Notes
to Financial Statements
June
30, 2020
(Unaudited)
NOTE
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ORGANIZATION
(A)
Organization and Description
The
Company is in the business of licensing and commercializing our proprietary medical devices and biomaterials for the treatment
of afflictions and diseases in animals, initially for dogs and horses. The Company’s operations are conducted from its headquarter
facilities in suburban Minneapolis, Minnesota.
(B)
Basis of Presentation
PetVivo
Holdings, Inc. (the “Company”) was incorporated in Nevada under a former name in 2009 and entered its current business
in 2014 through a stock exchange reverse merger with PetVivo, Inc., a Minnesota corporation. This merger resulted in Minnesota
PetVivo becoming a wholly-owned subsidiary of the Company. In April 2017, the Company acquired another Minnesota corporation,
Gel-Del Technologies, Inc., through a statutory merger, which is also a wholly-owned subsidiary of the Company.
In
November 2019, the Company effected a 9-for-10 reverse split of our authorized and outstanding shares of common stock. Pursuant
to this reverse stock split, each ten (10) shares of PetVivo’s outstanding common stock, $.001 par value per share, was
combined and converted into nine (9) post-split outstanding shares of common stock, $.001 par value per share; 24,974,518 pre-reverse-split
shares of common stock were combined during the 9-for-10 reverse split into 22,477,320 shares of post-reverse-split shares of
common stock with 254 shares being issued for fractional shares through the date of the balance sheet. Accordingly, all references
to number of shares of common stock and per share data have been adjusted retroactively where applicable to account for this reverse
split.
The
accompanying condensed consolidated financial statements are unaudited. These unaudited interim financial statements have been
prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and pursuant to
the rules and regulations of the SEC. Certain information and note disclosures, which are included in annual financial statements,
have been omitted pursuant to these rules and regulations. We believe the disclosures made in these interim unaudited financial
statements are adequate to make the information not misleading.
Although
these interim financial statements at June 30, 2020 and for the three months ended June 30, 2020 and 2019 are unaudited, in the
opinion of our management, such statements include all adjustments (consisting of normal recurring entries) necessary to present
fairly our financial position, results of operations and cash flows for the periods presented. The results for the three months
ended June 30, 2020 are not necessarily indicative of the results to be expected for the year ended March 31, 2021 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, 2020, included in our annual report on Form 10-K filed with the SEC on June
29, 2020.
(C)
Principles of Consolidation
The
accompanying consolidated financial statements include the accounts of the Company and its two wholly-owned Minnesota corporations.
All intercompany accounts have been eliminated upon consolidation.
(D)
Use of Estimates
In
preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates
and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements and revenues and expenses during the reported period. Actual results could differ from
those estimates. Significant estimates include estimated useful lives and potential impairment of property and equipment, estimate
of fair value of share-based payments and derivative instruments and recorded debt discount, valuation of deferred tax assets
and valuation of in-kind contribution of services and interest.
(E)
Cash and Cash Equivalents
The
Company considers all highly-liquid, temporary cash investments with an original maturity of three months or less to be cash equivalents.
At June 30, 2020, the Company had $128,564 in cash and no cash equivalents. At March 31, 2020, the Company had $10,582 in cash
and restricted cash and no cash equivalents.
(F)
Concentration-Risk
The
Company maintains its cash with various financial institutions, which at times may exceed limits insured by the Federal Deposit
Insurance Corporation (FDIC). At June 30, 2020, cash did not exceed the FDIC uninsured balances and management believes the Company
is not exposed to any significant credit risk on cash.
(G)
Property & Equipment
Property
and equipment are recorded at cost less accumulated depreciation. Expenditures for major additions and betterments are capitalized.
Maintenance and repairs are charged to operations as incurred. Depreciation is computed by the straight-line method (after taking
into account their respective estimated residual values) over the asset’s estimated useful life of (3) years for equipment,
(5) years for automobile, and (7) years for furniture and fixtures.
(H)
Patents and Trademarks
The
Company capitalizes direct costs for the maintenance and advancement of their patents and trademarks and amortizes these costs
over the lesser of a useful life of 60 months or the life of the patent. We evaluate the recoverability of intangible assets periodically
by taking into account events or circumstances that may warrant revised estimates of useful lives or that indicate the asset may
be impaired.
(I)
Loss Per Share
Basic
loss per share is computed by dividing net loss by weighted average number of shares of common stock outstanding during each period.
Diluted loss per share is computed by dividing net loss by the weighted average number of shares of common stock, common stock
equivalents and potentially dilutive securities outstanding during the period.
The
Company has 5,728,610 warrants outstanding as of June 30, 2020 with varying exercise prices ranging from $3.89 to $.30/share.
The weighted average exercise price for these warrants is $.51/share. These warrants are excluded from the weighted average number
of shares because they are considered anti-dilutive.
The
Company had 3,933,663 warrants outstanding as of June 30, 2019, with varying exercise prices ranging from $3.89 to $.30/share.
The weighted average exercise price for these warrants was $.53/share. These warrants are excluded from the weighted average number
of shares because they are considered antidilutive.
