Notes
to Financial Statements
September
30, 2018
NOTE
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ORGANIZATION
(A)
Basis of Presentation
PetVivo
Holdings, Inc. (the “Company”) was incorporated in Nevada under a former name in 2009, and entered it current business
in 2014 through a stock exchange reverse merger with PetVivo, Inc., a Minnesota corporation. This merger resulted in Minnesota
PetVivo becoming a wholly-owned subsidiary of the Company.
In
April 2017, the Company acquired another Minnesota corporation, Gel-Del Technologies, Inc., through a statutory merger, which
is also a wholly owned subsidiary of the Company.
The
accompanying condensed consolidated financial statements are unaudited. These unaudited interim financial statements have been
prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and pursuant to
the rules and regulations of the SEC. Certain information and note disclosures, which are included in annual financial statements,
have been omitted pursuant to these rules and regulations. We believe the disclosures made in these interim unaudited financial
statements are adequate to make the information not misleading.
Although
these interim financial statements at September 30, 2018 and for the three and six months ended September 30, 2018 and 2017 are
unaudited, in the opinion of our management, such statements include all adjustments (consisting of normal recurring entries)
necessary to present fairly our financial position, results of operations and cash flows for the periods presented. The results
for the three and six months ended September 30, 2018 are not necessarily indicative of the results to be expected for the year
ended March 31, 2019 or for any future period.
These
unaudited interim financial statements should be read and considered in conjunction with our audited financial statements and
the notes thereto for the year ended March 31, 2018, included in our annual report on Form 10-K filed with the SEC.
The
Company is in the business of distribution of medical devices and biomaterials for the treatment of afflictions and diseases in
animals. The Company’s management development and other operations are conducted from its headquarter facilities in suburban
Minneapolis, Minnesota.
(B)
Principles of Consolidation
The
accompanying condensed consolidated financial statements include the accounts of the Company and its two wholly-owned Minnesota
corporations. All intercompany accounts have been eliminated upon consolidation.
The
accounting for the acquisition of Gel-Del Technologies, Inc. began with the Security Exchange Agreement on April 10, 2015 which
was uncompleted, and as adjusted for completion pursuant to the Agreement and Plan of Merger effective April 10, 2017 (the “Merger”).
To complete the Merger, the Company issued 5,450,000 shares valued at market at $0.40 per share, which equaled $2,180,000 on the
date of completion (April 10, 2017).
(C)
Use of Estimates
In
preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates
and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements and revenues and expenses during the reported period. Actual results could differ from
those estimates. Significant estimates include estimated useful lives and potential impairment of property and equipment, estimate
of fair value of share-based payments and derivative instruments and recorded debt discount, valuation of deferred tax assets
and valuation of in-kind contribution of services and interest.
(D)
Cash and Cash Equivalents
The
Company considers all highly-liquid temporary cash investments with an original maturity of three months or less to be cash equivalents.
At September 30, 2018, the Company had $43,674 in cash and no cash equivalents.
(E)
Concentration-Risk
The
Company maintains its cash with various financial institutions, which at times may exceed limits insured by the Federal Deposit
Insurance Corporation (FDIC). At September 30, 2018, cash did not exceed the FDIC uninsured balances. The management believes
the Company is not exposed to any significant credit risk on cash.
(F)
Property & Equipment
Property
and equipment are recorded at cost. Expenditures for major additions and betterments are capitalized. Maintenance and repairs
are charged to operations as incurred. Depreciation is computed by the straight-line method (after taking into account their respective
estimated residual values) over the asset’s estimated useful life of (3) years for equipment, (5) years for automobile,
and (7) years for furniture and fixtures.
(G)
Patents and Trademarks
The
Company capitalizes direct costs for the maintenance and advancement of their patents and trademarks and amortizes these costs
over a useful life of 60 months.
(H)
Loss Per Share
Basic
loss per share is computed by dividing net loss by weighted average number of shares of common stock outstanding during each period.
Diluted loss per share is computed by dividing net loss by the weighted average number of shares of common stock, common stock
equivalents and potentially dilutive securities outstanding during the period.
The
Company has 3,736,423 warrants outstanding as of September 30, 2018 with varying exercise prices ranging from $3.50 to $.30/share.
The weighted average exercise price for these warrants is $.66/share. These warrants are excluded from the weighted average number
of shares because they are considered anti-dilutive.
(I)
Revenue Recognition
The
Company will recognize revenue on arrangements in accordance with FASB ASC No. 606, “Revenue From Contracts With Customers”.
Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration
we expect to receive in exchange for those products or services. The Company adopted the guidance on April 1, 2018 using the cumulative
catch-up transition method. This change in accounting did not have any material effect on the Company’s financial statements.
(J)
Research and Development
The
Company expenses research and development costs as incurred.
(K)
Fair Value of Financial Instruments
The
Company applies the accounting guidance under FASB ASC 820-10,
“Fair Value Measurements”
, as well as certain
related FASB staff positions. This guidance defines fair value as the price that would be received from selling an asset or paid
to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair
value measurements for assets and liabilities required to be recorded at fair value, the Company considers the principal or most
advantageous market in which it would transact business and considers assumptions that marketplace participants would use when
pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance.
The
guidance also establishes a fair value hierarchy for measurements of fair value as follows:
|
●
|
Level
1 - quoted market prices in active markets for identical assets or liabilities.
|
|
●
|
Level
2 - inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in active markets
for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active,
or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the
assets or liabilities.
|
|
●
|
Level
3 - unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the
assets or liabilities.
|
The
Company’s financial instruments consist of accounts receivable, accounts payable, accrued expenses, accrued expenses –
related party, notes payable, notes payable - related party, and convertible notes payable. The carrying amount of the Company’s
financial instruments approximates their fair value as of September 30, 2018 and March 31, 2018, due to the short-term nature
of these instruments and the Company’s borrowing rate of interest.
In
instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy,
the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input
that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular
input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.
The valuation of the Company’s notes recorded at fair value is determined using Level 3 inputs, which consider (i) time
value, (ii) current market and (iii) contractual prices.
The
Company had no assets and liabilities measured at fair value on a recurring basis at September 30, 2018 and March 31, 2018.
(L)
Stock-Based Compensation - Non-Employees
Equity
Instruments Issued to Parties Other Than Employees for Acquiring Goods or Services
The
Company accounts for equity instruments issued to parties other than employees for acquiring goods or services under guidance
of Sub-topic 505-50 of the FASB Accounting Standards Codification (“Sub-topic 505-50”).
Pursuant
to ASC Section 505-50-30, all transactions in which goods or services are the consideration received for the issuance of equity
instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument
issued, whichever is more reliably measurable. The measurement date used to determine the fair value of the equity instrument
issued is the earlier of the date on which the performance is complete or the date on which it is probable that performance will
occur.
If
the Company is a newly formed corporation or shares of the Company are thinly traded the use of share prices established in the
Company’s most recent private placement memorandum (“PPM”), or weekly or monthly price observations would generally
be more appropriate than the use of daily price observations as such shares could be artificially inflated due to a larger spread
between the bid and asked quotes and lack of consistent trading in the market.
The
fair value of share options and similar instruments is estimated on the date of grant using a Black-Scholes option-pricing valuation
model. The ranges of assumptions for inputs are as follows:
|
●
|
Expected
term of share options and similar instruments: Pursuant to Paragraph 718-10-50-2(f)(2)(i) of the FASB Accounting Standards
Codification the expected term of share options and similar instruments represents the period of time the options and similar
instruments are expected to be outstanding taking into consideration of the contractual term of the instruments and holder’s
expected exercise behavior into the fair value (or calculated value) of the instruments. The Company uses historical data to
estimate holder’s expected exercise behavior. If the Company is a newly formed corporation or shares of the
Company are thinly traded the contractual term of the share options and similar instruments is used as the expected term of
share options and similar instruments as the Company does not have sufficient historical exercise data to provide a reasonable
basis upon which to estimate expected term.
|
|
●
|
Expected
volatility of the entity’s shares and the method used to estimate it. Pursuant to ASC Paragraph 718-10-50-2(f)(2)(ii)
a thinly-traded or nonpublic entity that uses the calculated value method shall disclose the reasons why it is not practicable
for the Company to estimate the expected volatility of its share price, the appropriate industry sector index that it has
selected, the reasons for selecting that particular index, and how it has calculated historical volatility using that index. The
Company uses the average historical volatility of the comparable companies over the expected contractual life of the share
options or similar instruments as its expected volatility. If shares of a company are thinly traded the use of weekly or monthly
price observations would generally be more appropriate than the use of daily price observations as the volatility calculation
using daily observations for such shares could be artificially inflated due to a larger spread between the bid and asked quotes
and lack of consistent trading in the market.
|
|
●
|
Expected
annual rate of quarterly dividends. An entity that uses a method that employs different dividend rates during the
contractual term shall disclose the range of expected dividends used and the weighted-average expected dividends. The
expected dividend yield is based on the Company’s current dividend yield as the best estimate of projected dividend
yield for periods within the expected term of the share options and similar instruments.
|
|
●
|
Risk-free
rate(s). An entity that uses a method that employs different risk-free rates shall disclose the range of risk-free rates used.
