 years;
iii)
226,666 shares to John Dolan pursuant to a Settlement Agreement whereby Mr. Dolan agreed to release the Company of all claims
through the date of the agreement, September 11, 2019, including accrued compensation he had earned in the amount of $68,000 and
hold the shares for a period of at least 3 years; and
iv)
186,733 shares to a former employee pursuant to a Settlement Agreement dated August 29, 2019, whereby this individual agreed to
release the Company of all claims, including compensation earned in the amount of $80,029; and
v)
120,000 shares to a service provider for services provided during the one-year period ended July 13, 2019 and valued at $1/share
over that period on a pro-rata basis; and
vi)
400,000 shares to one shareholder that the Company sold in exchange for $100,000, which equates to a price per share of $.25/share.
John
Lai (CEO, President & Director), Randall Meyer (Director), and John Dolan (Secretary & Director) are all related parties,
and the reduction of $375,936 was included in Accrued Expenses – Related Party. The settlement of $80,029 for a former employee’s
accrued salary was accounted for as a reduction of Accounts Payable and Accrued Expenses. A loss on extinguishment of debt was
recorded in the amount of $81,738 related to these transactions.
Also,
on September 18, 2019, the Company entered into a certain consulting agreement whereby a service provider agreed to provide 12
months of video production, investor relations, and promotional services in exchange for 300,000 shares of common stock that are
not issued as of the balance sheet date. The scope of services includes but is not limited to airing 96 commercials nationally
on a prominent world-wide T.V. network and producing 12, monthly, 10-minute interviews.
Warrants
During
the six months ended September 30, 2019, the Company granted warrants to purchase a total of 300,000 shares of common stock including:
i)
warrants for 300,000 shares, valued at $119,954, to three new Directors, Messrs. Scott Johnson, Gregory Cash, and James Martin,
with 150,000 vested immediately and 150,000 vesting quarterly between August 2020 and May 2021, and exercisable over a five-year
term at $.30/share.
These
warrants’ values were arrived at by using the Black-Scholes valuation model with the following assumptions:
i)
an expected volatility of the Company’s shares on the date of the grants of approximately 313%, which was arrived at by
taking the number of trading days during the year ended on the date of the grant multiplied by the standard deviation of the percentage
change in the closing market price on a day-by-day basis; and
ii)
a risk-free rate identical to the U.S. Treasury 13-week treasury bill rate on the date of the grants of 2.30%
During
the six months ended September 30, 2019, the Company cancelled 360,000 warrants to purchase a total of 300,000 shares of common
stock including:
i)
warrants for 300,000 shares, valued at $300,770 using the Black-Scholes model, $117,144 in expense of which had yet to be taken
at the time of cancellation were cancelled pursuant to the terms of such warrants dictating cancellation upon the two-month anniversary
of a cease of service; and
ii)
warrants for 60,000 shares that were never originally valued, were to be vested upon billing from service providers, and were
cancelled due to a lack of documentation existing in relation to these warrants.
A
summary of warrant activity for the year ending March 31, 2019 and six-month period ending September 30, 2019 is as follows:
|
|
|
Number
of
Warrants
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Warrants
Exercisable
|
|
|
Weighted-
Average
Exercisable
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding,
March 31, 2018
|
|
|
3,486,709
|
|
|
|
0.59
|
|
|
|
2,433,601
|
|
|
|
0.57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,980,531
|
|
|
|
0.41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
1,111,027
|
|
|
|
0.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
12,977
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canceled
|
|
|
100,000
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, March
31, 2019
|
|
|
4,243,236
|
|
|
|
0.5
|
|
|
|
3,372,261
|
|
|
|
0.49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
300,000
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
360,000
|
|
|
|
0.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, September
30, 2019
|
|
|
4,183,236
|
|
|
|
0.49
|
|
|
|
4,005,736
|
|
|
|
0.48
|
|
At
September 30, 2019, 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
|
|
|
3,552,486
|
|
|
|
0.35
|
|
|
|
4.16
|
|
|
|
3,494,986
|
|
|
|
0.35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
.51-1.00
|
|
|
517,500
|
|
|
|
1
|
|
|
|
3.14
|
|
|
|
397,500
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.01-3.50
|
|
|
113,250
|
|
|
|
2.35
|
|
|
|
1.83
|
|
|
|
113,250
|
|
|
|
2.35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
4,183,236
|
|
|
|
0.49
|
|
|
|
3.97
|
|
|
|
4,005,736
|
|
|
|
0.48
|
|
For
the six-month periods ended September 30, 2019 and 2018, the total stock-based compensation on all instruments was $428,079 and
$599,004, respectively. It is expected that the Company will recognize expense after September 30, 2019 related to warrants issued,
outstanding, and valued using the Black Scholes pricing model as of September 30, 2019 in the amount of approximately $345,000.
