CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2019
(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 was received on February 19, 2019.
NOTE
2
-
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND GOING CONCERN
Basis
of Presentation and 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.
The
accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting
principles generally accepted in the United States of America (“GAAP”) and the rules and regulations of the Securities
and Exchange Commission for interim financial information. Accordingly certain information and footnote disclosures normally included
in financial statements in accordance with GAAP have been omitted. In the opinion of management, all adjustments (consisting of
normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the six months
ended March 31, 2019 are not necessarily indicative of the results that may be expected for the year ending September 30, 2019.
The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial
statements as of and for the year ended September 30, 2018 and footnotes thereto included in the Company’s Annual Report
on Form 10-K filed with the SEC on December 29, 2018. The consolidated balance sheet as of September 30, 2018 contained herein
has been derived from the audited consolidated financial statements as of September 30, 2018, but does not include all disclosures
required by GAAP.
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 six months
ended March 31, 2019, the Company has incurred a net loss of $2,082,412 and used cash in operations of $746,317. The working capital
deficit, stockholders’ deficit and accumulated deficit was $6,132,362, $10,090,060 and $21,713,704, respectively, at March
31, 2019. 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 March 31, 2019
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
MARCH
31, 2019
(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 March 31, 2019
|
|
|
At September 30, 2018
|
|
Description
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Derivative Liability
|
|
|
—
|
|
|
|
—
|
|
|
$
|
185,170
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
258,296
|
|
A
rollforward of the level 3 valuation financial instruments is as follows:
|
|
Derivative
Liabilities
|
|
Balance at September 30, 2018
|
|
$
|
258,296
|
|
|
|
|
|
|
Charged to derivative expense on assignment and restatement of note
|
|
|
15,971
|
|
Classified as initial debt discount on assignment and restatement of note
|
|
|
62,500
|
|
Reduction of derivative recorded as gain on extinguishment upon conversions
|
|
|
(78,471
|
)
|
Warrant exercises (partial)
|
|
|
(138,431
|
)
|
Fair Value adjustment - warrants
|
|
|
65,898
|
|
Fair Value adjustments – convertible note
|
|
|
(593
|
)
|
Balance at March 31, 2019
|
|
$
|
185,170
|
|
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
MARCH
31, 2019
(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 $5,193 and $0 for the six months ended March 31, 2019 and 2018 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 have 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
MARCH
31, 2019
(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
MARCH
31, 2019
(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 March 31, 2019, 18,305,000 options were outstanding of which 9,153,000 were exercisable, 299,942,688
warrants were outstanding and exercisable, and related party convertible debt and accrued interest totaling $963,975 was convertible
into 1,606,624,171 shares of common stock. Additionally, as of March 31, 2019, the outstanding principal balance, including accrued
interest of the third party convertible debt, totaled $6,288,591 and was convertible into 13,082,041,082 shares of common stock.
It should be noted that contractually the limitations on these notes (and the related warrant) limit the number of shares converted
to 826,694,060. The total dilutive potential shares of 15,006,912,941 exceed the number of common shares authorized and unissued.
As of March 31, 2019 and 2018, potentially dilutive securities consisted of the following:
|
|
March 31,
2019
|
|
|
March 31,
2018
|
|
Stock options
|
|
|
18,305,000
|
|
|
|
44,351,200
|
|
Warrants
|
|
|
299,942,688
|
|
|
|
600,000
|
|
Related party convertible debt and accrued interest
|
|
|
1,606,624,171
|
|
|
|
9,398,132
|
|
Third party convertible debt (including senior debt)
|
|
|
13,082,041,082
|
|
|
|
109,099,504
|
|
Total
|
|
|
15,006,912,941
|
|
|
|
163,448,836
|
|
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 March 31, 2019, 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 March 31, 2019 and September 30, 2018 is as follows:
|
|
March 31,
2019
|
|
|
September 30,
2018
|
|
Accounts receivable
|
|
$
|
1,002,261
|
|
|
$
|
1,615,582
|
|
Reserve for doubtful accounts
|
|
|
-
|
|
|
|
-
|
|
|
|
$
|
1,002,261
|
|
|
$
|
1,615,582
|
|
BANTEK,
INC. (f/k/a DRONE USA, INC.) AND SUBSIDIARIES
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2019
(Unaudited)
NOTE
4 -
INVENTORY
At
March 31, 2019 and September 30, 2018, inventory consists of finished goods and was valued at $152,692 and $533,106, respectively.