The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods within the
expected term of the share options and similar instruments.
|
Pursuant
to Paragraphs 505-50-25-8 and 505-50-25-9, an entity may grant fully-vested, non-forfeitable equity instruments that are exercisable
by the grantee only after a specified period of time if the terms of the agreement provide for earlier exercisability if the grantee
achieves specified performance conditions. Any measured cost of the transaction shall be recognized in the same period(s) and
in the same manner as if the entity had paid cash for the goods or services or used cash rebates as a sales discount instead of
paying with, or using, the equity instruments. A recognized asset, expense, or sales discount shall not be reversed if a share
option and similar instrument that the counterparty has the right to exercise expires unexercised.
(M)
Income Taxes
The
Company accounts for income taxes under Accounting Standards Codification (ASC) Topic 740. Deferred tax assets and liabilities
are determined based upon differences between financial reporting and tax bases of assets and liabilities and are measured using
the enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is provided
when it is more likely than not that some portion or all of a deferred tax asset will not be realized.
The
Company adopted the provisions of ASC Topic 740, on January 1, 2007. Previously, the Company had accounted for tax contingencies
in accordance with Statement of Financial Accounting Standards No. 5,
Accounting for Contingencies.
As required by ASC
Topic 450, the Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax
authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not
threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood
of being realized upon ultimate settlement with the relevant tax authority. At the adoption date, the Company applied ASC Topic
740 to all tax positions for which the statute of limitations remained open. As a result of the implementation of ASC Topic 740,
the Company did not recognize any change in the liability for unrecognized tax benefits.
The
Company is not currently under examination by any federal or state jurisdiction.
The
Company’s policy is to record tax-related interest and penalties as a component of operating expenses.
(N)
Inventory
Inventories
are recorded in accordance with ASC 330 and are stated at the lower of cost or net realizable value. We account for inventories
using the first in first out (FIFO) methodology and capitalize costs on a project basis as they occur.
(O)
Recent Accounting Pronouncements
In
February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) to increase transparency and comparability among organizations
by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements.
Topic 842 affects any entity that enters into a lease, with some specified scope exemptions. The guidance in this ASU supersedes
Topic 840, Leases. The core principle of Topic 842 is that a lessee should recognize the assets and liabilities that arise from
leases. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability)
and a right-of-use (“ROU”) asset representing its right to use the underlying asset for the lease term. For public
companies, the amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods
within those fiscal years. The Company expects to recognize ROU assets and related obligations upon adoption of ASU 2016-02. The
Company does not expect the adoption on this new standard to have any material effect upon the financial statements.
The
change from revenue recognition according to FASB issued ASC 605 to ASC 606 had no effect on the Company’s financial statements
for the years ending March 31, 2017 and March 31, 2018, or the three and six month periods ending September 30, 2017, and September
30, 2018.
All
other newly issued accounting pronouncements but not yet effective have been deemed either immaterial or not applicable.
NOTE
2 - NOTES PAYABLE
At
September 30, 2018 the company is obligated for several notes payable and accrued interest in the total amount of $165,000 and
$1,790, respectively. The note terms dictate 12% simple interest, compounding daily based on a 365-day year, paid out 6 months
from the date of the note. The bridge note also triggers the issuance of a detachable warrant for purchase of half of the principal
amount in shares exercisable at $1.00 per share. There were 82,500 detachable warrants issued in conjunction with bridge notes
entered into in the six-month period ending September 30, 2018. Pursuant to ASC 470 the fair value of the warrants attributable
to a discount on the debt is ($40,325), of which ($6,721) was amortized to interest expense on a straight-line basis over
the term of the loans.