The
Company uses the guidance in ASC 260 to determine if-converted loss per share. ASC 260 states that convertible securities should
be considered exercised at the later date of the first day of the reporting period’s quarter or the inception date of the
debt instrument. Also, the if-converted method shall not be applied for the purposes of computing diluted EPS if the effect would
be antidilutive.
At
June 30, 2020 and 2019, the Company had $280,000 in convertible notes outstanding, these notes mature in our fiscal quarter ended
June 30, 2021. If converted, the $280,000 in outstanding principal and accrued interest would convert into 387,693 shares of common
stock at a rate of $.72 per share. Also at June 30, 2020, the Company had a 15% OID convertible note outstanding in the principal
amount of $352,941 ($-0- at June 30, 2019) that had accrued $1,838 ($-0- at June 30, 2019) in accrued interest to yield an outstanding
balance of $354,779 that is convertible into shares at a rate of $.28/share into 1,267,068 shares of common stock on or after
December 15, 2020. See Note 7 to these financial statements for more information on the convertible notes discussed in this paragraph.
At
June 30, 2020, the Company had $25,197 ($-0- at June 30, 2019) in convertible notes outstanding held by related parties, these
notes mature August 14, 2021. If converted, the $25,197 in outstanding principal and accrued interest would convert into 99,279
shares of common stock at a rate of $.2538 per share. See Note 9 to these financial statements for more information on the convertible
notes due to related parties discussed in this paragraph.
(J)
Revenue Recognition
The
Company recognizes revenue on arrangements in accordance with FASB ASC No. 606, “Revenue From Contracts With Customers.”
Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration
we expect to receive in exchange for those products or services. The Company adopted the guidance on April 1, 2018 using the cumulative
catch-up transition method. This change in accounting did not have any material effect on the Company’s financial statements.
(K)
Research and Development
The
Company expenses research and development costs as incurred.
(L)
Fair Value of Financial Instruments
The
Company applies the accounting guidance under FASB ASC 820-10, “Fair Value Measurements,” as well as certain
related FASB staff positions. This guidance defines fair value as the price that would be received from selling an asset or paid
to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair
value measurements for assets and liabilities required to be recorded at fair value, the Company considers the principal or most
advantageous market in which it would transact business and considers assumptions that marketplace participants would use when
pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance.
The
guidance also establishes a fair value hierarchy for measurements of fair value as follows:
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Level
1 - quoted market prices in active markets for identical assets or liabilities.
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Level
2 - inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in active markets
for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active,
or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the
assets or liabilities.
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Level
3 - unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the
assets or liabilities.
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The
Company’s financial instruments consist of investments – equity securities receivable, notes payable and accrued interest,
notes payable and accrued interest - related party, and convertible notes payable. The carrying amount of the Company’s
financial instruments approximates their fair value as of June 30, 2020 and March 31, 2020, due to the short-term nature of these
instruments and the Company’s borrowing rate of interest.
In
instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy,
the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input
that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular
input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.
The valuation of the Company’s notes recorded at fair value is determined using Level 3 inputs, which consider (i) time
value, (ii) current market and (iii) contractual prices.
The
Company measured its investments – equity securities receivable at fair value at June 30, 2020, and March 31, 2020, see
Note 4 to the financial statements included in this Form 10-Q.
The
Company accounts for derivative instruments in accordance with Accounting Standards Codification 815, Derivatives and Hedging
(“ASC 815”), which establishes accounting and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. ASC 815 requires that an entity recognize all derivatives
as either assets or liabilities in the balance sheet and measure those instruments at fair value.
If
certain conditions are met, a derivative may be specifically designated as a hedge, the objective of which is to match the timing
of gain or loss recognition on the hedging derivative with the recognition of (i) the changes in the fair value of the hedged
asset or liability that are attributable to the hedged risk or (ii) the earnings effect of the hedged forecasted transaction.
For a derivative not designated as a hedging instrument, the gain or loss is recognized in income in the period of change.
(M)
Stock-Based Compensation - Non-Employees
Equity
Instruments Issued to Parties Other Than Employees for Acquiring Goods or Services
The
Company accounts for equity instruments issued to parties other than employees for acquiring goods or services under guidance
of Sub-topic 505-50 of the FASB Accounting Standards Codification (“Sub-topic 505-50”).
Pursuant
to ASC Section 505-50-30, all transactions in which goods or services are the consideration received for the issuance of equity
instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument
issued, whichever is more reliably measurable. The measurement date used to determine the fair value of the equity instrument
issued is the earlier of the date on which the performance is complete or the date on which it is probable that performance will
occur. If the Company is a newly formed corporation or shares of the Company are thinly traded the use of share prices established
in the Company’s most recent private placement memorandum (“PPM”), or weekly or monthly price observations would
generally be more appropriate than the use of daily price observations as such shares could be artificially inflated due to a
larger spread between the bid and asked quotes and lack of consistent trading in the market.
