See accompanying notes to unaudited condensed
consolidated financial statements
See accompanying notes to unaudited condensed
consolidated financial statements
See accompanying notes to unaudited condensed
consolidated financial statements
BANTEK, INC. (f/k/a DRONE USA, INC.) AND
SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
DECEMBER 31, 2018
(Unaudited)
NOTE 1 -
NATURE
OF OPERATIONS
Bantek, Inc. (f/k/a DRONE USA, INC.) (“Bantek”)
is an Unmanned Aerial Vehicles (“UAV”) and related services and technology company that intends to engage in the distribution
and integration of advanced low altitude UAV systems, services and products. Bantek also provides product procurement, distribution,
and logistics services through its wholly-owned subsidiary, Howco Distributing Co., (“Howco”) (collectively, the “Company”)
to the United States Department of Defense and Defense Logistics Agency. The Company has operations based in Pine Brook, New Jersey
and Vancouver, Washington. The Company continues to seek strategic acquisitions and partnerships with UAV firms that offer
superior technologies in high-growth markets, as well as acquisitions and partnerships with firms that have complementary technologies
and infrastructure.
On April 24, 2018 the Company amended its
articles of incorporation filed with the Delaware Secretary of State changing the Company name from Drone USA, Inc. to Bantek,
Inc. Acceptance of the name change by FINRA is pending.
NOTE 2
-
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES AND GOING CONCERN
Principles of Consolidation
The accompanying consolidated financial
statements include the accounts of Bantek and its wholly-owned subsidiaries, Drone USA, LLC (inactive), and Howco. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Going Concern
The accompanying consolidated financial
statements have been prepared assuming the Company will continue as a going concern, which contemplates the recoverability of assets
and the satisfaction of liabilities in the normal course of business. For the three months ended December 31, 2018, the Company
has incurred a net loss of $1,065,542 and used cash in operations of $376,753. The working capital deficit, stockholders’
deficit and accumulated deficit was $6,511,561, $9,709,862 and $20,696,834, respectively, at December 31, 2018. Furthermore, on
April 13, 2017 the Company received a default notice on its payment obligations under the senior secured credit facility agreement
(see Note 10), defaulted on its Note Payable – Seller in September 2017, and as of December 31, 2018 has received demands
for payment of past due amounts from several consultants and service providers. It is management’s opinion that these matters
raise substantial doubt about the Company’s ability to continue as a going concern for a period of twelve months from the
issuance date of this report. The ability of the Company to continue as a going concern is dependent upon management’s ability
to further implement its business plan and raise additional capital as needed from the sales of stock or debt. The Company has
been implementing cost-cutting measures and restructuring or setting up payment plans with vendors and service providers and plans
to raise equity through a private placement, and has restructured its secured obligations. The accompanying consolidated financial
statements do not include any adjustments that might be required should the Company be unable to continue as a going concern.
Use of Estimates
The preparation of consolidated financial
statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosures of contingent liabilities at the date of the consolidated financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates
include the allowance for bad debt on accounts receivable, reserves on inventory, valuation of goodwill and intangible assets for
impairment analysis, valuation of stock based compensation, the valuation of derivative liabilities and the valuation allowance
on deferred tax assets.
BANTEK, INC. (f/k/a DRONE USA, INC.) AND
SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
DECEMBER 31, 2018
(Unaudited)
Fair Value Measurements
The Company follows the FASB
Fair Value
Measurements
standard, as they apply to its financial instruments. This standard defines fair value, outlines a framework for
measuring fair value, and details the required disclosures about fair value measurements.
Fair value is defined as the price that
would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the
measurement date. The standard establishes a hierarchy in determining the fair value of an asset or liability. The fair value hierarchy
has three levels of inputs, both observable and unobservable. Level 1 inputs include quoted market prices for identical assets
or liabilities in an active market that the Company has the ability to access at the measurement date. Level 2 inputs are market
data, other than Level 1, that are observable either directly or indirectly. Level 2 inputs include quoted market prices for similar
assets or liabilities, quoted market prices in an inactive market, and other observable information that can be corroborated by
market data. Level 3 inputs are unobservable and corroborated by little or no market data. The standard requires the utilization
of the lowest possible level of input to determine fair value and carrying amounts of current liabilities approximate fair value
due to their short-term nature. The Company accounts for certain instruments at fair value using level 3 valuation.
|
|
At December 31, 2018
|
|
|
At September 30, 2018
|
|
Description
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Derivative Liability
|
|
|
—
|
|
|
|
—
|
|
|
$
|
198,205
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
258,296
|
|
A rollforward of the level 3 valuation financial instruments
is as follows:
|
|
Derivative
Liabilities
|
|
Balance at September 30, 2018
|
|
$
|
258,296
|
|
|
|
|
|
|
Fair Value of derivative related to assignment and restatement of note
|
|
|
78,471
|
|
Reduction of derivative recorded as gain on extinguishment upon conversions
|
|
|
(78,471
|
)
|
Warrant exercise (partial)
|
|
|
(68,232
|
)
|
Fair Value adjustment - warrants
|
|
|
8,734
|
|
Fair Value adjustments – convertible note
|
|
|
(593
|
)
|
Balance at December 31, 2018
|
|
$
|
198,205
|
|
The warrants were issued to a convertible
note holder in November and December 2017 and initially determined to be equity instruments and recorded as note discount and as
additional paid in capital. On June 4, 2018 the anti-dilutive provision of the warrants took effect and based on the new conversion
formula management determined the warrant became a derivative liability and reclassified the Fair Value on June 4, 2018 from additional
paid-in capital to derivative liability with fair market value changes recognized in operations for each reporting date. See note
12.
Cash and Cash Equivalents
Cash equivalents consist of liquid investments
with maturities of three months or less at the time of purchase. There are no cash equivalents at the balance sheet dates.
Accounts Receivable
Trade receivables are recorded at net realizable
value consisting of the carrying amount less the allowance for doubtful accounts, as needed. Factors used to establish an allowance
include the credit quality of the customer and whether the balance is significant. The Company may also use the direct write-off
method to account for uncollectible accounts that are not received. Using the direct write-off method, trade receivable balances
are written off to bad debt expense when an account balance is deemed to be uncollectible.
Inventory
Inventory consists of finished goods, which
are purchased directly from manufacturers. The Company utilizes a just in time type of inventory system where products are ordered
from the vendor only when the Company has received sales order from its customers. Inventory is stated at the lower of cost and
net realizable value on a first-in, first-out basis.
BANTEK, INC. (f/k/a DRONE USA, INC.) AND
SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
DECEMBER 31, 2018
(Unaudited)
Property & Equipment
Property and equipment are stated at cost and
depreciated over their estimated useful lives. Maintenance and repairs are charged to expense as incurred. When assets are retired
or disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting gains or losses are included
in income in the year of disposition. The Company examines the possibility of decreases in the value of these assets when events
or changes in circumstances reflect the fact that their recorded value may not be recoverable. Certain items classified as inventory
during the second fiscal quarter of 2018 have been reclassified to Property and Equipment. These assets are fully operational drones
used as demonstration units and were put into such use since acquisition. The units were all acquired during the year ended September
30, 2018 and each unit exceeds management’s threshold for capitalization of $2,000 for a single unit. The Company depreciates
these demonstration units over a period of 3 years using an accelerated method. Depreciation expense was $2,065 and $0 for the
three months ended December 31, 2018 and 2017 respectively.
Goodwill and Intangible Assets
The Company’s goodwill and tradename
assets are deemed to have indefinite lives and, accordingly, are not amortized, but are evaluated for impairment at least annually,
but more often whenever changes in facts and circumstances occur which may indicate that the carrying value may not be recoverable.
The customer list was deemed to have a life of 4 years and is being amortized through September 2020.
Long-Lived Assets
Long-lived assets are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Impairment is determined by
comparing the carrying value of the long-lived assets to the estimated undiscounted future cash flows expected to result from use
of the assets and their ultimate disposition. In instances where impairment is determined to exist, the Company writes down the
asset to its fair value.
Deferred Financing Costs
All unamortized deferred financing costs
related to the Company’s borrowings are presented in the consolidated balance sheets as a direct deduction from the related
debt. Amortization of these costs is reported as
interest and financing costs
included in the consolidated statement of
operations.
Revenue Recognition
Effective October 1, 2018, the Company adopted Accounting Standards
Codification (“ASC”) 606, Revenue From Contracts With Customers, which is effective for public business entities with
annual reporting periods beginning after December 15, 2017. This new revenue recognition standard (new guidance) has a five step
process: a) Determine whether a contract exists; b) Identify the performance obligations; c) Determine the transaction price; d)
Allocate the transaction price; and e) Recognize revenue when (or as) performance obligations are satisfied. The impact of the
Company’s initial application of ASC 606 did not have a material impact on its financial statements and disclosures and there
was no cumulative effect of the adoption of ASC 606.
The Company sells a variety of products to government entities.
The purchase orders received specifies each item and its manufacturer, the Company only needs to fulfill the performance obligation
by shipping the specified items. No other performance obligation exist under the terms of the contracts. The Company recognizes
revenue for the agreed upon sales price when the product is shipped to the customer, which satisfies the performance obligation.
The Company sells drones and related products
manufactured by third parties to various parties. The Company also offers technical services related to drone utilization. The
Company began offering insulation jackets for commercial and government facilities to insulate and monitor heating and cooling
equipment. Contracts for drone related products and services and insulating jacket related sales will be evaluated using the five
step process outline above. There has been no material sales for drone products and services for which full compliance with performance
obligations has not been met. Sales of insulation jackets have not yet commenced. Upon significant sales for drone products and
services and insulation jackets, the Company will disaggregate sales by these lines of business and within the lines of business
to the extent that the product or service has different revenue recognition characteristics.
BANTEK, INC. (f/k/a DRONE USA, INC.) AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
DECEMBER 31, 2018
(Unaudited)
Stock-based compensation
Stock-based compensation is accounted for
based on the requirements of ASC 718 –
“Compensation –Stock Compensation
“, which requires recognition
in the financial statements of the cost of employee and director services received in exchange for an award of equity instruments
over the period the employee or director is required to perform the services in exchange for the award (presumptively, the vesting
period). The ASC also requires measurement of the cost of employee and director services received in exchange for an award based
on the grant-date fair value of the award. The Company utilizes the Black-Sholes option pricing model and uses the simplified method
to determine expected term because of lack of sufficient exercise history. Additionally, effective October 1, 2016, the Company
adopted the Accounting Standards Update No. 2016-09 (“ASU 2016-09
”), Improvements to Employee Share-Based Payment
Accounting
. Among other changes, ASU 2016-09 permits the election of an accounting policy for forfeitures of share-based payment
awards, either to recognize forfeitures as they occur or estimate forfeitures over the vesting period of the award. The Company
has elected to recognize forfeitures as they occur and the cumulative impact of this change did not have any effect on the Company’s
consolidated financial statements and related disclosures.