NOTE
5 -
GOODWILL AND INTANGIBLE ASSETS
At
March 31, 2019, and September 30, 2018, the carrying amount of goodwill amounted to $2,410,335.
At
March 31, 2019 and September 30, 2018, the carrying amount of tradename amounted to $760,000.
At
March 31, 2019 and September 30, 2018, intangible assets other than goodwill and tradename consisted of:
|
|
March 31,
2019
|
|
|
September 30,
2018
|
|
Customer list
|
|
$
|
1,060,000
|
|
|
$
|
1,060,000
|
|
Less: accumulated amortization
|
|
|
(677,212
|
)
|
|
|
(544,715
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
382,788
|
|
|
$
|
515,285
|
|
The
customer list is being amortized over 48 months from the acquisition date. Amortization expense for the three months ended March
31, 2019 and 2018 was $132,498 and $132,499, respectively.
Future
amortization expense of the customer list is as follows:
For the Years Ending September 30,
|
|
|
|
2019
|
|
$
|
132,503
|
|
2020
|
|
|
250,285
|
|
Total
|
|
$
|
382,788
|
|
The
Company conducted its goodwill and its intangible assets impairment test as of March 31, 2019 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. The line bears interest at
a fluctuating rate equal to the prime rate plus 4.25%, which at March 31, 2019 and September 30, 2018 was 9.75% and
9.25%, respectively. As of March 31, 2019 and September 30, 2018, the balance of the line of credit was $44,627 and $45,915
respectively.
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 March 31, 2019 was $62,350.
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 note is not included in the settlements payable balance reported on the balance sheet at March, 31, 2019 as it is
included in the convertible notes payable balance. The balance accrued as accounts payable of $71,700 was treated as a gain on
debt extinguishment following the final waiver received in February 2019.
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, 2019 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 March 31, 2019 is $312,435, which
includes expected employer payroll taxes due as payments are made.
The
total settlement payable balance of $374,785, reported on the balance sheet includes the American Express settlement of $62,350
and the balance due to the former Chief Strategy Officer of $312,435.
BANTEK,
INC. (f/k/a DRONE USA, INC.) AND SUBSIDIARIES
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2019
(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 March
31, 2019 and September 30, 2018, accrued interest on this note amounted to $161,583 and $125,682, respectively.
NOTE
9 -
NOTES PAYABLE – RELATED PARTIES
The
Company has an $840,000 convertible note payable (“Note 1”) to Pike Falls 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 March 31, 2019 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 $150,262 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 six months ended
March 31, 2019, the Company borrowed $82,000 on this note. As of March 31, 2019 and September 30, 2018, Note 2 has not been converted,
the balance was $109,670 and $27,670, and accrued interest was $15,597 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 principal of $5,000 with a balloon payment at
maturity. The principal and accrued interest balances were $367,500 and $14,338 as of March 31, 2019.
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
on September 23, 2021 and requires monthly payments of $2,500 principal. The outstanding principal and accrued interest are $195,000
and $4,724 at March 31, 2019.
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 March 31, 2019, 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 March 31,
2019, 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
MARCH
31, 2019
(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 $578,420 from January 13, 2018to March 31, 2019.
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 of $537,643 has been
capitalized with the principal amount due of $6,018,192. The restated note has the same conversion price discount and therefore
continues to be stock settled debt under ASC 480, an additional $94,878 was charged to interest with a credit to debt premium.