The
fair value of share options and similar instruments is estimated on the date of grant using a Black-Scholes option-pricing valuation
model. The ranges of assumptions for inputs are as follows:
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Expected
term of share options and similar instruments: Pursuant to Paragraph 718-10-50-2(f)(2)(i) of the FASB Accounting Standards
Codification the expected term of share options and similar instruments represents the period of time the options and similar
instruments are expected to be outstanding taking into consideration of the contractual term of the instruments and holder’s
expected exercise behavior into the fair value (or calculated value) of the instruments. The Company uses historical data
to estimate holder’s expected exercise behavior. If the Company is a newly formed corporation or shares of the Company
are thinly traded the contractual term of the share options and similar instruments is used as the expected term of share
options and similar instruments as the Company does not have sufficient historical exercise data to provide a reasonable basis
upon which to estimate expected term.
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Expected
volatility of the entity’s shares and the method used to estimate it. Pursuant to ASC Paragraph 718-10-50-2(f)(2)(ii)
a thinly-traded or nonpublic entity that uses the calculated value method shall disclose the reasons why it is not practicable
for the Company to estimate the expected volatility of its share price, the appropriate industry sector index that it has
selected, the reasons for selecting that particular index, and how it has calculated historical volatility using that index.
The Company uses the average historical volatility of the comparable companies over the expected contractual life of the share
options or similar instruments as its expected volatility. If shares of a company are thinly traded the use of weekly or monthly
price observations would generally be more appropriate than the use of daily price observations as the volatility calculation
using daily observations for such shares could be artificially inflated due to a larger spread between the bid and asked quotes
and lack of consistent trading in the market.
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Expected
annual rate of quarterly dividends. An entity that uses a method that employs different dividend rates during the contractual
term shall disclose the range of expected dividends used and the weighted-average expected dividends. The expected dividend
yield is based on the Company’s current dividend yield as the best estimate of projected dividend yield for periods
within the expected term of the share options and similar instruments.
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Risk-free
rate(s). An entity that uses a method that employs different risk-free rates shall disclose the range of risk-free rates used.
The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods within the
expected term of the share options and similar instruments.
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Pursuant
to Paragraphs 505-50-25-8 and 505-50-25-9, an entity may grant fully vested, non-forfeitable equity instruments that are exercisable
by the grantee only after a specified period of time if the terms of the agreement provide for earlier exercisability if the grantee
achieves specified performance conditions. Any measured cost of the transaction shall be recognized in the same period(s) and
in the same manner as if the entity had paid cash for the goods or services or used cash rebates as a sales discount instead of
paying with, or using, the equity instruments. A recognized asset, expense, or sales discount shall not be reversed if a share
option and similar instrument that the counterparty has the right to exercise expires unexercised.
(N)
Income Taxes
The
Company accounts for income taxes under Accounting Standards Codification (ASC) Topic 740. Deferred tax assets and liabilities
are determined based upon differences between financial reporting and tax bases of assets and liabilities and are measured using
the enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is provided
when it is more likely than not that some portion or all of a deferred tax asset will not be realized.
The
Company accounts for income taxes under Accounting Standards Codification (ASC) Topic 740.
As
required by ASC Topic 740, the Company recognizes the financial statement benefit of a tax position only after determining that
the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not
threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood
of being realized upon ultimate settlement with the relevant tax authority. The Company applied ASC Topic 740 to all tax positions
for which the statute of limitations remained open. As a result of the implementation of ASC Topic 740, the Company did not recognize
any change in the liability for unrecognized tax benefits.
The
Company is not currently under examination by any federal or state jurisdiction.
The
Company’s policy is to record tax-related interest and penalties as a component of operating expenses.
(O)
Inventory
Inventories
are recorded in accordance with ASC 330 and are stated at the lower of cost 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. The current marketed shelf
life of our Kush inventory is 3 years. However, management reserves the right to review and adjust this as appropriate.
(P)
Recently Issued and Adopted Accounting Pronouncements
In
February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) to increase transparency and comparability among organizations
by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements.
Topic 842 affects any entity that enters into a lease, with some specified scope exemptions. The guidance in this ASU supersedes
Topic 840, Leases. The core principle of Topic 842 is that a lessee should recognize the assets and liabilities that arise from
leases. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability)
and a right-of-use (“ROU”) asset representing its right to use the underlying asset for the lease term. The Company
adopted Topic 842 on April 1, 2019 and resulted in a right of use asset and liability of $154,917.
In
January 2017, the FASB issued ASU No. 2017-04, “Intangibles and Other (Topic 350): Simplifying the Test for Goodwill Impairment”,
which eliminates the requirement to calculate the implied fair value of goodwill, but rather requires an entity to record an impairment
charge based on the excess of a reporting unit’s carrying value over its fair value. This amendment is effective for annual
or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. We adopted this ASU on April 1, 2020 and
it did not have a material effect on our consolidated financial statements.
In
August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurements (Topic 820): Disclosure Framework Changes to the Disclosure
Requirements for Fair Value Measurement. The amendments in this update modify the disclosure requirements on fair value measurements
in Topic 820. The ASU is effective for the Registrants for fiscal years beginning after December 15, 2019, and interim periods
therein. The Company adopted this ASU on April 1, 2020 and it did not have a material impact on the financial statements.