As of October 1, 2018 the Company has early
adopted ASU 2018-7 Compensation-Stock Compensation which conforms the accounting for non-employees to the accounting treatment
for employees. The new standard replaces using a fair value as of each reporting date with use of the calculated fair value as
of the grant date. The implementation of the standard provides for the use of the fair market value as of the adoption date, rather
than using the value as of the original grant date. Therefore the values calculated and reported at September 30, 2018 become a
proxy for the grant date value. The Company utilizes the Black-Sholes option pricing model and uses the simplified method to determine
expected term because of lack of sufficient exercise history. There was no cumulative effect on the adoption date.
Shipping and Handling Costs
The Company has included freight-out as
a component of cost of sales, which is not considered material for separate disclosure as it is typically less than 1% of cost
of goods sold.
Convertible Notes with Fixed Rate Conversion
Options
The Company may enter into convertible
notes, some of which contain, predominantly, fixed rate conversion features, whereby the outstanding principal and accrued interest
may be converted by the holder, into common shares at a fixed discount to the market price of the common stock at the time of conversion.
This results in a fair value of the convertible note being equal to a fixed monetary amount. The Company records the convertible
note liability at its fixed monetary amount by measuring and recording a premium, as applicable, on the Note date with a charge
to interest expense in accordance with ASC 480 - “Distinguishing Liabilities from Equity”.
Derivative Liabilities
The Company has certain financial instruments
that are derivatives or contain embedded derivatives. The Company evaluates all its financial instruments to determine if those
contracts or any potential embedded components of those contracts qualify as derivatives to be separately accounted for in accordance
with ASC 810-10-05-4 and 815-40. This accounting treatment requires that the carrying amount of any derivatives be recorded
at fair value at issuance and marked-to-market at each balance sheet date. In the event that the fair value is recorded
as a liability, as is the case with the Company, the change in the fair value during the period is recorded as either other income
or expense. Upon conversion, exercise or repayment, the respective derivative liability is marked to fair value at the conversion,
repayment or exercise date and then the related fair value amount is reclassified to other income or expense as part of gain or
loss on extinguishment.
BANTEK, INC. (f/k/a DRONE USA, INC.) AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
DECEMBER 31, 2018
(Unaudited)
Net Loss Per Share
Basic loss per share is calculated by dividing
the loss attributable to stockholders by the weighted-average number of shares outstanding for the period. Diluted loss per share
reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that shared in the earnings (loss) of the Company. Diluted loss per
share is computed by dividing the loss available to stockholders by the weighted average number of shares outstanding for the period
and dilutive potential shares outstanding unless such dilutive potential shares would result in anti-dilution. As of December 31,
2018, 18,505,000 options were outstanding of which 9,073,000 were exercisable, 136,083,627 warrants were outstanding of which 136,083,627
were exercisable, and related party convertible debt and accrued interest totaling $872,432 was convertible into 785,974,775 shares
of common stock. Additionally, as of December 31, 2018, the outstanding principal balance, including accrued interest of the third
party convertible debt, totaled $6,195,802 and was convertible into 10,670,340,897 shares of common stock. It should be noted that
contractually the limitations on these notes limit the number of shares converted to 425,147,386. The total dilutive potential
shares of 11,601,472,299 exceed the number of common shares authorized and unissued. As of December 31, 2018 and 2017, potentially
dilutive securities consisted of the following:
|
|
December 31,
2018
|
|
|
December 31,
2017
|
|
Stock options
|
|
|
9,073,000
|
|
|
|
44,351,200
|
|
Warrants
|
|
|
136,083,627
|
|
|
|
600,000
|
|
Related party convertible debt and accrued interest
|
|
|
785,974,775
|
|
|
|
4,527,184
|
|
Third party convertible debt (including senior debt)
|
|
|
10,670,340,897
|
|
|
|
34,567,604
|
|
Contingent liability – advisory fees
|
|
|
-
|
|
|
|
4,944,667
|
|
Total
|
|
|
11,601,472,299
|
|
|
|
88,990,655
|
|
Segment Reporting
The Company uses “the management
approach” in determining reportable operating segments. The management approach considers the internal organization and reporting
used by the Company’s chief operating decision maker for making operating decisions and assessing performance as the source
for determining the Company’s reportable segments. The Company’s chief operating decision maker is the chief executive
officer of the Company, who reviews operating results to make decisions about allocating resources and assessing performance for
the entire Company. As of December 31, 2018, the Company did not report any segment information since the Company only generated
sales from its subsidiary, Howco.
Recent Accounting Pronouncements
In February 2016, the FASB issued a new
accounting standard on leases. The new standard, among other changes, will require lessees to recognize a right-of-use asset and
a lease liability on the balance sheet for all leases. The lease liability will be measured at the present value of the lease payments
over the lease term. The right-of-use asset will be measured at the lease liability amount, adjusted for lease prepayments, lease
incentives received and the lessee’s initial direct costs (e.g. commissions). The new standard is effective for annual reporting
periods beginning after December 15, 2018, including interim reporting periods within those annual reporting periods. The adoption
will require a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest period
presented. The Company is currently evaluating the impact of this new accounting standard on its consolidated financial position
and results of operations.
The Company does not believe that any other
recently issued but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying consolidated
financial statements.
NOTE
3 -
ACCOUNTS RECEIVABLE
The Company’s accounts receivable
at December 31 and September 30, 2018 is as follows:
|
|
December 31,
2018
|
|
|
September 30,
2018
|
|
Accounts receivable
|
|
$
|
990,575
|
|
|
$
|
1,615,582
|
|
Reserve for doubtful accounts
|
|
|
-
|
|
|
|
-
|
|
|
|
$
|
990,575
|
|
|
$
|
1,615,582
|
|
BANTEK, INC. (f/k/a DRONE USA, INC.) AND
SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
DECEMBER 31, 2018
(Unaudited)
NOTE 4 -
INVENTORY
At December 31 and September 30, 2018,
inventory consists of finished goods and was valued at $307,158 and $533,106, respectively.
NOTE 5 -
GOODWILL
AND INTANGIBLE ASSETS
At December 31, and September 30, 2018,
the carrying amount of goodwill amounted to $2,410,335 and $2,410,335, respectively. On September 30, 2017, the Company adopted
ASU 2017-04 which revises the method of conducting an impairment test for goodwill.
At December 31 and September 30, 2018,
the carrying amount of tradename amounted to $760,000 and $760,000, respectively.
At December 31, and September 30, 2018,
intangible assets other than goodwill and tradename consisted of:
|
|
December 31,
2018
|
|
|
September 30,
2018
|
|
Customer list
|
|
$
|
1,060,000
|
|
|
$
|
1,060,000
|
|
Less: accumulated amortization
|
|
|
(610,964
|
)
|
|
|
(544,715
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
449,036
|
|
|
$
|
515,285
|
|
The customer list is being amortized over
48 months from the acquisition date. Amortization expense for the three months ended December 31, 2018 and 2017 was $66,249 and
$66,249, respectively.
Future amortization expense of the customer
list is as follows:
For the Years Ending September 30,
|
|
|
|
2019
|
|
$
|
198,751
|
|
2020
|
|
|
250,285
|
|
Total
|
|
$
|
449,036
|
|
The Company conducted its goodwill and
its intangible assets impairment test as of December 31, 2018 and determined that no impairment was required as the asset values
were supported by the historical, current and projected net income and positive cash flows of the component holding the goodwill
and intangible assets, the Company’s subsidiary, Howco.
NOTE 6 -
LINE OF
CREDIT - BANK
The Company has a revolving line of credit
with a financial institution, which balance is due on demand and principal payments are due monthly at 1/60
th
of the
outstanding principal balance. This revolving line of credit is in the amount of $50,000, and is personally guaranteed by the Company’s
Chief Executive Officer (“CEO”). The line bears interest at a fluctuating rate equal to the prime rate plus 4.25%,
which at December 31, 2018 and September 30, 2018 was 9.75% and 9.25%, respectively. As of December 31, 2018, the balance of the
line of credit was $45,915 with $4,085 available.
NOTE 7 -
SETTLEMENTS
PAYABLE
On July 20, 2018, the Company entered into
a settlement agreement with a collection agent for American Express relating to $127,056 of past due charges. The agreement provides
for initial payment of $12,706, the monthly payments of $6,500 and final payment on January 27, 2020 of $3,850. The amount due
at December 31, 2018 was $81,850.
On November 13, 2018 the Company and a vendor
agreed to settle $161,700 in past due professional fees for a convertible note in the amount of $90,000. The note (also discussed
below) bears interest at 5% and matures in July 2019 and has a fixed discount conversion feature. The balance accrued as accounts
payable of $71,700 is subject to a final waiver expected from the vendor that will allow a gain on debt extinguishment to be recognized.
On November 27 2018 the Company reached
an agreement and executed a related stipulation and payment terms agreement stemming from a legal action by the former Chief Strategy
Officer for improper termination. The plaintiff agreed to accept $600,000 in payments. The first scheduled payment of $200,000
was made on December 20, 2018 in accordance with the settlement terms. Twelve monthly payments of approximately $33,333 are due
starting on January 15, through December 15, 2019. The Company recorded $600,000 as accrued expense of which $500,000 was expensed
during the fiscal year 2018. The balance at December 31, 2018 is $412,435, which includes expected employer payroll taxes due as
payments are made.
BANTEK, INC. (f/k/a DRONE USA, INC.) AND
SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
DECEMBER 31, 2018
(Unaudited)
NOTE 8
-
NOTE PAYABLE
– SELLER
In connection with the acquisition of Howco
in September 2016, the Company issued a note payable in the amount of $900,000 to the sellers of Howco. The note matured on September
9, 2017 and bears interest at 5.50% per annum. The note requires payment of unpaid principal and interest upon maturity. The note
is secured by all assets of Howco Distribution Co. and subordinated to the Senior Secured Credit Facility discussed below. The
note is currently in default and the default interest rate is 8% per annum. At December 31, 2018 and September 30, 2018, accrued
interest on this note amounted to $144,027 and $125,682, respectively.