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 March 31, 2019
the principal of the Note B portion was $5,326,285. During the six months ended March 31, 2019, the Company paid $115,000 and
Livingston Asset Management (under the 3(a)(10) settlement) remitted $270,320 to TCA. Accrued but unpaid interest was $180,518,
at March 31, 2019. Note A principal subject to the 3(a)(10) court order was $421,587.
BANTEK,
INC. (f/k/a DRONE USA, INC.) AND SUBSIDIARIES
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2019
(Unaudited)
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.
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 March 31, 2019, there have been eleven issuances under section 3(a)(10) of the Securities Act totaling 566,838,000 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 six months ended March 31, 2019, proceeds of $270,320 were remitted to TCA by Livingston and applied to reduce the liability
with corresponding credits to additional paid in capital. $180,618 of debt premium was credited to additional paid in capital
in conjunction with the payments to TCA. At March 31, 2019 the balance of $421,587 along with related debt premium of $281,054
are 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 $2,037 of accrued interest at March 31, 2019.
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
MARCH
31, 2019
(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
March 1, 2019, the Company received a second tranche advance under the Crown Bridge Partners, LLC for principal amount of $35,000,
including covered fees and original issue discount totaling $5,000. Under the conversion terms of the above note, the holder is
entitled to a 35% discount plus an additional 10% discount based on the conversion rights of certain other note holders. Therefore
a discount of 45% is assumed for any conversions of this note tranche. The Company has accounted for the convertible promissory
note as stock settled debt under ASC 480 and recorded a debt premium of $28,636 with a charge to interest expense. The original
issue discount and fees charged were treated as debt discount and will be amortized to financing expenses over the term of the
note. Accrued interest was $432, and unamortized debt discount was $4,583, at March 31, 2019.
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 March 31, 2019 the following notes had been issued, of which the June1, July 1 August 1, and September 1, 2018
notes were fully converted by March 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; fully converted;
October
1, 2018, $12,500 principal, maturing March 31, 2019;
November
1, 2018, $12,500 principal, maturing April 30, 2019;
December
1, 2018, $12,500 principal, maturing May 31, 2019;
January
1, 2019, $12,500 principal, maturing June 30, 2019;
February
1, 2019, $12,500 principal, maturing July 31, 2019; and
March
1, 2019, $12,500 principal, maturing August 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 March 31, 2019 the derivative fair value was determined to have decreased to $8,881.
As the note reached its maturity date no further fair value adjustments will be recorded. For the six months ended March 31, 2019,
$5,000, balance of the debt discount was charged to interest expense and debt discount balances was $0.
BANTEK,
INC. (f/k/a DRONE USA, INC.) AND SUBSIDIARIES
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2019
(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
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.
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
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. 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
February 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. 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
March 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. 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
March 4, 2019, the Company issued a convertible promissory note to Redstart Holdings Corporation in the amount of $78,000. The
note bears interest at 10%, matures on December 31, 2019, includes legal fees of $3,000 and is convertible at 35% discount to
the average of the lowest two prices observed in the 15 days prior to the issuance of a conversion notice. The Company has accounted
for the convertible promissory note as stock settled debt under ASC 480 and recorded debt premium $42,000 with a charge to interest
expense for the notes. The fees charged were treated as debt discount and will be amortized to financing expenses over the term
of the note. Accrued interest was $513, and unamortized debt discount was $2,700, at March 31, 2019.
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.
BANTEK,
INC. (f/k/a DRONE USA, INC.) AND SUBSIDIARIES
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2019
(Unaudited)
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 six months ended March 31, 2019.