All
other newly issued accounting pronouncements but not yet effective have been deemed either immaterial or not applicable.
NOTE
2 - GOING CONCERN
The
accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United
States of America, which contemplate continuation of the Company as a going concern.
The
Company incurred net losses of $814,008 for the three-month period ended June 30, 2020 and had net cash used in operating activities
of $235,331 for the same period. Additionally, the Company has an accumulated deficit of $55,402,653, working capital deficit
of $1,745,124, and a stockholders’ deficit of $1,575,435 at June 30, 2020. These conditions raise substantial doubt
about the Company’s ability to continue as a going concern for a period of at least twelve months after the date of issuance
on these financial statements. In view of these matters, the Company’s ability to continue as a going concern is dependent
upon the Company’s ability to achieve a level of profitability and/or to obtain adequate financing through the issuance
of debt or equity in order to finance its operations.
Management
intends to raise additional funds either through a private placement or public offering of its equity securities. Management believes
that the actions presently being taken to further implement its business plan will enable the Company to continue as a going concern.
While the Company believes in its viability to raise additional funds, there can be no assurances to that effect. The ability
of the Company to continue as a going concern is dependent upon the Company’s ability to further implement its business
plan and raise additional funds.
COVID-19
has had an impact on the global economy, which directly or indirectly may have an impact on our ability to continue as a going
concern.
These
financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
NOTE
3 – LEASE AND COMMITMENTS
Rent
expense for the three-month periods ended June 30, 2020 and June 30, 2019 were $13,568 and $14,546, respectively.
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 Company resided in the facility starting in November of 2017. The base rent is
$2,078 per month and the Company is responsible for its proportional share of common space expenses, property taxes, and building
insurance. This lease is terminable by the landlord if damage causes the property to no longer be utilized as an integrated whole
and by the Company if damage causes the facility to be unusable for a period of 45 days. The Company entered into a lease amendment
whereby the lease term was extended through November of 2026 in exchange for a loan of $42,500 and a grant of $7,500 for lease
improvements. Through the balance sheet date, the Company has received $15,000 in loan proceeds and expects to receive the remaining
loan amount of $27,500 and grant amount of $7,500 if certain criteria are met relating to the build out of our Edina facility;
some of these criteria are not contingent upon the Company’s performance.
The
following is a maturity analysis of the annual undiscounted cash flows of the operating lease liabilities as of June 30, 2020:
Year Ended March 31,
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2021
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$
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18,702
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2022
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24,936
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2023
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24,936
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2024
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24,936
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2025
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24,936
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Thereafter
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29,092
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$
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147,538
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Less: Amount representing interest
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(4,684
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)
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Present value of lease
liabilities
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$
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142,854
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In compliance with ASC 842 the Company adopted
new guidance in relation to lease accounting on April 1, 2019 whereby we recognized operating lease right-to-use assets and corresponding
and equal operating lease liabilities for the lease of our facility in Edina, MN. As of June 30, 2020, planned future base rent
lease payments total $147,538, which has been discounted to $142,854 using the 52-week treasury bill coupon equivalent
discount rate of 2.18% and a present value model. As of June 30, 2020, the Company only had one operating lease so that the remaining
lease term and weighted average discount rate are approximately 6 years and 2.18%, respectively.
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June 30, 2020
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Present value of future base rent lease payments
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$
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142,854
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Base rent payments included in prepaid expenses
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-
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Present value of future base rent lease payments – net
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$
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142,854
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As
of June 30, 2020, the present value of future base rent lease payments – net is classified between current and non-current
assets and liabilities as follows:
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June 30, 2020
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Operating lease right-of-use asset
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$
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142,854
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Total operating lease assets
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142,854
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Operating lease current liability
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24,791
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Operating lease other liability
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|
|
118,063
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Total operating lease liabilities
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$
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142,854
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Pursuant
to a lease wherein our subsidiary, Gel-Del Technologies, Inc., was the lessee until the lease’s termination in 2017, the
Company owes approximately $330,000 to the lessor as of June 30, 2020; this amount is included in accounts payable.
NOTE
4 – INVESTMENTS – EQUITY SECURITIES
On
June 28, 2019, the Company entered into a purchase agreement with a third-party to purchase 1,500,000 shares of Emerald Organic
Products, Inc. (OTC Pink: “EMOR”) common stock for consideration of $1,500. The Company applied guidance from ASU
No. 2016-01 Financial Instruments – Overall – Recognition and Measurement of Financial Assets and Financial Liabilities
and ASC 820 to arrive at a fair value at June 30, 2019 of $1,500. The Company took into account many factors when determining
the stock’s fair value including, but not limited to, the nature and duration of the restriction on the stock, the extent
to which potential buyers would be limited by the restriction, and qualitative and quantitative factors specific to both the instrument
and the issuer.