NOTE 9 -
NOTES PAYABLE – RELATED PARTIES
The Company has an $840,000 convertible
note payable (“Note 1”) to a related party entity controlled by the Company’s CEO. Note 1 bears interest at an
annual rate of 7% with an original maturity date of June 11, 2017 which has been extended to June 11, 2022, at which time all unpaid
principal and interest is due. The holder of Note 1 has the option to convert the outstanding principal and accrued interest, in
whole or in part, into shares of common stock at a conversion price equal to the volume weighted average price per share of common
stock for the 30-day period prior to conversion. As of December 31 and September 30, 2018, Note 1 has not been converted and the
balance of the note was $688,444 and $688,444, and accrued interest was $138,115 and $125,968, respectively. This note is considered
a stock settled debt in accordance with ASC 480 and the fixed monetary amount is equal to the principal amount based on the conversion
formula.
The Company has a convertible note payable
(“Note 2”) with the Company’s CEO. Note 2 bears interest at an annual rate of 7% with a maturity date of December
31, 2017, at which time all unpaid principal and interest was due. On December 15, 2017 the due date was extended to July 2, 2018
and then in July, 2018, the due date was extended to June 30, 2019, on December 23, 2018 the maturity date of the note was extended
to September 23, 2024. The holder of Note 2 has the option to convert the outstanding principal and accrued interest, in whole
or in part, into shares of common stock at a conversion price equal to the volume weighted average price per share of common stock
for the 30-day period prior to conversion. During the three months ended December 31, 2018, the Company borrowed $19,000 on this
note. As of December 31, 2018 and September 30, 2018, Note 2 has not been converted, the balance was $46,670 and $27,670, and accrued
interest was $11,845 and $11,350, respectively. This note is considered a stock settled debt in accordance with ASC 480 and the
fixed monetary amount is equal to the principal amount based on the conversion formula.
On December 20, 2018 the Company issued
a, non-convertible promissory note to the CEO for $400,000. The note bears interest at 12% per annum, matures in 5 years on January
7, 2024 and requires monthly payment of interest and principal of $5,000 with a balloon payment at maturity. The accrued interest
balance was $1,315 as of December 31, 2018.
NOTE 10 -
CONVERTIBLE NOTES PAYABLE
AND ADVISORY FEE LIABILITIES
Senior Secured Credit Facility Note
Effective September 13, 2016 (“Effective
Date”), the Company entered into a senior secured credit facility note (the “Agreement”) with an investment fund
to provide capital for the acquisition of Howco. The Company can borrow up to $6,500,000, subject to lender approval, with an initial
convertible promissory note at closing of $3,500,000 (the “Convertible Note”). The Convertible Note bears interest
at a rate of 18% per annum, required monthly payments of $52,500 which is interest only starting on October 13, 2016 through February
13, 2017, and monthly payments, including interest and principal, of $298,341 starting on March 13, 2017 through maturity on March
13, 2018. Events of default are defined in the Agreement and Convertible Note. In the event of default the Convertible Note balance
will bear interest at 25% per annum. In connection with this Agreement, the Company was obligated to pay additional advisory fees
of $850,000 payable in the form of cash or common stock in accordance with the terms of the Agreement. The Company was also required
to reserve 7,000,000 shares of common stock related to this transaction. The reserved shares will be released upon the satisfaction
of the loan.
In the event the lender makes additional
loans under the Agreement, the Company agreed to pay additional advisory fees under similar terms as the $850,000 fee. As of September
30, 2018, the Company had issued 539,204 shares of common stock in satisfaction of the $850,000 advisory fee in accordance with
the terms of the agreement, such shares being issued in September 2016. The proceeds from the sale of the 539,204 shares were
supposed to be applied towards the $850,000 advisory fee due. Based upon the value of the shares, at the time the lender sells
the shares, the Company may be required to redeem unsold shares for the difference between the $850,000 and the lender’s
sales proceeds. Accordingly, the $850,000 was reflected as a current liability through December 31, 2017. In January 2018, in
connection with a settlement agreement (see below), the accrued advisory fee was reclassified to the principal balance of the
replacement Convertible Note. Through the date of the settlement agreement and through December 31, 2018, the lender had not reported
any proceeds from the sale of these shares (see below). Prior to the settlement agreement in January 2018, notwithstanding anything
contained in the Agreement to the contrary, in the event the Lender has not realized net proceeds from the sale of Advisory Fee
Shares equal to at least the Advisory Fee by the earlier to occur of: (A) the twelve (12) month anniversary of the Effective Date;
(B) the occurrence of an Event of Default; or (C) the Maturity Date, then at any time thereafter, the Lender shall have the right,
upon written notice to the Borrower, to require that the Borrower redeem all Advisory Fee Shares then in Lender’s possession
for cash equal to the Advisory Fee, less any cash proceeds received by the Lender from any previous sales of Advisory Fee Shares,
if any. In the event such redemption notice is given by the Lender, the Borrower shall redeem the then remaining Advisory Fee
Shares in Lender’s possession for an amount of Dollars equal to the Advisory Fee, less any cash proceeds received by the
Lender from any previous sales of Advisory Fee Shares, if any, payable by wire transfer to an account designated by Lender within
five (5) Business Days from the date the Lender delivers such redemption notice to the Borrower.
BANTEK, INC. (f/k/a DRONE USA, INC.) AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
DECEMBER 31, 2018
(Unaudited)
The Convertible Note is only convertible
upon default or mutual agreement by both parties at a conversion rate of 85% of the lowest of the daily volume weighted average
price of the Company’s common stock during the 5 business days immediately prior to the conversion date. At any time and
from time to time while this Note is outstanding, but only upon: (i) the occurrence of an Event of Default under any of the Loan
Documents; or (ii) mutual agreement between the Company and the Holder, this Note may be, at the sole option of the Holder, convertible
into shares of the Company’s common stock, in accordance with the terms and conditions set forth below. At any time while
this Note is outstanding, but only upon: (i) the occurrence of an Event of Default under any of the Loan Documents; or (ii) mutual
agreement between the Company and the Holder, the Holder may convert all or any portion of the outstanding principal, accrued and
unpaid interest, and any other sums due and payable hereunder or under any other Loan Documents (such total amount, the “Conversion
Amount”) into shares of common stock of the Company (the “Conversion Shares”) at a price equal to: (i) the Conversion
Amount (the numerator);
divided by
(ii) 85% of the lowest of the daily volume weighted average price of the Company’s
common stock during the five business days immediately prior to the conversion date, which price shall be indicated in the conversion
notice (the denominator) (the “Conversion Price”). Upon liquidation by the Holder of Conversion Shares issued pursuant
to a Conversion Notice, provided that the Holder realizes a net amount from such liquidation equal to less than the Conversion
Amount specified in the relevant conversion notice (such net realized amount, the “Realized Amount”), the Company shall
issue to the Holder additional shares of the Company’s common stock equal to: (i) the Conversion Amount specified in the
relevant conversion notice;
minus
(ii) the Realized Amount, as evidenced by a reconciliation statement from the Holder (a
“Sale Reconciliation”) showing the Realized Amount from the sale of the Conversion Shares;
divided by
(iii)
the average volume weighted average price of the Company’s common stock during the five business days immediately prior to
the date upon which the Holder delivers notice (the “Make-Whole Notice”) to the Company that such additional shares
are requested by the Holder (such number of additional shares to be issued, the “Make-Whole Shares”).
Once a default occurs the Convertible Note
will be accounted for as stock settled debt at its fixed monetary value and any shares issued upon conversion are also subject
to a make whole provision similar to that described above for the $850,000 advisory fee payable. On March 13, 2017 the Company
defaulted on the monthly principal and interest payment of $298,341. Due to this default, as of June 30, 2017, the Company has
accounted for the embedded conversion option as stock settled debt and recorded a debt premium of $617,647 with a charge to interest
expense, and the interest rate increased to 25% (default rate).
On March 28, 2017, the Company entered
into an agreement with the above senior secured credit facility lender to receive a range of advisory services for a total of $1,200,000
with no definitive terms or length of service which was expensed in fiscal 2017 and had been recorded as an accrued liability –
advisory fees through December 31, 2017. In connection with the settlement agreement discussed below, in January 2018, the advisory
services fee payable was reclassified to the principal balance of the replacement Convertible Note.
On January 3, 2018, the Company entered
into a settlement agreement (the “Settlement Agreement”) and replacement note agreements with the investment fund related
to a senior secured credit facility note dated September 13, 2016. On the effective date of the Settlement Agreement, all amounts
owed to the investment fund aggregated $5,788,642 and consisted of a convertible promissory note of $3,500,000, accrued interest
payable of $238,642, and accrued advisory fees payable of $2,050,000. Additionally, on the effective date, the amount due of $5,788,642
was split and apportioned into 2 separate and distinct replacement notes (“Replacement Note A” and “Replacement
Note B”). Replacement Note A shall have a principal amount of $1,000,000 and Replacement Note B shall have a principal balance
of $4,788,642, both of which shall be and remained secured by the original security agreements, the pledge agreements, the guarantee
agreement and other applicable loan documents and both shall bear interest at 18% per annum. The default was not waived by this
settlement agreement. The Company originally recorded a premium on stock settled debt of $617,647 on the $3,500,000, and subsequent
to the settlement agreement recorded an additional premium on stock settled debt of $403,878 on the additional $2,288,642. The
interest rate was amended to 12% effective June 12, 2018.
The Credit Agreement is hereby amended
such that the Maturity Date is extended to January 13, 2019 (the “Extended Maturity Date”) for replacement Note B,
while the Note A maturity date remained at March 13, 2018 but was due as of March 2017 due to the principal and interest payment
default discussed above. Notwithstanding anything contained in this Agreement to the contrary, all Obligations owing by the Company
and all other Credit Parties under the Credit Agreement, First Replacement Note B, and all other Loan Documents shall be paid in
full by the Extended Maturity Date as follows: $52,500 per month from January 13, 2018 to December 13, 2018 and the remaining principal
and accrued interest on January 13, 2019. Interest payments made since the amendment have totaled $283,440 and are therefore not
in accord with that amendment. However TCA has received payments under the 3(a)(10) settlement (below) totaling $353,420 from January
13, 2018 and December 31, 2018.