The
senior secured credit facility note balance and convertible debt balances consisted of the following at March 31, 2019 and September
30, 2018:
|
|
March 31,
2019
|
|
|
September 30,
2018
|
|
Principal
|
|
$
|
6,099,892
|
|
|
$
|
5,568,566
|
|
Premiums
|
|
|
1,516,070
|
|
|
|
1,380,175
|
|
Unamortized discounts
|
|
|
(7,283
|
)
|
|
|
(5,000
|
)
|
|
|
|
7,608,679
|
|
|
|
6,943,741
|
|
Non-current, including premiums and discounts
|
|
|
(6,266,217
|
)
|
|
|
-
|
|
Current, including premiums and discounts
|
|
$
|
1,342,462
|
|
|
$
|
6,943,741
|
|
For
the six months ended March 31, 2019 and 2018, amortization of debt discount on the above convertible notes amounted to $5,717
and $445,734, 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 March 31, 2019.
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).
BANTEK,
INC. (f/k/a DRONE USA, INC.) AND SUBSIDIARIES
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2019
(Unaudited)
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 March 31, 2019.
NOTE
12 -
STOCKHOLDERS’ DEFICIT
Preferred
Stock
As
of March 31, 2019, 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 March 31, 2019 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. On January 30, 2019 the Company’s shareholders approved an increase in authorized common stock to 6,000,000,000 from
1,500,000,000, which became effective February 24, 2019. As of March 31, 2019 and September 30, 2018 there were 1,851,217,313
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 March 31, 2019, 81,695,000 awards remain available
for grant under the Plan.
Shares
Issued for employee Service
Under
the terms of the January 4, 2019 compensation agreement with CFO, the Company issues 100,000 shares each month to the CFO. For
the six months ended March 31, 2019, the Company was obligated to and issued 200,000 shares valued at the grant date quoted stock
price of $.0001, for total of $200, charged to compensation expenses.
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. The prepaid expense
was fully amortized at March 31, 2019.
BANTEK,
INC. (f/k/a DRONE USA, INC.) AND SUBSIDIARIES
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2019
(Unaudited)
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. Unamortized prepaid expenses amounted to $1,077, at March 31, 2019
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.
On
March 1, 2019, under the Company’s March 1, 2019, agreement with its technology support provider the Company is to issue
common shares equal to $1,500 every month. The Company recognized the expense of $1,500 and authorized the issuance of 1,666,667
shares to the vendor as of March 31, 2019.
On
March 31, 2019, 10,000,000, common shares were issued to Tysadco Partners for the Company’s investor relations firm as per
the agreement for monthly payments in common shares of $4,000 per month totaling $16,000, which was fully recognized as expense
as of March 31, 2019. The issuance settled the amounts due for October 20, 2018 through February 20, 2019.
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.
Between
February 4, 2019 and March 19, 2019, 465,214,000 common shares were issued to Livingston of which 95,768,000 shares remained pending
settlement at various third party brokers at March 31, 2019. The issuances totaling $46,523 were credited to common stock with
the same amount charged to additional paid in capital until remitted to TCA (see below).
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.
Between
February 4, 2019 and March 27, 2019, 369,446,000 shares were sold and settled. Livingston remitted payments of $225,000, in partial
settlement of the TCA Note A, under the 3(a)(10) arrangement. The liability was reduced by $225,000, the principal reduction of
$225,000 and the related debt premium of $150,000 were recorded as additional paid in capital.
In
total $270,320, was remitted to TCA reducing the related note from $691,907 to $421,587 during the six months ended March 31,
2019 and $180,618 was charged to debt premium reducing the balance to $281,054 at March 31, 2019.
Shares
Issued for Warrant Exercise
On
October 17, 2018, Crown Bridge Partners was issued 35,420,168 common shares at $.0072, in a cashless exchange for 39,990,513 warrants
surrendered. $68,232 was recorded as equity and derivative liabilities were reduced by the same amount.
On
January 4, 2019, Crown Bridge Partners was issued 52,100,526 common shares at $.0002235, in a cashless exchange for 58,230,000
warrants surrendered. $28,892 was recorded as equity and derivative liabilities were reduced by the same amount.
