BANTEK, INC. (f/k/a DRONE USA, INC.) AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2018 AND 2017
NOTE 1 -
NATURE
OF OPERATIONS
Bantek, Inc. (f/k/a DRONE USA, INC.) (“Bantek”)
is an Unmanned Aerial Vehicles (“UAV”) and related services and technology company that intends to engage in the distribution
and integration of advanced low altitude UAV systems, services and products. Bantek also provides product procurement, distribution,
and logistics services through its wholly-owned subsidiary, Howco Distributing Co., (“Howco”) (collectively, the “Company”)
to the United States Department of Defense and Defense Logistics Agency. The Company has operations based in Pine Brook, New Jersey
and Vancouver, Washington. The Company continues to seek strategic acquisitions and partnerships with UAV firms that offer
superior technologies in high-growth markets, as well as acquisitions and partnerships with firms that have complementary technologies
and infrastructure.
On April 24, 2018 the Company amended its articles
of incorporation filed with the Delaware Secretary of State changing the Company name from Drone USA, Inc. to Bantek, Inc.
Acceptance of the name change by FINRA is pending.
NOTE 2
-
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES AND GOING CONCERN
Principles of Consolidation
The accompanying consolidated financial
statements include the accounts of Bantek and its wholly-owned subsidiaries, Drone USA, LLC (inactive), and Howco. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Going Concern
The accompanying consolidated financial
statements have been prepared assuming the Company will continue as a going concern, which contemplates the recoverability of assets
and the satisfaction of liabilities in the normal course of business. For the year ended September 30, 2018, the Company has incurred
a net loss of $5,774,867 and used cash in operations of $794,369. The working capital deficit, stockholders’ deficit and
accumulated deficit was $12,170,117, $9,157,344 and $19,631,292, respectively, at September 30, 2018. Furthermore, on April 13,
2017 the Company received a default notice on its payment obligations under the senior secured credit facility agreement (see Note
10), defaulted on its Note Payable – Seller in September 2017, and as of September 30, 2018 has received demands for payment
of past due amounts from several consultants and service providers. It is management’s opinion that these matters raise substantial
doubt about the Company’s ability to continue as a going concern for a period of twelve months from the issuance date of
this report. The ability of the Company to continue as a going concern is dependent upon management’s ability to further
implement its business plan and raise additional capital as needed from the sales of stock or debt. The Company has been implementing
cost-cutting measures and restructuring or setting up payment plans with vendors and service providers and plans to raise equity
through a private placement, and restructure or repay 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 the earn-out liability, 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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2018 AND 2017
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 September 30, 2018
|
|
|
At September 30, 2017
|
|
Description
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Derivative Liability
|
|
|
—
|
|
|
|
—
|
|
|
$
|
258,296
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
A rollforward of the level 3 valuation financial instruments
is as follows:
|
|
Earn-Out Liability
|
|
Balance at September 30, 2016
|
|
$
|
129,000
|
|
Decrease in fair value of earn-out payable
|
|
|
(129,000
|
)
|
Balance at September 30, 2017
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
Derivative
Liabilities
|
|
Balance at September 30, 2017
|
|
|
-
|
|
Initial Fair Value of derivative recorded as discount
|
|
$
|
85,000
|
|
Initial Fair Value of derivative recorded as expense
|
|
|
74,463
|
|
Reduction of derivative recorded as gain on extinguishment upon conversion
|
|
|
(111,818
|
)
|
Reclassifications of Fair Value of Warrants from equity
|
|
|
261,484
|
|
Fair value adjustments for the year
|
|
|
(50,833
|
)
|
Balance at September 30, 2018
|
|
$
|
258,296
|
|
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.
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.
BANTEK, INC. (f/k/a DRONE USA, INC.) AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2018 AND 2017
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.
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 $9,659 in 2018.
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
Sales are recognized upon shipment of product
to the customer. Provisions for returns and allowances are recorded in the period the sales occur. Payments received from customers
prior to shipment of the product to them, are recorded as customer deposit liabilities.
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.
Pursuant to ASC 505-50 –
“Equity-Based
Payments to Non-Employees”
, all share-based payments to non-employees, including grants of stock options, are recognized
in the consolidated financial statements as compensation expense over the service period of the consulting arrangement or
until performance conditions are expected to be met. Using a Black-Scholes valuation model, the Company periodically reassessed
the fair value of non-employee options until service conditions are met, which generally aligns with the vesting period of the
options, and the Company adjusted the expense recognized in the consolidated financial statements accordingly.
Shipping and Handling Costs
The Company has included freight-out as
a component of cost of sales, which amounted to $101,139 and $173,662 for the years ended September 30, 2018 and 2017, respectively.
BANTEK, INC. (f/k/a DRONE USA, INC.) AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2018 AND 2017
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.