NOTE
5 – PROPERTY AND EQUIPMENT
The
components of property and equipment were as follows:
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June 30, 2020
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March 31, 2020
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Leasehold improvements
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$
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139,943
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|
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$
|
98,706
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Furniture and office equipment
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|
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10,130
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10,130
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Production equipment
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87,473
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87,473
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R&D equipment
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25,184
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25,184
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Total, at cost
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262,730
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221,493
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Accumulated depreciation
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(118,075
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)
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|
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(111,586
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)
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Total, net
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$
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144,655
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|
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$
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109,907
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During
the three months ended June 30, 2020 and 2019, depreciation expense was $6,489 and $6,981, respectively.
NOTE
6 – INTANGIBLE ASSETS
The
components of intangible assets, all of which are finite-lived, were as follows:
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June 30, 2020
|
|
|
March 31, 2020
|
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Patents
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|
$
|
3,824,272
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|
|
$
|
3,822,542
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|
Trademarks
|
|
|
25,023
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|
|
|
25,023
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Total, at cost
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|
|
3,849,295
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|
|
|
3,847,565
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Accumulated Amortization
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(3,834,470
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)
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|
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(3,788,954
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)
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Total, net
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|
$
|
14,825
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|
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$
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58,611
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During
the three-month periods ended June 30, 2020 and 2019, amortization expense was $45,316 and $137,109, respectively.
NOTE
7 – CONVERTIBLE NOTES AND NOTES PAYABLE
At
June 30, 2020, the Company is obligated for $77,770 in notes payable and $326,643 in convertible notes payable.
At
March 31, 2020, the Company is obligated for $66,350 in notes payable and $286,981 in convertible notes payable.
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June 30, 2020
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March 31, 2020
|
|
|
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|
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Notes Payable
|
|
|
Convertible Notes Payable
|
|
|
Notes Payable
|
|
|
Convertible Notes Payable
|
|
1.
|
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Third Parties – Principal
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|
$
|
15,000
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|
|
$
|
632,941
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|
|
$
|
15,000
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|
|
$
|
280,000
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|
|
|
Third Parties – Unamortized Debt Discount
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|
|
-
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|
(333,333
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)
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|
|
-
|
|
|
|
-
|
|
|
|
Third Parties – Interest
|
|
|
325
|
|
|
|
1,838
|
|
|
|
95
|
|
|
|
6,981
|
|
|
|
Third Parties – Total
|
|
|
15,325
|
|
|
|
301,446
|
|
|
|
15,095
|
|
|
|
286,981
|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
|
2.
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|
Related Parties – Principal
|
|
|
59,642
|
|
|
|
25,000
|
|
|
|
59,642
|
|
|
|
-
|
|
|
|
Related Parties – Interest
|
|
|
2,803
|
|
|
|
197
|
|
|
|
1,613
|
|
|
|
-
|
|
|
|
Related Parties – Total
|
|
|
62,445
|
|
|
|
25,197
|
|
|
|
61,255
|
|
|
|
-
|
|
|
|
Total
|
|
$
|
77,770
|
|
|
$
|
326,643
|
|
|
$
|
76,350
|
|
|
$
|
286,981
|
|
At June 30, 2020, the Company is obligated
for one convertible note payable held by RedDiamond Partners, LLC (“RDCN”); the Company entered into the RDCN on June
15, 2020, whereby the note is convertible on or after January 15, 2021 and before maturity on March 15, 2021 at a rate of $.28/share.
The RDCN was issued in the principal amount of $352,941 with $52,941 being made up of a 15% Original Issue Discount (“OID”)
and included a conversion feature because there are exercise contingencies triggered by the occurrence of an Event of Default,
which includes events that are outside the control of the Company (i.e. not based solely on the market for the Company’s
stock or the Company’s own operations). Additionally, the RDCN accrues interest at a rate of 12.5% per annum, calculated
on a 360-day-per-year-basis. At June 30, 2020, the Company owed $354,779 in outstanding balance whereby $352,941 was made up of
principal and $1,838 was made up of accrued interest. This RDCN was issued alongside a warrant for purchase of 557,143 shares
of Company common stock (“RDCN Warrants”) with a relative value of $91,500; see Note 13 for more information on these
RDCN Warrants. The outstanding principal balance of the RDCN was reduced to $-0- by various discounts on the debt totaling ($352,941)
as follows: i) the RDCN Warrants generated a discount on the debt of ($91,500) based on the relative value of the same; ii) $2,500
in investor legal costs was treated as a discount on the debt of ($2,500) since this was paid by the Company; iii) $52,941 of
OID was treated as a discount on the debt of ($52,941); iv) a discount of ($206,000) was taken due to the conversion option being
treated as a derivative. As of June 30, 2020, the Company had ($333,333) ($-0- at March 31, 2020) in unamortized debt discount
remaining. In evaluating the various instruments and their components within this transaction (including issuance of the RDCN
and RDCN Warrants) for treatment as a derivative and the respective accounting treatment of the same, the Company referenced ASC
470 and ASC 815 in conjunction with interpretive guidance. Subsequently, at June 30, 2020, the Company amortized a pro-rata portion
of the discount on the debt on a straight-line basis to interest expense in the amount of $19,608. In conjunction with the RDCN
and RDCN Warrants issuances, the Company also paid $30,000 and issued 75,000 warrants (“Think Warrants”) valued at
$31,500 using the Black-Scholes model to Think Equity for soliciting the RedDiamond Partners, LLC transaction; see Note 13 for
more information on these warrants. The total issuance costs paid to Think Equity of $61,500 of cash and warrants, which the
Company recorded the relative value (as noted in Note 13) of $52,399 to expense since no further discount was available to
be taken on the debt.