BANTEK,
INC. (f/k/a DRONE USA, INC.) AND SUBSIDIARIES
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2019
(Unaudited)
On
February 6, 2019, Crown Bridge Partners was issued 60,611,842 common shares at $.0006815, in exchange for 69,375,000 warrants
surrendered. $41,307 was recorded as equity and derivative liabilities were reduced by the same amount.
Shares
Issued for Conversion of Convertible Notes
Between
November 1, 2018, 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,
debt discount of $62,500 was amortized to interest expense and loss on debt extinguishment of $14,057 was recorded.
Between
November 6, 2018, 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.
On
January 8, 2019, Livingston Asset Management, LLC converted $9,500 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 converted $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.
On
March 18, 2019, Livingston Asset Management converted $12,500 of principal, $640 of accrued interest and $1,145 in fees from
the fee note issued September 1, 2018, for 47,618,033 at the contracted price of $0.0003.
For
the Livingston Asset Management LLC conversions noted above from January 8, 2019 to March 18, 2019, total debt, interest and fees
were $58,403 and related debt premium of $50,000 resulted in credits to equity of $108,403.
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.
BANTEK,
INC. (f/k/a DRONE USA, INC.) AND SUBSIDIARIES
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2019
(Unaudited)
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 six months ended March 31, 2019.
For
the six months ended March 31, 2019 and 2018, the Company recorded $132,393 and $145,322 of compensation and consulting expense
related to stock options, respectively. Total unrecognized compensation and consulting expense related to unvested stock options
at March 31, 2019 amounted to $486,184. The weighted average period over which share-based compensation expense related to these
options will be recognized is approximately 2 years.
For
the six months ended March 31, 2019 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
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
(200,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2019
|
|
|
18,305,000
|
|
|
|
.22
|
|
|
|
7.18
|
|
|
|
-
|
|
|
|
-
|
|
Exercisable at March 31, 2019
|
|
|
9,153,000
|
|
|
$
|
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.
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 March 31, 2019,
the warrant was revalued and the warrant holder is entitled to exercise its warrants for 299,942,688 common shares and the related
derivative liability is $176,853.
BANTEK,
INC. (f/k/a DRONE USA, INC.) AND SUBSIDIARIES
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2019
(Unaudited)
For
the six months ended March 31, 2019 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
|
|
|
$
|
-
|
|
|
$
|
|
|
Anti-Dilution adjustment at December 31, 2018
|
|
|
106,995,193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised at January 4, 2019
|
|
|
(58,230,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised at February 6, 2019
|
|
|
(69,375,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anti-Dilution adjustment at March 31, 2019
|
|
|
290,964,061
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding and exercisable at March 31, 2019
|
|
|
299,942,688
|
|
|
$
|
.00016
|
|
|
|
|
|
|
|
|
|
|
|
131,974
|
|
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
six months ended March 31, 2019 and 2018 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 six months
ended March 31, 2019 and 2018 was $26,113 and $0, respectively.
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 then 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 was 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 the former CFO as of September 30, 2017 of approximately $93,000 which is included in accrued expenses on
the accompanying consolidated balance sheet at March 31, 2019 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. Under the current terms of the lease it is renewable on an annual basis. Rent expense for the New
Jersey offices amounted to approximately $320 for the six months ended March 31, 2019.
Under
the terms of the January 4, 2019 compensation agreement with CFO, the Company issues 100,000 shares each month to the CFO. The
monthly stock awards are charged to compensation expense using the grant date quoted price of $.0001. For the six months ended
March 31, 2019, the Company was obligated to and issued 200,000 shares.
The
Company has certain notes payable to related parties (see Note 9).
BANTEK,
INC. (f/k/a DRONE USA, INC.) AND SUBSIDIARIES
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2019
(Unaudited)
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 March 31, 2019.
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.