Income Taxes
The Company’s current provision for
income taxes is based upon its estimated taxable income in each of the jurisdictions in which it operates, after considering the
impact on taxable income of temporary differences resulting from different treatment of items for tax and financial reporting purposes.
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their respective tax bases and any operating loss or tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in
the year in which those temporary differences are expected to be recovered or settled. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income in those periods in which temporary differences become deductible.
Should management determine that it is more likely than not that some portion of the deferred tax assets will not be realized,
a valuation allowance against the deferred tax assets would be established in the period such determination was made. The Company
follows the accounting for uncertainty in income taxes guidance, which clarifies the accounting and disclosures for uncertainty
in income taxes recognized in the Company’s financial statements and prescribes a recognition threshold and measurement attribute
for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. It also
provides guidance on derecognition and measurement of a tax position taken or expected to be taken in a tax return.
The Company currently has no federal or
state tax examinations in progress. As of September 30, 2018, the Company’s tax returns for the tax years 2017, 2016 and
2015 remain subject to audit, primarily by the Internal Revenue Service.
The Company did not have material unrecognized
tax benefits as of September 30, 2018 and 2017 and does not expect this to change significantly over the next 12 months. The Company
will recognize interest and penalties accrued on any unrecognized tax benefits as a component of provision for income taxes.
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 September
30, 2018, 18,505,000 options were outstanding of which 7,544,000 were exercisable, 69,578,947 warrants were outstanding of which
69,578,947 were exercisable, and related party convertible debt and accrued interest totaling $853,432 was convertible into 159,495,739 shares of common stock. Additionally, as of September 30, 2018, the outstanding principal balance, including accrued
interest of the third party convertible debt, totaled $6,085,830 and was convertible into 1,661,402,806 shares of
common stock. The total dilutive potential shares of 1,898,021,492 exceed the number of common shares authorized and unissued.
As of September 30, 2018 and 2017, potentially dilutive securities consisted of the following:
|
|
September 30,
2018
|
|
|
September 30,
2017
|
|
Stock options
|
|
|
7,544,000
|
|
|
|
44,351,200
|
|
Warrants
|
|
|
69,578,947
|
|
|
|
500,000
|
|
Related party convertible debt and accrued interest
|
|
|
159,495,739
|
|
|
|
4,781,526
|
|
Third party convertible debt (including senior debt)
|
|
|
1,661,402,806
|
|
|
|
21,972,557
|
|
Contingent liability – advisory fees
|
|
|
-
|
|
|
|
3,710,796
|
|
Total
|
|
|
1,898,021,492
|
|
|
|
75,316,079
|
|
BANTEK, INC. (f/k/a DRONE USA, INC.) AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2018 AND 2017
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 September 30, 2018, the Company did not report any segment information since the Company only generates
sales from its subsidiary, HowCo.
Recent Accounting Pronouncements
In May 2014, the FASB issued a new accounting
standard that attempts to establish a uniform basis for recording revenue to virtually all industries financial statements, under
U.S. GAAP as amended in March 2016 and April 2016. The revenue standard’s core principle is built on the contract between
a vendor and a customer for the provision of goods and services. It attempts to depict the exchange of rights and obligations between
the parties in the pattern of revenue recognition based on the consideration to which the vendor is entitled. In order to accomplish
this objective, companies must evaluate the following five basic steps: (i) identify the contract with the customer, (ii) identify
the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the
performance obligations in the contract, and (v) recognize revenue when (or as) the entity satisfies a performance obligation.
There are three basic transition methods that are available - full retrospective, retrospective with certain practical expedients,
and a cumulative effect approach. Under the third alternative, an entity would apply the new revenue standard only to contracts
that are incomplete under legacy U.S. guidance at the date of initial application and recognize the cumulative effect of the new
standard as an adjustment to the opening balance of retained earnings. Prior years would not be restated and additional disclosures
would be required to enable users of the financial statements to understand the impact of adopting the new standard in the current
year compared to prior years that are presented under legacy U.S. guidance. For public business entities, this standard is effective
for annual periods beginning after December 15, 2017, and interim periods within those annual periods. The Company adopted this
standard on October 1, 2018 Early adoption is prohibited. The adoption of this new accounting standard did not have a material
impact on its consolidated financial position and results of operations.
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.
In June 2018, the FASB issued ASU 2018-07,
which amends Compensation – Stock Compensation Topic 718 related to its provisions on accounting for nonemployee shares based
payments. This amendment is not effective for the Company for the fiscal year ended September 30, 2018. The Company will adopt
the provisions during fiscal year 2019.