NOTE
3 – NOTES PAYABLE – RELATED PARTY
At
September 30, 2018, the Company is obligated for:
i)
A Director note payable and accrued interest in the total amount of $100,701. We are obligated to pay $3,100 per month applied
towards accrued interest first, then the principal amount due. The entirety of the outstanding principal and accrued interest
due is payable upon sales of equity in excess of $3,500,000 within a two-year period.
ii)
A Director note payable in the principal amount of $50,000, that is shown net of a ($10,183) debt discount for 25,000 detachable
warrants exercisable for a 3-year term at $1.00 per share, and accrued interest of $493.15. The note terms dictate 12% simple
interest, compounding daily based on a 365-day year, paid out 6 months from the date of the note. Pursuant to ASC 470
the fair value of the warrants attributable to a discount on the debt is ($10,183), of which ($2,036) was amortized to interest
expense on a straight-line basis over the term of the loan.
NOTE
4 - GOING CONCERN
As
reflected in the accompanying condensed consolidated financial statements, the Company had no significant revenue and had a negative
equity and recurring material losses. These factors raise substantial doubt about the Company’s ability to continue as a
going concern.
Management
intends to raise additional funds either through a private placement or public offering of its equity securities. Management believes
that the actions presently being taken to further implement its business plan will enable the Company to continue as a going concern.
While the Company believes in its viability to raise additional funds, there can be no assurances to that effect. The ability
of the Company to continue as a going concern is dependent upon the Company’s ability to further implement its business
plan and raise additional funds.
The net loss for the three and six month periods ending September 30, 2018 was ($740,881) and ($2,840,466),
respectively. Our working capital as of September 30, 2018 was ($1,423,792). Our cash used in operations for the six-month period
ending September 30, 2018 was ($436,292).
These
financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
NOTE
5 - COMMON STOCK AND WARRANTS
Common
Stock
During
the six-month period ended September 30, 2018 the Company issued 2,239,013 shares of common stock including:
i)
478,662 were issued to the Company’s President, John Lai, to replace shares he placed into escrow in 2017 valued at $861,592;
ii)
520,749 shares were to reduce debt valued at $296,521, 485,287 of these shares valued at $181,967 were recorded in our financial
statements during fiscal year ended March 31, 2018;
iii)
200,000 were issued as compensation to the Company’s CEO, Wesley Hayne, valued at $42,000, these shares were granted and
recorded to expense and Additional Paid in Capital during the fiscal year ended March 31, 2018;
iv)
310,000 were issued for cash valued at $310,000, 250,000 were from a private offering to one individual in December of 2017 for
$250,000, and 60,000 were from a private offering to one individual in September of 2016 for $60,000;
v)
361,816 were issued for services valued at $626,951, 324,723 shares valued at $584,500 were issued to the Company’s President,
John Lai, to replace shares given up to obtain financing in 2015;
vi)
367,786 were issued pursuant to warrant exercises for cash amounting to $213,893 , 60,000 warrants were exercised at $1.00
per share and 307,786 warrants were exercised at $.50 per share.
Warrants
During
the six-month period ended September 30, 2018 the Company granted warrants to purchase a total of 657,500 shares of common stock
including:
i)
warrants for 80,000 shares to two advisory board members for service, vested semi-annually over two years, and exercisable over
a five-year term at $1.00/share;
ii)
warrants for 80,000 shares to John Carruth, the Company’s Controller, in consideration of his employment, vested quarterly
over two years, and exercisable over a five-year term at $1.00/share;
iii)
warrants for 30,000 shares to a lawyer for general legal counsel, fully-vested and exercisable over a five-year term at $1.00/share;
iv)
warrants for 60,000 shares to various information technology service providers for IT services, vested as billed, exercisable
over a five-year term;
v)
warrants for 300,000 shares to three new Directors in consideration of their service, vested quarterly over two years, and exercisable
over a five-year term at $1.00/share;
vi)
warrants for 107,500 shares to several note holders pursuant to their bridge note agreements, vested immediately, and exercisable
over a three-year term at $1.00/share.
During
the six-month period ended September 30, 2018 the Company reduced previous grants of warrants to purchase 100,000 shares of common
stock including:
i)
warrants for 60,000 shares from a service provider due to the termination of a contract;
ii)
warrants for 40,000 shares from a former advisory board member due to the termination of a contract.
During
the six-month period ended September 30, 2018 warrants to purchase 307,786 shares of common stock with a strike price of $.50
per share were exercised for $153,893 in cash.