On October 30, 2018, TCA the Company’s
senior lender amended its credit facility which had been restructured in January 2018 when fees due for advisory and other matters
along with accrued but unpaid interest were capitalized and separated into two notes, Note A having $1,000,000 principal and Note
B having $4,788,642 both having the same maturity terms, interest rates and conversion rights. Under the current amendment total
amounts outstanding under the notes along with accrued interest have been capitalized with the principal amount due of $6,018,192.
The new note accrues interest on the principal balance at 12% per annum, includes amortization to the new maturity of December
15, 2020. The amortization payments credited toward the principal amount and accrued interest vary and include payments made under
the 3(a)(10) settlement agreement with a third party related to Note A. Economically the total principal and accrued interest outstanding
remain unchanged as reported in the consolidated balance sheet. All other terms including conversion rights and a make-whole provision
in the case of a conversion shortfall remain the same as stated in the footnotes above. At December 31, 2018 the principal of the
Note B portion was $5,326,285 and the Note A principal subject to the 3(a)(10) court order was $646,580.
On November 15, 2017, the Company executed
a Liability Purchase Term Sheet with Livingston Asset Management (“Livingston”) under which Livingston agreed to purchase
up to $10,000,000 that the Company owes to its creditors through direct purchase of the debts from the Company’s creditors
in return for a convertible note issued by the Company in the principal amount of $50,000 bearing interest of 10% per year to
cover certain legal fees and other expenses of Livingston. The note matures in six months and is convertible into shares of our
common stock at a 30% reduction off the lowest closing bid price for 20 trading days prior to the date of conversion. Livingston
has the right to retain 30% of any negotiated reduction off the face amount of the liability the Company owes to such creditors.
The Company has accounted for the convertible promissory note as stock settled debt under ASC 480 and recorded a debt premium
of $21,428 with a charge to interest expense. The note and accrued interest were fully converted as of September 30, 2018 for
18,162,608 common shares. Debt premium of $21,428 was charged to additional paid in capital.
BANTEK, INC. (f/k/a DRONE USA, INC.) AND
SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
DECEMBER 31, 2018
(Unaudited)
On January 30, 2018 pursuant to the Liability
Purchase Term Sheet, the TCA Replacement Note A in the principal amount of $1,000,000 was purchased by Livingston Asset Management
LLC (“Livingston”) from the original lender. Principal of Replacement Note A is due to Livingston with all then accrued
but unpaid interest due to the original lender. In accordance with the terms of the Settlement Agreement, the Court was advised
of Company’s intention to rely upon the exception to registration set forth in Section 3(a)(l0) of the Securities Act to
support the issuance of its common shares and the Court held a fairness hearing regarding the issuance (the “Hearing”)
on March 12, 2018. Following entry of an Order by the Court which occurred on March 12, 2018, in settlement of the claims, the
Company shall issue and deliver to Livingston shares of its common stock (the “Settlement Shares”) in one or more tranches
as necessary, and subject to adjustment and ownership limitations as set forth in the Settlement Agreement, sufficient to generate
proceeds such that the aggregate Remittance Amount equals the Claim Amount. The Company will issue free trading shares of its common
stock under section 3(a)(10) of the Securities Act to Livingston in the amount of such judgment in a series of tranches so that
Livingston will not own more than 9.99% of our outstanding shares per tranche. The parties reasonably estimate that the fair market
value of the Settlement Shares to be received by Livingston is equal to approximately $1,666,667 which is based on a discount of
40%.
As of December 31, 2018, there have been
seven issuances under section 3(a)(10) of the Securities Act totaling 101,624,000 shares, which have been recorded at par value
with an equal charge to additional paid-in capital. The value originally recorded as a liability remains in the convertible note
balance, until these shares have been sold and reported to the Company by the lender as part of the Make-Whole provision at which
time the proceeds value of such shares are reclassified to additional paid-in capital. During the three months ended December 31,
2018, proceeds of $45,320 were remitted to TCA by Livingston and applied to reduce the liability with corresponding credits to
additional paid in capital. $30,618 of debt premium was credited to additional paid in capital in conjunction with the payments
to TCA. At December 31, 2018 the balance of $646,580 along with related debt premium is included in convertible notes payable on
the balance sheet.
On March 7, 2018 the Company entered into
a placement agent and advisory agreement with Scottsdale Capital Advisors in connection with the Livingston liability purchase
term sheet executed on November 15, 2017. The placement agent services fee amounted to $15,000 payable to Scottsdale Capital Advisors
in the form of a convertible note. The note matures six months from the date of issuance and shall accrue interest at the rate
of 10% per annum. The $15,000 note is convertible into shares of the Company’s common stock at a discount of 30% of the low
closing bid price for the twenty trading days prior to the conversion and is not subject to any registration rights. The Company
has accounted for the convertible promissory note as stock settled debt under ASC 480 and recorded a debt premium of $6,429 with
a charge to interest expense. The note has not been converted and the principal balance is $15,000 with $1,659 of accrued interest
at December 31, 2018.
Other Convertible Debt
In July 2017, the FASB issued Accounting
Standards Update No. 2017-11 Earnings Per Share (Topic 260) Distinguishing Liabilities from Equity (Topic 480) Derivatives and
Hedging (Topic 815) (“ASU 2017-11”), which changes the classification analysis of certain equity-linked financial instruments
(or embedded features) with down round features. When determining whether certain financial instruments should be classified as
liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument
is indexed to an entity’s own stock. ASU 2017-11 also clarifies existing disclosure requirements for equity-classified instruments.
As a result, a freestanding equity-linked financial instrument (or embedded conversion option) no longer would be accounted for
as a derivative liability at fair value as a result of the existence of a down round feature. For freestanding equity classified
financial instruments, ASU 2017-11 requires entities that present earnings per share (EPS) in accordance with ASC Topic 260 to
recognize the effect of the down round feature when it is triggered. That effect is treated as a dividend and as a reduction of
income available to common shareholders in basic EPS. For the Company, ASU 2017-11 is effective for fiscal years, and interim periods
within those fiscal years, beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period.
The Company adopted this standard on October 1, 2017.
On November 9, 2017, the Company received
a first tranche payment of $75,500 under the terms of a Securities Purchase Agreement dated October 25, 2017, with Crown Bridge
Partners, LLC (“Crown Bridge”) under which the Company issued to Crown Bridge a convertible note in the principal
amount of $105,000 and a five-year warrant to purchase 100,000 shares of the Company’s common stock at an exercise price
of $0.35 as a commitment fee which is equal to the product of one-third of the face value of each tranche divided by $0.35. Under
the terms of the note Crown Bridge was to receive “right of first refusal” for any subsequent loans or notes to fund
the Company. The Company violated this covenant when funding was received from other sources without offering Crown Bridge the
opportunity to participate. On December 20, 2017 the Company cured this covenant violation by issuing 200,000 additional warrants
have the same exercise price and terms of the original warrants. The warrants have full ratchet price protection and cashless
exercise rights.
BANTEK, INC. (f/k/a DRONE USA, INC.) AND
SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
DECEMBER 31, 2018
(Unaudited)
The convertible note (the “Note”)
issued to Crown Bridge in the principal amount of $105,000, has an original issue discount of $10,500 and issue costs of $19,000
both of which are recorded as debt discount along with the warrant relative fair value of $12,507 for the original 100,000 warrants
and $31,529 for the penalty warrants to be amortized over the twelve month term of this tranche, bears interest of 10% (12% default
rate) per annum, and has a maturity date of 12 months from the date of each tranche of payments under the Note with future tranches
being at the discretion of Crown Bridge. The conversion rate for any conversion of unpaid principal and interest under the Notes
is at a 35% discount to the lowest market price of the shares of the Company’s common stock within a 20 day trading period
prior to the date of conversion to which an additional 10% discount will be added if the conversion price of the Company’s
common stock is less than $0.05 per share and no shares of the Company’s common stock can be issued to the extent Crown Bridge
would own more than 4.99% of the outstanding shares of the Company’s common stock and the conversion shares contain piggy-back
registration rights. The Note is subject to customary default provisions including an event of default if the bid price of the
Company’s common stock is less than its par value of $.0001 per share. The Company is entitled to prepay the Note between
30 days after its issuance until 180 days from its issuance at amounts that increase from 112% of the prepayment amount to 137%
of the prepayment amount depending on the length of time when prepayments are made. The Company has accounted for the convertible
promissory note as stock settled debt under ASC 480 and recorded a debt premium of $56,538 with a charge to interest expense. As
of September 30, 2018 the note holder fully converted principal and accrued interest into common shares. The debt premium on stock
settled debt was fully recognized as additional paid in capital.
On June 1, 2018 the Company
entered into a consulting and services arrangement with Livingston Asset Management. The arrangement provides for
financial management services including accounting and related periodic reporting among other advisory services. Under the
agreement the Company will issue to Livingston Asset Management Convertible Fee Notes having principal of $12,500, interest
of 10% per annum, maturity of six or seven months. The notes are convertible into common shares at a discount of 50% to the
lowest bid price in the 30 trading days immediately preceding the notice of conversion. The Company has accounted for the
convertible promissory note as stock settled debt under ASC 480 and recorded a debt premium of $12,500 with a charge to
interest expense for each note. As of December 31, 2018 the following notes had been issued, of which the June1, July 1 and
August 1, 2018 notes were fully converted by January 31, 2019:
June 1, 2018, $12,500 principal, maturing December
31, 2018 – fully converted;
July 1, 2018, $12,500 principal, maturing January
31, 2019 – fully converted;
August 1, 2018, $12,500 principal maturing
January 31, 2019 fully converted;
September 1, 2018, $12,500 principal, maturing
February 28, 2019;
October 1, 2018, $12,500 principal, maturing
March 31, 2019;
November 1, 2018, $12,500 principal, maturing
April 30, 2019; and
December 1, 2018, $12,500 principal, maturing
May 31, 2019.
The notes were charged to professional
fees for each corresponding service month. The Company has accounted for each of the Convertible Fee Notes as stock settled debt
under ASC 480 and recorded a debt premium of $12,500 each with a charge to interest expense.