At
June 30, 2020 and March 31, 2020, the Company is/was obligated for several convertible notes payable held by accredited investors
(“Accredited Investor Convertible Notes” or “AICN” or “AICNs”). At June 30, 2020 the total
outstanding balance of these AICNs of $280,000 was made up of $280,000 in principal and $-0- in accrued interest. At March 31,
2020, the total outstanding balance of these AICNs of $286,981 was made up of $280,000 in principal and $6,981 in accrued interest.
The Company entered into these AICNs during the quarter ended June 30, 2019. All of these AICNs mature during the quarter ended
June 30, 2021, two years from their inception dates. These AICNs accrue interest at a rate of 10% annually. Accrued interest is
due and payable each calendar quarter in cash; during the three-month periods ended June 30, 2020 and 2019, the Company paid out
$13,962 and $5,362, respectively, in accrued interest to these AICN note holders. These AICNs automatically convert into shares
of common stock at a rate of $.72 per share at the earlier of the maturity date or an uplist to a national securities exchange
(e.g. NASDAQ or New York Stock Exchange) provided that the Company’s stock price is at least $.87 at the time of the uplist.
The AICN note holders have the right to convert their outstanding principal and interest into shares of the Company’s common
stock at any time during their note’s term at $.72 per share. No AICN note holders have converted their notes through the
date of this report. As of June 30, 2020 and March 31, 2020, these AICNs did not include a beneficial conversion feature.
NOTE
8 – DERIVATIVE LIABILITY
The Company evaluates its convertible instruments,
options, warrants or other contracts to determine if those contracts or embedded components of those contracts qualify as derivatives
to be separately accounted for under ASC Topic 815, “Derivatives and Hedging.” The result of this accounting treatment
is that the fair value of the derivative is marked-to-market each balance sheet date and recorded as a liability. In the event
that the fair value is recorded as a liability, the change in fair value is recorded in the statement of operation as other income
(expense). Upon conversion or exercise of a derivative instruments, the instrument is marked to fair value at the conversion date
then that fair value is reclassified to equity. Equity instruments that are initially classified as equity that become subject
to reclassification under ASC Topic 815 are reclassified to liabilities at the fair value of the instrument on the reclassification
date.
The
Company used the following assumptions for determining the fair value of the conversion feature in the RDCN referenced in Note
7 to these financial statements, under the binomial pricing model with Monte Carlo simulations at June 15, 2020 and June 30, 2020,
the issuance and balance sheet dates, respectively:
|
|
June 15, 2020
|
|
|
June 30, 2020
|
|
Stock price on valuation date
|
|
$
|
.42
|
|
|
$
|
.44
|
|
Conversion price
|
|
$
|
.28
|
|
|
$
|
.28
|
|
Days to maturity
|
|
|
273
|
|
|
|
258
|
|
Weighted-average volatility*
|
|
|
367
|
%
|
|
|
367
|
%
|
Risk-free rate
|
|
|
.18
|
%
|
|
|
.18
|
%
|
The
initial valuation of $526,800 at June 15, 2020, generated a discount on the debt of $206,000, which net the convertible note liability
to $-0- and forced a recognition of derivative expense of $320,800 and a corresponding offset to derivative liability of $526,800.
At June 30, 2020, the Company revalued the derivative liability at $548,200 and recognized $21,400 to derivative expense and derivative
liability.
The Company recorded derivative liability
transactions during the three-month period ended June 30, 2020 as follows:
|
|
3
Months Ended June 30, 2020
|
|
Convertible
note embedded derivative liability
|
|
|
|
Balance
at March 31, 2020
|
|
$
|
-0-
|
|
|
|
|
|
|
Initial
recognition of derivative liability
|
|
|
526,800
|
|
|
|
|
|
|
Change
in fair value
|
|
|
21,400
|
|
|
|
|
|
|
Balance
at June 30, 2020
|
|
$
|
548,200
|
|
NOTE
9 – CONVERTIBLE NOTES AND NOTES PAYABLE – RELATED PARTY
At
June 30, 2020 and March 31, 2020, the Company was obligated for a related party note payable and accrued interest in the total
amount of $62,445 and $61,255, respectively; the maturity date of this note was April 30, 2020 and the Company is in default on
this note as of the date of this filing. The related party note payable terms are accrual of interest at 8% annually with payments
of $3,100 per month, which are applied to interest first, then principal. The Company is currently in negotiations to resolve
this note that is in default and payable to Dr. David Masters.