A
summary of warrant activity for the periods ending March 31, 2018 and September 30, 2018 is as follows:
|
|
Number
of Warrants
|
|
|
Weighted-Average
Exercise Price
|
|
|
Warrants
Exercisable
|
|
|
Weighted-Average
Exercisable Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding,
March 31, 2017
|
|
|
133,250
|
|
|
|
2.00
|
|
|
|
133,250
|
|
|
|
2.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
3,413,459
|
|
|
|
.54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
60,000
|
|
|
|
1.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, March
31, 2018
|
|
|
3,486,709
|
|
|
|
.59
|
|
|
|
2,433,601
|
|
|
|
.57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
657,500
|
|
|
|
1.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
307,786
|
|
|
|
.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
100,000
|
|
|
|
1.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, September
30, 2018
|
|
|
3,736,423
|
|
|
|
.66
|
|
|
|
2,508,366
|
|
|
|
.62
|
|
At
September 30, 2018, the range of warrant prices for shares under warrants and the weighted-average remaining contractual life
is as follows:
|
|
Warrants
Outstanding
|
|
|
Warrants
Exercisable
|
|
Range
of Warrant
Exercise Price
|
|
Number
of Warrants
|
|
|
Weighted-Average
Exercise Price
|
|
|
Weighted-
Average
Remaining Contractual Life
(Years)
|
|
|
Number
of Warrants
|
|
|
Weighted-
Average Exercise Price
|
|
.30-.50
|
|
|
2,495,673
|
|
|
|
.43
|
|
|
|
2.52
|
|
|
|
2,020,673
|
|
|
|
.46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
.51-1.00
|
|
|
1,167,500
|
|
|
|
1.02
|
|
|
|
4.27
|
|
|
|
414,443
|
|
|
|
1.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.01-3.50
|
|
|
73,250
|
|
|
|
2.82
|
|
|
|
2.19
|
|
|
|
73,250
|
|
|
|
2.82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
3,736,423
|
|
|
|
.66
|
|
|
|
3.06
|
|
|
|
2,508,366
|
|
|
|
.62
|
|
NOTE
6 – MERGER AGREEMENT WITH GEL-DEL
On
November 21, 2014, the respective Boards of Directors and executive officers of our company and of Gel-Del Technologies, Inc.,
a Minnesota corporation (“Gel-Del”), entered into and agreed to a merger between our company and Gel-Del, subject
to approval by our shareholders and the shareholders of Gel-Del. Approval of our shareholders of this initial merger was obtained
by us on April 10, 2015 through a Written Consent pursuant to Nevada corporate statutes, and approval of Gel-Del shareholders
was obtained through a meeting of its shareholders duly held on March 25, 2015 pursuant to Minnesota corporate statutes. Concurrent
with obtaining full shareholder approval, we also appointed the directors of Gel-Del as directors of our company.
We
then controlled Gel-Del, combined all Gel-Del operations with ours, and became responsible to provide future funding for Gel-Del.
Accordingly, we concluded that Gel-Del was a VIE entity for which we were the primary beneficiary and that for accounting purposes,
we would consolidate our financial statements with those of Gel-Del. As required by US GAAP accounting, our initial consolidation
of this VIE was accounted for similar to a business combination with the assets and liabilities of Gel-Del stated at their fair
value. In light of the pending merger, we determined the fair value of Gel-Del based on the agreed consideration of 4,150,000
common shares using the $4.02 per share trading price of our common stock at April 10, 2015. The assets of Gel-Del equaled $295,716
and its liabilities were $2,295,462 for a difference of $1,999,746 that resulted in a total purchase consideration of $18,978,462.
We allocated $13,407,693 to goodwill and $5,570,769 to patents and trademarks. We recorded a non-controlling interest of $16,683,000.
We
were unable to consummate the initial merger agreement with Gel-Del due primarily to a substantial public market decline in the
trading value of our common stock. In order to complete our Gel-Del merger, in early 2017 we agreed to provide Gel-Del an additional
31.3% of our common shares than was provided for in the initial merger agreement. Accordingly, pursuant to an Agreement of Merger
dated March 20, 2017, our management and Gel-Del management revised the structure and terms of the Gel-Del merger to provide for
the issuance of these additional shares to Gel-Del and to effect the transaction through a statutory triangular merger. The revised
merger was then completed under Minnesota Statutes whereby Gel-Del and a wholly-owned subsidiary of ours (which was incorporated
in Minnesota expressly for this transaction) completed this triangular merger (the “Merger”). Pursuant to the Merger,
Gel-Del was the surviving entity and concurrently became our wholly-owned subsidiary, resulting in our obtaining full ownership
of Gel-Del. Our primary reason to effect the Merger was to obtain 100% ownership and control of Gel-Del and its patented bioscience
technology, including ownership of Gel-Del’s Cosmeta subsidiary. The effective date for the Merger was April 10, 2017 when
the Merger was filed officially with the Secretary of State of Minnesota.