On August 29, 2018 the Company entered
into an agreement with a legal firm to provide securities related and other legal services. Under the agreement the Company will
issue convertible notes with varying principal amounts for services. The first note was issued on August 29, 2018 for $6,000, interest
of 12%, and maturity date of February 28, 2018. The conversion feature allows for conversion into common shares at the lesser of:
a) 70% of the share price on the date of the note; or b) 50% of the lowest bid price during the 30 trading days preceding the date
of the notice of conversion. In connection with the issuance of this Note, the Company determined that the terms of the Note contain
a conversion formula that caused variations in the conversion price resulting in the treatment of the conversion option as a bifurcated
derivative to be accounted for at fair value. Accordingly, under the provisions of FASB ASC Topic No. 815-40, “Derivatives
and Hedging – Contracts in an Entity’s Own Stock”, the embedded conversion option contained in the convertible
instruments were accounted for as derivative liabilities at the date of issuance and shall be adjusted to fair value through earnings
at each reporting date. The fair value of the embedded conversion option derivatives were determined using the Binomial valuation
model. $10,435 was recognized as derivative liability with $6,000 charged to debt discount and $4,035 charged to derivative expense
on issuance. The debt discount of $6,000 will be amortized to interest expense to the maturity date of the note. At December 31,
2018 the derivative fair value was determined to have decreased to $8,881. At December 31, 2018 $3,000 of debt discount was charged
to interest expense and the balance was $2,000.
BANTEK, INC. (f/k/a DRONE USA, INC.) AND
SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
DECEMBER 31, 2018
(Unaudited)
On September 4, 2018 and September 18,
2018 the Company issued additional convertible notes of $10,000 and $6,000 respectively for legal services to the same legal firm.
The notes have 6 month maturities and 12% interest rates. The notes are convertible into common shares at a discount of 50% to
the lowest bid price in the 30 trading days immediately preceding the notice of conversion. The Company has accounted for the convertible
promissory note as stock settled debt under ASC 480 and recorded debt premiums of $10,000 and $6,000 with a charge to interest
expense for the notes. The notes were charged to professional fees during the month the notes were issued.
On October 18, 2018 the Company issued
a convertible promissory note to an attorney for services in the amount of $6,000. The note bears interest at 12%, matures in six
months and is convertible into the Company’s common stock at 50% of the lowest closing bid price on the 30 trading days immediately
preceding the notice of conversion. The Company has accounted for the convertible promissory note as stock settled debt under ASC
480 and recorded debt premium $6,000 with a charge to interest expense for the notes. The note was charged to professional fees
during the month the note was issued.
On November 18, 2018 the Company issued
a convertible promissory note to an attorney for services in the amount of $6,000. The note bears interest at 12% and is convertible
into the Company’s common stock at 50% of the lowest closing bid price on the 30 trading days immediately preceding the notice
of conversion. The Company has accounted for the convertible promissory note as stock settled debt under ASC 480 and recorded debt
premium $6,000 with a charge to interest expense for the notes. The note was charged to professional fees during the month the
note was issued.
On December 18, 2018 the Company issued
a convertible promissory note to an attorney for services in the amount of $6,000. The note bears interest at 12% and is convertible
into the Company’s common stock at 50% of the lowest closing bid price on the 30 trading days immediately preceding the notice
of conversion. The Company has accounted for the convertible promissory note as stock settled debt under ASC 480 and recorded debt
premium $6,000 with a charge to interest expense for the notes. The note was charged to professional fees during the month the
note was issued.
On November 13, 2018, the Company issued
a convertible promissory note for $90,000 to a vendor in settlement of past due amounts due for services. The note bears interest
at 5%, matures on June 30, 2019 and is convertible into the Company’s common stock at 50% of the lowest closing bid price
during the 20 trading days immediately preceding the notice of conversion. The Company has accounted for the convertible promissory
note as stock settled debt under ASC 480 and recorded debt premium $90,000 with a charge to interest expense for the notes. The
original amount payable was reduced by $90,000 on the date the note was issued.
Note Amendments, Assignments and Restatements
On October 17, 2018 Porta Pellex
assigned $62,500 of the principal balance of its note to Trillium Partners LP along with $7,500 of accrued interest, leaving an
unpaid balance of $62,500 plus accrued interest on Porta Pellex’s original note. The assigned portion of the note was restated
to provide for conversion of interest and principal into common shares at 50% discount to the lowest bid price over the 20 trading
days prior to conversion notification. This modification was treated as a debt extinguishment. The modified note was treated as
stock settled debt in accordance with ASC 480 and $62,500 was recorded as put premium with a charge to interest expense for the
assigned and restated note. The Trillium Partners LP note principal and accrued interest was fully converted into 115,668,621 common
stock by November 27, 2018.
On October 23, 2018 Porta Pellex
assigned $62,500 of the remaining principal balance of its note to Jefferson Street Capital LLC along with $7,500 of accrued interest.
The assigned portion of the note was restated to provide for conversion of interest and principal into common shares at the lower
of: 50% discount to the lowest bid price over the 20 trading days prior to conversion notification; or 50% of the lowest bid price
during the 20 trading days prior to the closing date of the related assignment. This modification was treated as a debt extinguishment.
In connection with the issuance of this Note, the Company determined that the terms of the modified Note contain a conversion formula
that caused variations in the conversion price resulting in the treatment of the conversion option as a bifurcated derivative to
be accounted for at fair value. Accordingly, under the provisions of FASB ASC Topic No. 815-40, “Derivatives and Hedging
– Contracts in an Entity’s Own Stock”, the embedded conversion option contained in the convertible instruments
were accounted for as derivative liabilities at the date of assignment and shall be adjusted to fair value through earnings at
each reporting date. The fair value of the embedded conversion option derivatives were determined using the Binomial valuation
model. In connection with this Note, on the initial measurement date of October 23, 2018, the fair values of the embedded conversion
option derivative of $78,471 was recorded as derivative liabilities, $15,971 was charged to current period operations as initial
derivative expense, and $62,500 was recorded as a debt discount and is being amortized into interest expense over the expected
holding period of the restated note. The Jefferson Street Capital LLLC note principal and accrued interest was fully converted
into 128,619,959 shares of common stock by December 5, 2018. A net loss on debt extinguishment of $14,057 was recorded during the
three months ended December 31, 2018.
BANTEK, INC. (f/k/a DRONE USA, INC.) AND
SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
DECEMBER 31, 2018
(Unaudited)
The senior secured credit facility note
balance and convertible debt balances consisted of the following at December 31, 2018 and September 30, 2018:
|
|
December 31,
2018
|
|
|
September 30,
2018
|
|
Principal
|
|
$
|
6,206,391
|
|
|
$
|
5,568,566
|
|
Premiums
|
|
|
1,495,057
|
|
|
|
1,380,175
|
|
Unamortized discounts
|
|
|
(2,000
|
)
|
|
|
(5,000
|
)
|
|
|
|
7,699,448
|
|
|
|
6,943,741
|
|
Non-current
|
|
|
(5,696,089
|
)
|
|
|
-
|
|
Current
|
|
$
|
2,003,359
|
|
|
$
|
6,943,741
|
|
For the three months ended December 31,
2018 and 2017, amortization of debt discount on the above convertible notes amounted to $3,000 and $207,676, respectively.
NOTE 11 -
NOTE PAYABLE
On October 19, 2017, the Company entered
into a loan agreement with a third party entity under which the Company received approximately $232,500, net of fees and expenses
of $17,500 recorded as debt discounts and amortized to interest expense over the Note term, in return for issuing a promissory
note (the “Note”) in the principal amount of $250,000. The Note bears interest at 12% (18% default rate) per annum
and has a maturity date of April 20, 2018. The Note may be prepaid in full or in part with additional premium or penalty. The Note
is secured by certain assets of the Company’s CEO, certain assets of Howco and all of the assets of Drone USA as a junior
security interest to the first secured interest of the senior lender. Additionally, the loan is guaranteed by the Company’s
CEO. For the year ended September 30, 2018, amortization of debt discount amounted to $17,500. On April 20, 2018, the note matured
and all principal and unpaid interest was due immediately. The Company has obtained an amendment from lender changing the maturity
to October 20, 2018. This loan went into default after October 20, 2018. The Company paid a fee of $10,000 related to the amendment
which has been recorded as financing expense.
On September 4, 2018 Porta Pellex the holder
of the note above sold and assigned 50% of the face amount to Trillium Partners LP and World Market Ventures LLC. Following the
assignment Port Pellex held $125,000 which is the balance at September 30, 2018 and Trillium Partners LP and World Market Ventures
each held $62,500 in principal. The assigned notes were restated with a 50% conversion discount from the lowest bid price of the
common stock in the 20 days immediately preceding the conversion notice date. The modification was treated as debt extinguishment,
for which no gain or loss was incurred.
Trillium Partners LP converted $1,095 in
fees, all principal and $6,781 of interest into 35,187,910 common shares on September 19, 2018 at the conversion price of $0.002.
The $62,500 of put premium was credited to additional paid in capital in conjunction with the conversion.
World Market Ventures LLC converted principal
of $61,481 and $6,657 of interest into 34,500,000 common shares on September 19, 2018 at the conversion price of $0.001975. The
$61,481 of put premium was credited to additional paid in capital in conjunction with the conversion. $1,020 of principal and $1,020
of put premium are included in the convertible notes at December 31, 2018.
On October 17, 2018 Porta Pellex
assigned $62,500 of the principal balance of its note to Trillium Partners LP along with $7,500 of accrued interest, leaving an
unpaid balance of $62,500 plus accrued interest on Porta Pellex’s original note. The assigned portion of the note was restated
to provide for conversion of interest and principal into common shares at 50% discount to the lowest bid price over the 20 trading
days prior to conversion notification. The modification was treated as debt extinguishment. The modification was treated as stock
settled debt in accordance with ASC 480 and $62,500 was recorded as put premium with a charge to interest expense. The assigned
note was fully converted for common shares by November 27, 2018.
On October 20, 2018, the balance of the
note principal of $62,500 due to Porta Pellex was in default. This default was cured when the final assignment to Jefferson Street
Capital LLC was executed (see below).
On October 23, 2018 Porta Pellex assigned
$62,500 of the remaining principal balance of its note to Jefferson Street Capital LLC along with $7,500 of accrued interest. The
assigned portion of the note was restated to provide for conversion of interest and principal into common shares at the lower of:
50% discount to the lowest bid price over the 20 trading days prior to conversion notification; or 50% of the lowest bid price
during the 20 trading days prior to the closing date of the related assignment. This modification was treated as a debt extinguishment.