At June 30, 2020, the Company was obligated
for related party convertible notes payable principal and accrued interest in the total amount of $25,000 and $197, respectively,
recorded to the Convertible notes and accrued interest payable - related party account. At March 31, 2020, the Company was
not obligated for any related party convertible notes payable or accrued interest. These notes were entered into on May 14, 2020,
accrue interest at 6% per annum, are convertible at $.2538 per share, and mature on August 14, 2020.
NOTE
10 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES
At
June 30, 2020 and March 31, 2020, the Company is obligated to pay $780,835 and $794,057, respectively, in accounts payable and
accrued expenses. Of the total at June 30, 2020 of $780,835, $543,430 is made up of accounts payable, while the $237,404 in accrued
expenses is made up of past employee’s accrued salaries and related payroll taxes payable. Of the total at March 31, 2020
of $794,057, $556,653 is made up of accounts payable, while the $237,404 in accrued expenses is made up of past employee’s
accrued salaries and related payroll taxes payable. The potential payroll taxes owed are not due until the accrued compensation
has been paid. Since the Company has not paid these accrued wages, the Company has appropriately left the potential payroll taxes
associated with these accrued wages unpaid. The Company has established an accrued liability for the potential taxes of approximately
$22,025 and $22,025 at June 30, 2020 and March 31, 2020, respectively.
NOTE
11 – PPP LOAN
On May 1, 2020, the Company received $38,665
in loan proceeds pursuant to the Paycheck Protection Program enacted by the 2020 US Federal government Coronavirus Aid, Relief,
and Economic Security Act. At June 30, 2020, the Company was obligated for the outstanding balance of $38,730, made up of $38,665
in principal and $65 in accrued interest. The principal and accrued interest may be forgivable and the Company has applied
for forgiveness. The loan accrues interest at a rate of 1% per annum and matures on May 1, 2022; if not forgiven prior to December
1, 2020, the Company is required to pay monthly installments toward principal and interest until the note is paid in full.
NOTE
12 – ACCRUED EXPENSES – RELATED PARTY
At
June 30, 2020, the Company is obligated to pay $239,372 in accrued expenses due to related parties. Of the total, $24,882 is made
up of accounts payable, while $214,490 is made up of accrued salaries and potential payroll taxes payable.
At
March 31, 2020, the Company was obligated to pay $252,607 in accrued expenses due to related parties. Of the total, $17,502 was
made up of accounts payable, while $235,105 is made up of accrued salaries and potential payroll taxes payable.
NOTE
13 - COMMON STOCK AND WARRANTS
Common
Stock
During
the three-month period ended June 30, 2020 the Company issued 200,000 shares of common stock as follows:
i)
120,000 shares valued using the Black-Scholes model at $40,680 and recorded in Stock-based compensation to a service provider
for video marketing services over a 6-month term;
ii)
80,000 shares with a relative value of $34,709 pursuant to a purchase of 80,000 units whereby a unit is made up of 1 share of
common stock and ½ warrant. The value of $34,709 along with the relative value of the warrants associated with this transaction
of $17,291 ($52,000 total) was recorded during the quarter ended March 31, 2020 to Common Stock Subscribed and moved to Additional
Paid in Capital and Capital Stock upon receipt of funds and issuance of shares of common stock during the quarter ended June 30,
2020.
During
the three-month period ended June 30, 2019 the Company did not issue any stock.
Warrants
During
the three-month period ended June 30, 2020, the Company granted warrants to purchase a total of 827,491 shares of common stock,
which is included in the vested stock based compensation of approximately $184,000, including:
i)
warrants for 40,000 shares, valued at $17,291 using the Black-Scholes model, to one investor, whereby the value was recorded during
the quarter ended March 31, 2020 to Common Stock Subscribed and moved to Additional Paid in Capital upon receipt of funds and
issuance of warrants during the quarter ended June 30, 2020 and further whereas the warrants vested immediately upon issuance
and are exercisable at $1.00 per share for 3 years from the grant date of April 6, 2020;
ii)
warrants for 90,000 shares, valued at $28,964 using the Black-Scholes model, to John Lai, whereby the value was recorded to Stock-based
compensation and the warrants vest upon the Company raising $10,000,000 or more through an S-1 offering as long as that occurs
prior to October 31, 2020; if these warrants vest they will be exercisable for a period of 5-years at $.35 per share;
iii)
warrants for 557,143 shares (RDCN Warrants), valued at $234,000 using the Black-Scholes model, to RedDiamond Partners, LLC, whereby
the relative value of $91,500 was recorded to Warrants issued in conjunction with convertible debt on the statement
of equity; the warrants have a cashless conversion feature, are exercisable at $.35 per share for a term of five years from the
date of the grant of June 15, 2020 when the Company entered into a securities purchase agreement and issued a convertible note
as outlined in Note 7;
iv)
warrants for 75,000 shares (Think Warrants), valued at $31,500 using the Black-Scholes model, whereby the relative value of the
warrants was recorded to Stock-based compensation, whereas the warrants are exercisable for 5 years from the date of the grant
of June 15, 2020 at an exercise price of $.35 per share. These were issued to Think Equity as a placement fee for soliciting the
RedDiamond transaction as described in roman numeral iii above and Note 7 to these financial statements;
v)
warrants for 27,237 shares, valued at $11,984 using the Black-Scholes model, whereby the value of the warrants was recorded to
Stock-based compensation, whereas the warrants are exercisable for 5 years from the date of the grant at $.40 per share to various
directors of the Company for services on various committees;
vi)
warrants for 29,762 shares, valued at $13,095 using the Black-Scholes model, whereby the value of the warrants was recorded to
Stock-based compensation on the statement of equity, whereas the warrants are exercisable for 5 years from the date of the grant
at $.40 per share to John Lai;
vii)
warrants for 8,349 shares, valued at $3,674 using the Black-Scholes model, whereby the value of the warrants was recorded to Stock-based
compensation on the statement of equity, whereas the warrants are exercisable for 5 years from the date of the grant at $.40 per
share to a service provider for various consulting services.