NOTE
13 – INCOME TAXES
The
following table presents the net deferred tax assets as of September 30, 2019 and March 31, 2019:
|
|
|
September
30, 2019
|
|
|
March
31, 2019
|
|
|
Net operating loss carryforwards:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(4,008,742
|
)
|
|
$
|
(3,801,404
|
)
|
|
State
|
|
|
(1,870,746
|
)
|
|
|
(1,773,989
|
)
|
|
Total net
operating loss carryforwards
|
|
|
(5,879,488
|
)
|
|
|
(5,575,393
|
)
|
|
Total deferred
tax assets
|
|
|
(5,879,488
|
)
|
|
|
(5,575,393
|
)
|
|
Valuation
allowance
|
|
|
5,879,488
|
|
|
|
5,575,393
|
|
|
Net deferred
tax assets
|
|
$
|
–
|
|
|
$
|
–
|
|
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.
At
September 30, 2019 and March 31, 2019, respectively, the Company had net operating loss carryforwards of approximately $19,000,000
and $18,100,000. The deferred tax assets arising from the net operating loss carryforwards are approximately $5,880,000 and $5,580,000
as of September 30, 2019 and March 31, 2019, 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 net operating loss carryforwards, if not utilized, will begin to expire in 2021 for federal and Minnesota purposes.
Of
the approximately $19,000,000 in net operating loss carryforwards, approximately $7,000,000 has been accumulated in our pre-merger
operating subsidiary, Gel-Del Technologies, Inc. IRC 382 provides guidance around whether or not the Company is able to utilize
the pre-merger Gel-Del Technologies, Inc. net operating loss of approximately $7,000,000. Management believes that these pre-merger
dollars will be allowable if our deferred tax asset is ever realized.
A
reconciliation of the expected tax computed at the U.S. statutory federal income tax rate to the total benefit for income taxes
at September 30, 2019 and 2018 is as follows:
|
|
|
2019
|
|
|
2018
|
|
|
Expected tax at 30.8%
|
|
$
|
(5,879,488
|
)
|
|
$
|
(4,984,867
|
)
|
|
Valuation allowance
|
|
|
5,879,488
|
|
|
|
4,984,867
|
|
|
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 September 30, 2019, and 2018, 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 2016 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
14 – SUBSEQUENT EVENTS
On
October 31, 2019, the Company’s Board of Directors approved the issuance of 1,345,000 warrants with a strike price of $.50/share
that are exercisable for a term of 5 years from the date of the grant, as follows:
i)
600,000 to John Lai, the Company’s CEO, whereby 400,000 are vested quarterly over a three-year term and 200,000 vest upon
achieving performance-based milestones. These warrants were valued using the Black-Scholes model at $299,973; and
ii)
500,000 to John Carruth, the Company’s CFO, whereby 400,000 are vested quarterly over a three-year term and 100,000 vest
upon achieving performance-based milestones. These warrants were valued using the Black-Scholes model at $249,977; and
iii)
245,000 to John Dolan, the Company’s Secretary, whereby 100,000 are vested quarterly over a three-year term, 100,000 vest
upon achieving performance-based milestones, and 45,000 are vested immediately. These warrants were valued using the Black-Scholes
model at $122,489. $22,498 in expense was recognized during the three-month period ended September 30, 2019 as the 45,000 warrants
that vested immediately were granted for services provided prior to October 1, 2019.
On
October 31, 2019, the Company’s Board of Directors also approved a compensation plan for John Lai that included his retention
of 600,000 escrowed shares that he never returned to the Company’s Treasury.
After
the balance sheet date through the date of this 10-Q filing, the Company entered into certain subscription agreements whereby
we sold 540,000 shares of common stock for $135,000 effecting a purchase price of $.25/share.
During
October 2019, the Company engaged Barry Kaplan and Associates to provide investor relations services in exchange for cash consideration
and 100,000 shares of PetVivo common stock.