In connection with the issuance of this Note, the Company determined that the terms of the modified Note contain a conversion formula
that caused variations in the conversion price resulting in the treatment of the conversion option as a bifurcated derivative to
be accounted for at fair value. Accordingly, under the provisions of FASB ASC Topic No. 815-40, “Derivatives and Hedging
– Contracts in an Entity’s Own Stock”, the embedded conversion option contained in the convertible instruments
were accounted for as derivative liabilities at the date of assignment and shall be adjusted to fair value through earnings at
each reporting date. The fair value of the embedded conversion option derivatives were determined using the Binomial valuation
model. In connection with this Note, on the initial measurement date of October 23, 2018, the fair values of the embedded conversion
option derivative of $78,471 was recorded as derivative liabilities, $15,971 was charged to current period operations as initial
derivative expense, and $62,500 was recorded as a debt discount to be amortized into interest expense over the holding period of
the restated note.
The assigned note was fully converted for
common shares by December 5, 2018.
Following the assignments and conversions
into common stock the Porta Pellex note balance was fully liquidated and $1,020 of principal remained in the form of a convertible
note balance was held by World Market Ventures LLC as of December 31, 2018.
BANTEK, INC. (f/k/a DRONE USA, INC.) AND
SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
DECEMBER 31, 2018
(Unaudited)
NOTE 12 -
STOCKHOLDERS’ DEFICIT
Preferred Stock
As of December 31, 2018, the Company is
authorized to issue 5,000,000 shares of $0.0001 par value preferred stock, with designations, voting, and other rights and preferences
to be determined by the Board of Directors of which 4,999,750 remain available for designation and issuance.
As of December 31 and September 30, 2018,
the Company has designated 250 shares of $0.0001 par value Series A preferred stock, of which 250 shares are issued and outstanding.
These preferred shares have voting rights per shareholder equal to the total number of issued and outstanding shares of common
stock divided by 0.99.
Common Stock
On April 17, 2018 the Company’s shareholders
approved an increase in authorized common stock to 1,500,000,000 from 200,000,000, which became effective upon the filing of an
amendment to the articles of incorporation with the State of Delaware on April 24, 2018. As of December 31, and September 30, 2018
there were 1,046,868,825 and 767,160,077 shares outstanding, respectively.
Stock Incentive Plan
The Company established its 2016 Stock
Incentive Plan (the “Plan”) that permits the granting of incentive stock options and other common stock awards. The
maximum number of shares available under the Plan is 100,000,000 shares. The Plan is open to all employees, officers, directors,
and non-employees of the Company. Options granted under the Plan will terminate and may no longer be exercised (i) immediately
upon termination of an employee or consultant for cause or (ii) one year after termination of employment, but not later than the
remaining term of the option. As of December 31, 2018, 81,495,000 awards remain available for grant under the Plan.
Shares Issued for non-employee Services
In February 2017, the Company issued 400,000
vested shares of common stock to an entity as payment for consulting services rendered. As the shares fee is considered contractually
earned upon the execution of the agreement, the shares were valued on the February 17, 2017 measurement date at $0.23 per share
or a total of $92,000 based on the quoted trading price and amortized over the 6-month term of the agreement. In June 2017, upon
renewal of the agreement, the Company issued an additional 400,000 vested shares of common stock to this entity as payment for
consulting services rendered valued at $93,160, or $0.2329 per share, based on the quoted trading price. In connection with the
issuance of these shares, during the year ended September 30, 2017, the Company recorded professional fees of $141,380 and a prepaid
expense of $43,780 which were amortized into professional fees during the year ended September 30, 2018.
On April 1, 2018, the Company entered into
a one year oral management consulting agreement with an individual. In connection with this agreement, the Company issued 4,000,000
common shares to the consultant. Such shares were valued on the vesting dates of April 1, 2018 at $296,000, or $0.074 per share
based on the quoted trading price. In connection with these shares, the Company has record prepaid professional fees of $295,600
to be recognized monthly as expense over the one-year term. There was $73,900 remaining as prepaid expense at December 31, 2018.
On June 19, 2018 Tysadco Partners was issued
533,333 shares of restricted common stock for services under a one-year agreement. 400,000 shares were issued as the “retainer”,
to be vested in four equal installments beginning on effective date of the agreement and 60, 120 and 180 days following the effective
date. The remaining 133,333 shares were issued for the monthly compensation arrangement. The related charges will be measured on
the vesting dates at fair value and recognized in Professional Fees (expense) pro rata over the service term.
BANTEK, INC. (f/k/a DRONE USA, INC.) AND
SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
DECEMBER 31, 2018
(Unaudited)
On September 24, 2018 2,387,302 common
shares were issued to Tysadco Partners for the Company’s investor relations firm as per the agreement for monthly payments
in shares of $4,000 per month totaling $16,000, which was fully recognized as expense as of September 30, 2018. The issuance settled
the amounts due for June 21, 2018 through October 20, 2018.
Shares Issued for Settlement
On August 27, 2018 the Company settled
outstanding accounts payable with a vendor by issuing 2,307,693 common shares. On September 27, 2018, the Company agreed to issue
2,692,307 shares for a total of 5,000,000 shares to settle the payable balance of $15,000. These shares were valued at the market
price of $0.0058 and $0.004 on the grant date and settlement date respectively, resulting in a loss on settlement of $9,154.
Shares Issued Under 3(a)(10)
The Company issued common shares to Livingston
Asset Management, pursuant to Replacement Note A and the related 3(a)(10) settlement (see Note 10).
Between March 14, 2018 and October 29, 2018,
101,624,000 common shares were issued and sold by Livingston, with 71,624,000 shares issued and sold through
September 30, 2018, and the remaining 30,000,000 issued as of September 30, 2018 and sold as of November 22, 2018.
The shares of the Company’s common stock
issued under section 3(a)(10) of the Securities Act, have been initially recorded at par value with an equal charge to additional
paid-in capital and proceeds of $308,100 and pro rata note premium of $204,989 totaling $513,089 have been recorded as equity relating
to these issued shares as of September 30, 2018 and proceeds of $45,320 and $30,618 of debt premium totaling $75,938 were recorded
to equity in the three months ended December 31, 2018.
Common Stock Sold for Settlement Payment
of 3(a)(10)
On November 22, 2018 Livingston Asset Management
finalized sale of 30,000,000 shares of common stock and remitted a payment to TCA for $45,320 in partial settlement of TCA Note
A under the terms of the 3(a)(10) agreement. The liability was reduced by $45,320. The principal reduction of $45,320 and related
debt premium of $30,618 were recorded as additional paid in capital.
Shares Issued for Warrant Exercise
On October 17, 2018 Crown Bridge Partners was
issued 35,420,168 common shares at $.0072, in exchange for 39,990,513 warrants surrendered. $68,232 was recorded as equity and
derivative liabilities were reduced by $28,793.
Shares Issued for Conversion of Convertible
Notes
Between November 1 and December 5, 2018
Jefferson Street Capital was issued 128,619,959 common for conversion of principal related to the Porta Pellex note assignment
and restatement cited above. The note was converted at contracted rates and the shares issued had aggregate fair values on the
conversion dates of $166,929. The note principal of $62,500, interest due of $7,500 fees of $4,400 were fully liquidated as a result
of the conversions. Derivative liabilities of $78,471 were relieved to gain on debt extinguishment recorded as additional paid
in capital, debt discount of $62,500 was amortized to interest expense and loss due to debt extinguishment of $14,057 was recorded.
Between November 6 and November 27, 2018 Trillium
Partners LP was issued 115,668,621 common for conversion of $62,500 principal related to the Porta Pellex note assignment and restatement
cited above. The note principal of $62,500, accrued interest or $7,500 and fees of $2,290 were fully liquidated as a result of
the conversions. The note was converted at contracted rates. Debt premiums of $62,500 were recorded as additional paid in capital.
BANTEK, INC. (f/k/a DRONE USA, INC.) AND
SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
DECEMBER 31, 2018
(Unaudited)
Stock Options
On July 1, 2016, the Company granted options
under the 2016 Stock Incentive Plan to purchase 22,500,000 shares of its common stock to several employees, and an additional 4,300,000
to certain non-employees for services at an exercise price of $0.20 per share. The fair value of the shares of the underlying common
stock at the date of grant based on the quoted trading price was $0.20 per share. 20,000,000 of the options issued to certain employees
and 4,000,000 of the options issued to one consultant vested immediately and have a ten year term. The remaining 2,800,000 options
cliff vest 50% per year over the following two year period and have a ten year term. Assumptions related to the estimated fair
value of these stock options on their date of grant, which the Company estimated using the Black-Scholes option pricing model,
are as follows: risk-free interest rate of approximately 1.46%; expected divided yield of 0%; expected option life of 5 years for
the shares that vest immediately; expected option life of 5.75 years for the shares that vest over a two year period using the
simplified method; and expected volatility of approximately 841%. The value of the options granted to non-employees which vested
over time are remeasured at each reporting date until vesting occurs. The aggregate grant date fair value of these awards, as adjusted
to apply variable measurement date accounting for non-employee awards, amounted to $5,579,990 as of September 30, 2016. The Company
recognizes compensation cost for unvested stock-based incentive awards on a straight-line basis over the requisite service period.
For the year ended September 30, 2017,
the Company granted options under the 2016 Stock Incentive Plan to purchase 15,566,200 shares of its common stock to several employees,
and 10,485,000 shares of its common stock to certain non-employees at exercise prices ranging from $0.20 to $0.24 per share with
vesting terms ranging from immediately vesting to 5 years to employees and certain consultants, respectively. The options were
valued at the grant date and remeasurement date using a Black-Scholes option pricing model with the following assumptions; risk-free
interest rate of 1.46%, expected dividend yield of 0%, expected option term of 1.75 to 5 years for the shares that vested immediately
and 5.75 to 6.5 years for those with vesting terms using the simplified method and expected volatility ranging from 117% to 125%.
The value of the options granted to non-employees which vested over time are remeasured at each reporting date until vesting occurs.
The aggregate grant date fair value of these awards, as adjusted to apply variable measurement date accounting for non-employee
awards, amounted to $3,863,388 as of September 30, 2017. The Company recognizes compensation cost for unvested stock-based incentive
awards on a straight-line basis over the requisite service period.
There were no options granted under the
2016 Stock Incentive Plan for the three months ended December 31, 2018.
For the three months ended December 31,
2018 and 2017, the Company recorded $66,823 and $189,267 of compensation and consulting expense related to stock options, respectively.