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. The former CFO has responded to
the suit and is requesting arbitration over this matter as well as the compensation. (see Note 7and 14)
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 March 31, 2019. The Company is in discussion with the
vendor to address the past due amounts.
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, was recognized a gain on debt extinguishment following receipt of the waiver and release
from the vendor.
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 March 31, 2019 a balance of $312,435 remained as accrued expense which
includes related employer payroll taxes expected to be incurred for future payments.
As
of March 31, 2019, the Company has received demand for payment of past due amounts for services by several consultants and service
providers.
BANTEK,
INC. (f/k/a DRONE USA, INC.) AND SUBSIDIARIES
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2019
(Unaudited)
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 March 31, 2019, 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 March 31, 2019 and September 30, 2018.
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 March 31, 2019
are as follows:
Years ending September 30,
|
|
Amount
|
|
2019
|
|
$
|
30,310
|
|
2020
|
|
|
40,737
|
|
Total minimum non-cancelable operating lease payments
|
|
$
|
71,047
|
|
For
the six months ended March 31, 2019 and 2018, rent expense amounted to $29,426 and $28,330, respectively.
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 March 31, 2019 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, 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 six months ended March 31, 2019, Howco accrued $6,000 under this plan.
BANTEK,
INC. (f/k/a DRONE USA, INC.) AND SUBSIDIARIES
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2019
(Unaudited)
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 March 31,
2019 and September 30, 2018, cash in bank did not exceed the federally insured limits of $250,000. The Company has not experienced
any losses in such accounts through March 31, 2019.
Economic
Concentrations
With
respect to customer concentration, two customers accounted for approximately 52.5% and 15.5%, of total sales for the six months
ended March 31, 2019. Three customers accounted for approximately 55%, 16%, and 11%% of total sales for the six months ended
March 31, 2018.
With
respect to accounts receivable concentration, two customers accounted for 37.4% and 37.1% of total accounts receivable at March
31, 2019. Three customers accounted for approximately, 50%, 20% and 20% of total accounts receivable at September 30, 2018.
With
respect to supplier concentration, two suppliers accounted for approximately 22% and 18% of total purchases for the six months
ended March 31, 2019. Two suppliers accounted for approximately 41% and 12% of total purchases for the six months ended March
31, 2018.
With
respect to accounts payable concentration, two suppliers accounted for approximately 15.9%, and 15.7% of total accounts payable
at March 31, 2019. 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 $22,181 for the six months ended March 31, 2019. Foreign sales totaled approximately
$32,000 for the six months ended March 31, 2018.
NOTE
17 -
SUBSEQUENT EVENTS
On
April 1, 2019, the Company entered into a agreement with Stratcon Advisory for various specified investor relations services.
The agreement has term of 1 year and monthly fees if $4,000, paid in restricted shares of the Company.
Convertible
Notes Issued
On
April 1, 2019 the Company issued a convertible promissory note for $12,500 to Livingston Asset Management under the services agreement.
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
April 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
May 1, 2019 the Company issued a convertible promissory note for $12,500 to Livingston Asset Management under the services agreement.
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.
Common
Shares Issued for Convertible Notes
O
n
April 3, 2019, the Company issued 71,883,550 common shares in conversion of the October 1, 2018 convertible note for the full
principal of $12,500, accrued interest of $626.71, and conversion fees of $1,250, at the contractual rate of $.0002.
Common
Shares Issued for 3(a)(10) Settlement
On
April 10, 2019, the Company issued 180,514,000 common shares to Livingston Asset Management. The shares are accounted for at par
with an offset to additional paid in capital until the proceeds from sales are remitted to reduce the debt covered by the 3(a)(10).
Common
Shares Issued for Services
On
May 3, 2019, the Company issued an additional 7,970.000 shares of common stock to its technology service provider to cover
the shortfall of the monthly fee arrangement. As a result 12,358,974 shares were issued to this vendor in settlement of
amounts due. The shares were valued on the commitment dates at the then current market prices.