During
the three-month period ended June 30, 2019, the Company granted warrants to purchase a total of 270,000 shares of common stock
including:
i)
warrants for 270,000 shares, valued at $119,954 using the Black-Scholes model, to three Directors, Messrs. Scott Johnson, Gregory
Cash, and James Martin, with 135,000 vested immediately and 135,000 vesting quarterly between August 2020 and May 2021, and exercisable
over a five-year term at $.33 per share.
A
summary of warrant activity for the year ending March 31, 2020 and three-month period ending June 30, 2020 is as follows:
|
|
Number of
Warrants
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Warrants
Exercisable
|
|
|
Weighted-
Average
Exercisable
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, March 31, 2019
|
|
|
3,818,919
|
|
|
|
.55
|
|
|
|
3,035,035
|
|
|
|
.54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,905,700
|
|
|
|
.52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cashless conversions
|
|
|
(337,500
|
)
|
|
|
.32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(90,000
|
)
|
|
|
.56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canceled
|
|
|
(396,000
|
)
|
|
|
.58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, March 31, 2020
|
|
|
4,901,119
|
|
|
|
.53
|
|
|
|
4,072,369
|
|
|
|
.53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued in conjunction with convertible debt
|
|
|
632,143
|
|
|
|
.35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sold
|
|
|
40,000
|
|
|
|
1.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
155,348
|
|
|
|
.37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, June 30, 2020
|
|
|
5,728,610
|
|
|
|
.51
|
|
|
|
4,939,235
|
|
|
|
.51
|
|
At
June 30, 2020, the range of warrant prices for shares under warrants and the weighted-average remaining contractual life is as
follows:
|
|
|
Warrants Outstanding
|
|
|
Warrants Exercisable
|
|
Range of Warrant
Exercise Price
|
|
|
Number of
Warrants
|
|
|
Weighted-
Average Exercise
Price
|
|
|
Weighted-
Average
Remaining
Contractual Life
(Years)
|
|
|
Number of
Warrants
|
|
|
Weighted-
Average
Exercise
Price
|
|
.30-.50
|
|
|
|
3,087,192
|
|
|
|
.37
|
|
|
|
4.71
|
|
|
|
3,182,817
|
|
|
|
.33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
.51-1.00
|
|
|
|
2,145,739
|
|
|
|
.58
|
|
|
|
2.67
|
|
|
|
1,260,739
|
|
|
|
.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.01-3.89
|
|
|
|
495,679
|
|
|
|
1.42
|
|
|
|
2.11
|
|
|
|
495,679
|
|
|
|
1.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
5,728,610
|
|
|
|
.51
|
|
|
|
3.72
|
|
|
|
4,939,235
|
|
|
|
.51
|
|
For
the three-month periods ended June 30, 2020 and 2019, the total stock-based compensation on all instruments was $183,244 and $157,134,
respectively. It is expected that the Company will recognize expense after June 30, 2020 related to warrants issued, outstanding,
and valued using the Black Scholes pricing model as of June 30, 2020 in the amount of approximately $431,000.
NOTE
14 – SUBSEQUENT EVENTS
Prior
to the issuance date of this Form 10-Q and subsequent to the balance sheet date, the Company entered into an agreement to issue
10,000 shares of common stock to a service provider for legal services valued at $4,400; these shares remain unissued as of the
date of filing of this Form 10-Q with the SEC.
Prior
to the issuance date of this Form 10-Q and subsequent to the balance sheet date, the Company issued 40,000 shares of common stock
to a service provider for investor relations services valued at $17,600.
Prior
to the issuance date of this Form 10-Q and subsequent to the balance sheet date, the Company issued 61,027 shares of common stock
pursuant to a warrant conversion whereby the warrant holder converted 168,750 warrants valued at $102,807 using the Black-Scholes
pricing model into 61,027 shares of common stock.
On
July 1, 2020, the Company issued 15,000 warrants to two directors of the Company, valued at $6,600, vesting in equal amounts over
the two-month period ending August 31, 2020 at $.40 per share for a term of 5 years from the date of the grant.
On
August 14, 2020, three directors, messrs Johnson, Martin, and Cash, who held convertible notes as detailed in Note 9, converted
$25,382 in outstanding principal and interest into 100,008 shares of common stock.