Total unrecognized compensation and consulting expense related to unvested stock options at December 31, 2018 amounted to $551,555.
The weighted average period over which share-based compensation expense related to these options will be recognized is approximately
2 years.
For the three months ended December 31,
2018 and year ended September 30, 2018, a summary of the Company’s stock options activity is as follows:
|
|
Number of
Options
|
|
|
Weighted-
Average
Exercise Price
|
|
|
Weighted-
Average
Remaining
Contractual
Term (Years)
|
|
|
Weighted-
Average
Grant-Date
Fair Value
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at September 30, 2017
|
|
|
44,351,200
|
|
|
$
|
0.21
|
|
|
|
9.27
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Forfeited
|
|
|
(25,846,200
|
)
|
|
|
0.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2018
|
|
|
18,505,000
|
|
|
|
.22
|
|
|
|
8.46
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding at December 31, 2018
|
|
|
18,505,000
|
|
|
|
.22
|
|
|
|
7.18
|
|
|
|
-
|
|
|
|
-
|
|
Exercisable at December 31, 2018
|
|
|
9,073,000
|
|
|
$
|
0.21
|
|
|
|
6.37
|
|
|
$
|
-
|
|
|
$
|
-
|
|
All options were issued at an options price equal to the market
price of the shares on the date of the grant.
BANTEK, INC. (f/k/a DRONE USA, INC.) AND
SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
DECEMBER 31, 2018
(Unaudited)
Warrants
On September 9, 2016, 500,000 5-year warrants
exercisable at $0.01 per share were issued as part of the consideration for the Howco acquisition. These warrants were valued at
aggregate of $180,000.
On November 9, 2017, the Company received
a first tranche payment of $75,500 under the terms of a Securities Purchase Agreement dated October 25, 2017, with Crown Bridge
under which the Company issued to Crown Bridge a convertible note in the principal amount of $105,000 and a five-year warrant to
purchase 100,000 shares of the Company’s common stock at an exercise price of $0.35 as a commitment fee which is equal to
the product of one-third of the face value of each tranche divided by $0.35. On December 20, 2017 an additional 200,000 warrants
were issued as a penalty and in order to entice Crown Bridge to waive its right of first refusal to provide additional financing
under the terms of their convertible note. A debt discount of $44,036 was recorded for the relative fair market value of the total
300,000 warrants and amortized to interest expense as of September 30, 2018. The warrants have full ratchet price protection and
cashless exercise rights (See Note10). The warrant includes an anti-dilution clause that was triggered on June 4, 2018. On June
4, 2018 an unrelated convertible note holder became entitled to convert their note into common shares at a 60% discount to the
stock’s market price. The anti-dilution provision trigger entitled Crown Bridge to exercise its warrants under a formula
that increased the number of common shares to 31,250,000 at a price of $.0036 per share. Due to the fact that the number of shares
and exercise price can change due to market changes in the price of the common stock the Company has concluded to treat the warrants
as derivatives and to revalue that derivative at each reporting date. Therefore a derivative liability of $261,484 with a charge
to additional paid in capital was recorded on June 4, 2018. As of December 31, 2018 the warrant was revalued and the warrant holder
is entitled to exercise its warrants for 136,083,627 common shares and the related derivative liability is $189,324.
For the three months ended December 31,
2018 and the year ended September 30, 2018, a summary of the Company’s warrant activity is as follows:
|
|
Number of
Warrants
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Weighted-
Average
Remaining
Contractual
Term (Years)
|
|
|
Weighted-
Average
Grant-Date
Fair Value
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at September 30, 2017
|
|
|
500,000
|
|
|
$
|
0.01
|
|
|
|
2.94
|
|
|
$
|
.36
|
|
|
$
|
-
|
|
Granted
|
|
|
300,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anti Dilution
|
|
|
68,778,947
|
|
|
$
|
0.00151
|
|
|
|
4.08
|
|
|
|
.0036
|
|
|
$
|
185,822
|
|
Outstanding and exercisable at September 30, 2018
|
|
|
69,578,947
|
|
|
$
|
0.00158
|
|
|
|
4.1
|
|
|
$
|
-
|
|
|
$
|
185,822
|
|
Exercised at October 17, 2018
|
|
|
(39,990,513
|
)
|
|
$
|
0.000158
|
|
|
|
4.1
|
|
|
$
|
-
|
|
|
$
|
28,793
|
|
Anti Dilution adjustment at December 31, 2018
|
|
|
106,995,193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding and exercisable at December 31, 2018
|
|
|
136,583,627
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE
13 -
DEFINED CONTRIBUTION PLAN
In August 2016, Drone established a qualified
401(k) plan with a discretionary employer matching provision. All employees who are at least twenty-one years of age and no minimum
service requirement are eligible to participate in the plan. The plan allows participants to defer up to 90% of their annual compensation,
up to statutory limits. Employer contributions charged to operations for the three months ended December 31, 2018 and 2017 was
$0 and $0, respectively.
The Company’s subsidiary, Howco,
is the sponsor of a qualified 401(k) plan with a safe harbor provision. All employees are eligible to enter the plan within one
year of the commencement of employment. Employer contributions charged to expense for the three months ended December 31, 2018
and 2017 was $3,519 and $0, respectively.
BANTEK, INC. (f/k/a DRONE USA, INC.) AND
SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
DECEMBER 33, 2018
(Unaudited)
NOTE
14 -
RELATED PARTY TRANSACTIONS
On October 1, 2016, the Company entered
into employment agreements with two of its officers. The employment agreement with the company’s President and CEO provides
for annual base compensation of $370,000 for a period of three years, which can, at the Company’s election, be paid in cash
or Common Stock or deferred if insufficient cash is available, and provides for other benefits, including a discretionary bonus
and equity a provision for the equivalent of 12 months’ base salary, and an additional one-time severance payment of $2,500,000
upon termination under certain circumstances, as defined in the agreement. The employment agreement with the Company’s Treasurer
and CFO provides for annual base compensation of $250,000 for a period of three years, which can, at the Company’s election,
be paid in cash or Company Common Stock or deferred if insufficient cash is available, and provides for other benefits, including
a discretionary bonus and equity grants, a provision for the equivalent of 12 months’ base salary and an additional one-time
severance payment of $1,500,000 upon termination under certain circumstances, as defined in the agreement. On July 10, 2017, the
CFO of the Company who also a member of the Board resigned. Pursuant to the employment agreement, this employee is not eligible
for the one-time severance payment of $1,500,000 and accordingly, the final balance of accrued wages due to this former CFO as
of September 30, 2017 due of approximately $93,000 which is included in accrued expenses on the accompanying consolidated balance
sheet at December 31, and September 30, 2018.
On March 28, 2017, we entered into an at-will
employment agreement with Matthew Wiles as General Manager of Howco. Under the terms of employment agreement, Mr. Wiles’
compensation is $140,000 per annum and he also will be eligible for a bonus of 10% of Howco’s gross profits over $1.25 million
to be paid in cash after the annual financial statements have been completed and, if applicable, audited for filing with the SEC.
Mr. Wiles will also receive options to acquire 250,000 shares of Drone USA’s common stock vesting over five years in equal
amounts on the anniversary date of his Employment Agreement.
From July 2017 to August 2018, the Company
utilized as its corporate headquarters the office space and equipment of an entity in West Haven, Connecticut related to the Company’s
CEO at no cost. Since September 30, 2018 the Company leases space in New Jersey as its corporate headquarters.
The Company has certain convertible notes
payable to related parties (see Note 9).
NOTE 15 -
COMMITMENTS
AND CONTINGENCIES
Contingencies
Legal Matters
On February 6, 2018 the Company sent a
letter to the previous owners of Howco Distributing Co. (“Howco”) alleging that they made certain financial misrepresentations
under the terms of the Stock Purchase Agreement by which the Company acquired control of Howco during 2016. The Company claimed
that the previous owners took excessive amounts of cash from the business prior to the close of the merger. On March 13, 2018 the
Company filed a lawsuit against the previous owners by issuing a summons. On April 12, 2018, the Company received the Defendants’
answer. The Company and the previous owners are in discussion to settle the matter as of December 31, 2018.
In connection with the merger in fiscal
2016, with Texas Wyoming Drilling, Inc., a vendor has a claim for unpaid bills of approximately $75,000 against the Company. The
Company and its legal counsel believe the Company is not liable for the claim pursuant to its indemnification clause in the merger
agreement.
Settlements
During the quarter ended June 30, 2017,
the Company received demands for non-payment of five months of rent for its New York location. In July 2017, the Company vacated
the New York premises. Subsequent to June 30, 2017, a lawsuit was filed in the Supreme Court of the State of New York for an alleged
breach of a Service Agreement for approximately $63,000 in connection with the lease the Company entered into for its former office
space in New York. As of September 30, 2017, the Company accrued into accounts payable approximately $63,000 pursuant to ASC 420-10-30
“Cost to Terminate an Operating Lease”. In October 2017, the Company entered into a settlement agreement with the New
York lease landlord and paid $30,000 in full settlement and recorded a settlement gain of $33,361.
On August 9, 2017, a lawsuit was filed
by an investor relations firm against the Company in the Supreme Court, Westchester County (Index No. 61772/2017). The complaint
alleged two causes of action, one for goods and services furnished and one for an account stated, in the amount of $74,325. The
plaintiff obtained a default judgment. The Company has filed an Order to Show Cause to vacate the default judgment on the grounds
that the service of the complaint was invalid. The court granted the Company’s Order to Show Cause on December 19, 2017 and
set the hearing on the Order to Show Cause for January 12, 2018. At December 31, 2017, $68,544 was accrued in accounts payable.
On February 14, 2018 the Company entered into a stipulation agreement with the investor relations firm which settled the amount
due at $20,000 if payment was made by February 21, 2018. The lump sum payment was made on February 16, 2018 and a gain on extinguishment
of debt of $48,544 was recorded.
On January 29, 2018, the Company entered
into a settlement agreement and mutual release with a vendor who had provided public relations and other consulting services whereby
the Company shall pay to this vendor an aggregate amount of $60,000 of which $30,000 was paid on February 2, 2018. Additionally,
the Company shall pay ten monthly payments of $3,000 per month beginning on February 29, 2018. Additionally, the vendor returned
400,000 common shares of the Company’s common stock which will be cancelled upon satisfaction of the liability. The liability
is recorded at $21,000 as of December 31, 2018. The Company is in discussion with the vendor to address the past due amounts.