Pursuant
to the Merger, we issued a total of 5,450,000 shares of our common stock pro rata to the pre-merger shareholders of Gel-Del, resulting
in each outstanding common share of Gel-Del being converted into 0.788 common share of our company. Gel-Del did not have any outstanding
options, warrants, convertible debt, or other rights convertible into equity. The 5,450,000 shares represented approximately 30%
of our total post-merger outstanding common shares and were valued at the closing price of our common shares on the effective
date of the Merger of $0.40 per share, resulting in total consideration of $2,180,000. Incident to completion of the Merger, we
recorded an impairment loss of approximately $14,700,000 including $13,407,693 in goodwill and approximately $1,292,307 in patents
and trademarks, in order to account for the decline in our initial valuation of Gel-Del. In accordance with authoritative guidance,
the non-controlling interest associated with Gel-Del was reclassified to additional paid-in capital, including the difference
between the non-controlling interest and the consideration paid.
NOTE
7 – LEASE AND COMMITMENTS
Rent
expense for the three and six months ended September 30, 2018 were $25,807 and $40,414, respectively. Rent expense for the three
and six months ended September 30, 2017 were $10,990 and $25,184, respectively.
On
July 2
nd
, 2018 the Company gave its manufacturing contractor in Rochester, MN a 90-day notice to cancel the lease and
agreement; the financial impact of this cannot be fully measured. Subsequently, the Company entered into an agreement with a 60-day
notice clause for 1,000 square feet of manufacturing and office space in White Bear Lake, MN; this is detailed further in the
8-K filed on August 20, 2018 that is incorporated by reference in Exhibit 10.20.
The
Company entered into an eighty-four month lease for 3,577 square feet of newly constructed office, laboratory and warehouse space
located in Edina, Minnesota on May 3, 2017. The base rent is $2,078 per month and the Company is responsible for its proportional
share of common space expenses, property taxes, and building insurance. Future minimum rental commitments are as follows:
Year
Ended March 31,
|
|
|
|
|
2019
|
|
$
|
12,468
|
|
2020
|
|
$
|
24,936
|
|
2021
|
|
$
|
24,936
|
|
2022
|
|
$
|
24,936
|
|
2023
|
|
$
|
24,936
|
|
Thereafter
|
|
$
|
21,770
|
|
|
|
$
|
133,982
|
|
NOTE
8 – OPERATING LOSS
The
operating loss of ($2,824,680) for the six months ended September 30, 2018 is primarily due to ($1,937,292) in expense associated
with equity issuances including ($463,749) in warrant expense and ($1,473,543) in stock expense.
NOTE
9 – INVENTORY
The
$57,775 of total inventory is broken out as follows:
|
|
September
30, 2018
|
|
Finished Goods
|
|
$
|
45,573
|
|
Work in Process
|
|
|
-0-
|
|
Manufacturing Supplies
|
|
|
2,834
|
|
Raw Materials
|
|
|
9,368
|
|
Total Inventory
|
|
$
|
57,775
|
|
NOTE
10 – SUBSEQUENT EVENTS
On
October 2, 2018 the Company entered into a bridge note agreement with an accredited investor whereby $25,000 was loaned to the
company and any principal and accrued interest is payable 6 months from the date of the note. Interest is accrued based on a 365-day
year at 12% and compounds daily. There were 12,500 detachable warrants issued in conjunction with the bridge note.
On
November 1, 2018 the Company and its independent contract quality control organization discovered a possible contamination in
vials produced from lots #2 and #3 of three separate lots that are included in inventory. No vials derived from Lots #2 and #3
have been distributed to customers. The identified lots and vials were produced by the Company’s former third-party contract
manufacturer. On November 5, 2018 we issued a formal Notice of Product Quarantine and Product Monitoring Period whereby we asked
for any unused vials to be quarantined while the Company’s scientific team and third-party contract testing organization
analyzed whether lot #1 also included contamination. No evidence of contamination of vials produced for distribution from Lot
#1 has been identified to date. We anticipate to incur additional expenses in our fiscal third quarter relating to product testing. Due to there being
a reasonable expectation of the suspected contamination existing as of the balance sheet date, pursuant to ASC 330 we have identified
this as a Type I, recognized subsequent event and written have off approximately $47,500 in inventory costs to research and development
expense attributed to the loss of Lots #2 and #3.