BANTEK, INC. (f/k/a DRONE USA, INC.) AND
SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
DECEMBER 31, 2018
(Unaudited)
On November 13, 2018 the Company and a vendor
agreed to settle $161,700 in past due professional fees for a convertible note in the amount of $90,000. The note bears interest
at 5% and matures in July 2019 and has a fixed discount conversion feature. The accrued balance as accounts payable of $71,700
is subject to a final waiver from the vendor that will allow a gain on the debt extinguishment to be recognized. (see note 17)
During 2016, Company entered into an employment
agreement with the Company’s former Chief Strategy Officer which provided for annual base compensation of $400,000 for a
period of three years and provided for other additional benefits as defined in the agreement including a signing bonus of $100,000
payable during the first year of employment. During November 2018 the Company reached an agreement and executed a related stipulation
and payment terms agreement stemming from the legal action by the former Chief Strategy Officer for improper termination. The plaintiff
agreed to accept $600,000 in payments. The first scheduled payment of $200,000 was made on December 20, 2018 in accordance with
the settlement terms. Twelve monthly payments of approximately $33,333 are due starting on January 15, through December 15, 2019.
As of December 31, 2018 a balance of $412,435 remained as accrued expense which includes related employer payroll taxes expected
to be incurred for future payments. (see note 17)
As of December 31, 2018, the Company has
received demand for payment of past due amounts for services by several consultants and service providers.
Commitments
Exclusive Agreement
On June 1, 2016, the
Company entered into an exclusive agreement with a Brazilian entity in the drone technology market. The agreement provides that
the Company will acquire exclusive rights to this entity’s UAV technology and intellectual property that includes research
and development efforts completed by this entity. The Company will also secure exclusive export and representation rights to this
entity’s products along with the non-binding option to acquire full ownership of this entity for $1 million should the companies
agree at a later date it would be in the best interest of both businesses. As consideration for this agreement, the Brazilian entity
CEO was appointed to the position of Chief Technology Officer of the Company and granted an option for 2,000,000 shares of common
stock.
Consulting Agreements
In June 2017, the Company entered into
an agreement with an investment bank to provide placement agent services on an exclusive basis as it relates to a private placement
(“the placement”). The agreement calls for the investment bank to receive 9% of the gross proceeds of the placement
and 2.5% warrant coverage of the amount raised. The warrants shall entitle the investment bank to purchase securities of the Company
at a purchase price equal to 110% of the implied price per share of the placement or 100% of the public market closing price of
the Company’s common stock on the date of the placement, whichever is lower. The warrants shall have a term of five years
after the closing of the placement. The agreement expired on September 30, 2017 but the terms of the agreement remains effective
for previously introduced investors for capital raised during the year ended September 30, 2018. The investment bankers have not
presented any claims under this agreement.
Lease Obligations
The Company entered into an agreement with
a manufacturer in Pismo Beach, California. The agreement provides for certain services to be provided by the manufacturer as needed
by the Company. The agreement has an initial term of three years with one year renewals. In connection with this agreement, the
Company has agreed to sublease space based in San Luis Obispo, California from the manufacturer for the purposes of the development
and manufacturing of unmanned aerial vehicles. The lease provides for base monthly rent of approximately $15,000 for the initial
term to be increased to $16,500 per month upon extension. The lease term begins February 1, 2017 and expires January 31, 2019 with
the option to extend the term an additional 24 months. However, the Company never took possession of the premises and in July 2017,
the Company made a decision to not take possession of the premises. The Company is in default of the rent payments and had received
verbal demand of payments. As of December 31, 2018, the Company has not made any of the required monthly rent payments in connection
with this agreement. During fiscal 2017, the Company had expensed and accrued into accounts payable the remaining amounts due under
the term of the lease for a total accrual of $360,000 pursuant to ASC 420-10-30. This balance remains accrued as of December 31,
2018 and 2017.
In May 2017, the Company extended Howco’s
office lease through May 30, 2020. The lease requires monthly payments including base rent plus CAM with annual increases. Future
minimum lease payments under non-cancelable operating leases at December 31, 2018 are as follows:
Years ending September 30,
|
|
Amount
|
|
2019
|
|
$
|
60,137
|
|
2020
|
|
|
40,737
|
|
Total minimum non-cancelable operating lease payments
|
|
$
|
100,874
|
|
For the three months ended December 31,
2018 and 2017, rent expense amounted to $14,513 and $14,565, respectively.
BANTEK, INC. (f/k/a DRONE USA, INC.) AND
SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
DECEMBER 31, 2018
(Unaudited)
Purchase commitments
The Company entered into agreements to
act as a distributor or dealer with third party drone suppliers. Some of these agreements require the Company to maintain certain
levels of inventory of the supplier’s products. At December 31 and September 30, 2018 no inventory was required to be held
under the terms of these arrangements.
Profit Sharing Plan (for Howco)
On April 13, 2018, Howco Distributing announced
to its employees a Company-wide profit sharing program. In fiscal year 2018, Howco Distributing, will paid out ten-percent of the
Company’s income before depreciation and amortization. The employee profit share is equal to their annual salary divided
by the Company’s total annual payroll and multiplied by 10% of adjusted net income for the fiscal year. During the three
months ended December 31, 2018 the employees earned approximately $6,000 under this plan.
NOTE 16 -
CONCENTRATIONS
Concentration of Credit Risk
The Company maintains its cash in bank
and financial institution deposits that at times may exceed federally insured limits. At December 31, and September 30, 2018, cash
in bank did not exceeded the federally insured limits of $250,000. The Company has not experienced any losses in such accounts
through December 31, 2018.
Economic Concentrations
With respect to customer concentration, two
customers accounted for approximately 54.6% and 13.1%, of total sales for the three months ended December 31, 2018.
Four customers accounted for approximately 53%, 19%, 19% and 10%% of total sales for the three months ended December 31, 2017.
With respect to accounts receivable concentration,
five customers accounted for 28.7%, 26.4%, 15.1%, 12.8% and 11.2% of total accounts receivable at December 31, 2018. Three customers
accounted for approximately, 50%, 20% and 20% of total accounts receivable at September 30, 2018.
With respect to supplier concentration, three
suppliers accounted for approximately 25.3%, 21.1% and 15.9% of total purchases for the three months ended December 31, 2018. One
supplier accounted for approximately 39% of total purchases for the three months ended December 31, 2017.
With respect to accounts payable concentration, two suppliers accounted
for approximately 20.8% and 15.8% of total accounts payable at December 31, 2018. Three suppliers accounted for approximately 18%,
13% and 11% of total accounts payable at September 30, 2018.
With respect to foreign sales, it totaled
approximately $4,863 for the three months ended December 31, 2018. Foreign sales totaled approximately $27,000 for the three months
ended December 31, 2017.
NOTE 17 -
SUBSEQUENT
EVENTS
On February 5, 2019, the Company filed
Form Pre 14C with the SEC following majority shareholder approval on January 30, 2019 to increase the number of authorized common
shares from 1,500,000,000 to 6,000,000,000. The filing should become definitive on February 24, 2019 when a Form Def 14C is
filed.
On February 11, 2019, the Supreme Court of
the State of New York issued a summons to the former CFO of the Company, to appear before the court to answer the Company’s
complaint seeking payment under a personal guarantee of the defendant to provide half of any compensation paid to the former Chief
Strategy Officer. The Company is seeking $300,000 from the defendant relating to the November 27, 2018 settlement agreement with
the former Chief Strategy Office for $600,000.
On February 13, 2019, the Company received
waiver and release arising from a vendor settlement of past due amounts due of $161,681 for the $90,000 convertible note issued
to the vendor on November 13, 2018. The Company will immediately recognized a gain on extinguishment of debt in the amount of $71,681.
BANTEK, INC. (f/k/a DRONE USA, INC.) AND
SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
DECEMBER 31, 2018
(Unaudited)
Convertible Notes Issued
On January 1, 2019 the Company issued a
convertible promissory note for $12,500 to Livingston Asset Management under the services agreement mentioned above. The note bears
interest at 10%, matures in six months and is convertible into the Company’s common stock at 50% of the lowest closing bid
price on the 30 trading days immediately preceding the notice of conversion.
On January 18, 2019 the Company issued
a convertible promissory note to an attorney for services in the amount of $6,000. The note bears interest at 12%, matures in six
months and is convertible into the Company’s common stock at 50% of the lowest closing bid price on the 30 trading days immediately
preceding the notice of conversion.
On February 1, 2019 the Company issued
a convertible promissory note for $12,500 to Livingston Asset Management under the services agreement mentioned above. The note
bears interest at 10%, matures in six months and is convertible into the Company’s common stock at 50% of the lowest closing
bid price on the 30 trading days immediately preceding the notice of conversion.
Related Party Promissory Note Issued
On January 19, 2019 the Company issued
a, promissory note to the CEO for $200,000. The note bears interest at 12% per annum, matures in 5 years on September 23, 2021.
Common Shares Issued for Convertible
Notes
On January 8, 2019, Livingston Asset Management,
LLC converted $9,000 of principal, $682 of accrued interest and $1,145 in fees for the fee note issued June 1, 2018 for 45,306,040
at the contracted price of $0.00025. The unliquidated balance of the fee note was $3,000 following the conversion.
On January 18, 2019, Livingston Asset Management
converted $3,000 of the remaining principal balance, $24 of accrued interest and $1,145 in fees for the fee note issued June 1,
2018 and $12,500 of principal, $678 of accrued interest and $1,145 in fees from the fee note issued July 1, 2018 for total of 73,967,680
shares of common stock at the contracted price of $0.00025. The note was fully liquidated following the conversion.
On February 11, 2019, Livingston Asset
Management submitted a conversion notice to convert $12,500 of principal, $654 of accrued interest and $1,145 in fees from the
fee note issued August 1, 2018, for 47,663,700 at the contracted price of $0.0003.
Common Shares Issued under 3(a)(10)
On February 4, 2019 the Company issued
119,455,000 common shares to Livingston Asset Management under the 3(a)(10) agreement which are offered for sale to settle the
Company’s obligation to its senior secured note holder.
Warrant Exercises
On January 4, 2019 Crown Bridge Partners
exercised warrants for 52,100,526 common shares at $.0002, using the cashless formula as per the agreement.
On January 30, 2019 Crown Bridge Partners
exercised warrants for 60,611,842 common shares at $.00024, using the cashless formula as per the agreement.