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 September 30, 2018 and 2017 is as follow:
|
|
September 30,
2018
|
|
|
September 30,
2017
|
|
Accounts receivable
|
|
$
|
1,615,582
|
|
|
$
|
1,169,091
|
|
Reserve for doubtful accounts
|
|
|
-
|
|
|
|
-
|
|
|
|
$
|
1,615,582
|
|
|
$
|
1,169,091
|
|
BANTEK, INC. (f/k/a DRONE USA, INC.) AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2018 AND 2017
NOTE 4 -
INVENTORY
At September 30, 2018 and 2017, inventory
consists of finished goods and was valued at $533,106 and $681,057, respectively.
NOTE 5 -
GOODWILL
AND INTANGIBLE ASSETS
At September 30, 2018 and 2017, the carrying
amount of goodwill amounted to $2,410,335 and $2,410,335, respectively. On September 30, 2017, the Company adopted ASU 2017-04
which revises the method of conducting an impairment test for goodwill.
At September 30, 2018 and 2017, the carrying
amount of tradename amounted to $760,000 and $760,000, respectively.
At September 30, 2018 and 2017, intangible
assets other than goodwill and tradename consisted of:
|
|
September 30,
2018
|
|
|
September 30,
2017
|
|
Customer list
|
|
$
|
1,060,000
|
|
|
$
|
1,060,000
|
|
Less: accumulated amortization
|
|
|
(544,715
|
)
|
|
|
(279,719
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
515,285
|
|
|
$
|
780,281
|
|
The customer list is being amortized over
48 months from the acquisition date. Amortization expense for the years ended September 30, 2018 and 2017 was $264,996 and $264,997,
respectively.
Future amortization expense of the customer
list is as follows:
For the Years Ending
September 30,
|
|
|
|
2019
|
|
$
|
265,000
|
|
2020
|
|
|
250,285
|
|
Total
|
|
$
|
515,285
|
|
The Company conducted its goodwill and
its intangible assets impairment test as of September 30, 2018 and determined that no impairment was required as the asset values
were supported by the historical, current and projected net income and positive cash flows of the component holding the goodwill
and intangible assets, the Company’s subsidiary, Howco.
NOTE 6 -
LINE OF
CREDIT - BANK
The Company has a revolving line of credit
with a financial institution, which balance is due on demand and principal payments are due monthly at 1/60
th
of the
outstanding principal balance. This revolving line of credit is in the amount of $50,000, and is personally guaranteed by the Company’s
Chief Executive Officer (“CEO”). The line bears interest at a fluctuating rate equal to the prime rate plus 4.25%,
which at September 30, 2018 and September 30, 2017 was 9.25% and 8.50%, respectively. As of September 30, 2018, the balance of
the line of credit was $45,915 with $4,085 available.
NOTE 7 -
SETTLEMENTS
PAYABLE
On July 20, 2018, the Company entered into
a settlement agreement with a collection agent for American Express relating to $127,056 of past due charges. The agreement provides
for initial payment of $12,706, the monthly payments of $6,500 and final payment on January 27, 2020 of $3,850. The amount due
at September 30, 2018 was $101,350.
Howco entered into an agreement with a
vendor in February 2018 to make monthly payments of $70,000 including interest charges to liquidate $620,803 of past due invoices.
The amount outstanding at September 30, 2018 is $59,905.
BANTEK, INC. (f/k/a DRONE USA, INC.) AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2018 AND 2017
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 September 30, 2018 and September 30, 2017, accrued
interest on this note amounted to $125,682 and $53,682, respectively.
NOTE 9 -
CONVERTIBLE NOTES PAYABLE – RELATED PARTIES
The Company has an $840,000 convertible
note payable (“Note 1”) to a related party entity controlled by the Company’s CEO. Note 1 bears interest at an
annual rate of 7% with an original maturity date of June 11, 2017 which has been extended to June 11, 2022, at which time all unpaid
principal and interest is due. The holder of Note 1 has the option to convert the outstanding principal and accrued interest, in
whole or in part, into shares of common stock at a conversion price equal to the volume weighted average price per share of common
stock for the 30-day period prior to conversion. As of September 30, 2018 and 2017, Note 1 has not been converted and the balance
of the note was $688,444 and $688,444, and accrued interest was $125,968 and $77,776, 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. 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 year ended September 30, 2018, the
Company borrowed $670 and repaid $95,000 on this note. As of September 30, 2018 and 2017, Note 2 has not been converted, however
a portion of the balance was paid down with cash, the balance was $27,670 and $122,000, and accrued interest was $11,350 and $10,707,
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.
NOTE 10 -
CONVERTIBLE NOTES PAYABLE
AND ADVISORY FEE LIABILITIES
Senior Secured Credit Facility Note
Effective September 13, 2016 (“Effective
Date”), the Company entered into a senior secured credit facility note (the “Agreement”) with an investment fund
to provide capital for the acquisition of Howco. The Company can borrow up to $6,500,000, subject to lender approval, with an initial
convertible promissory note at closing of $3,500,000 (the “Convertible Note”). The Convertible Note bears interest
at a rate of 18% per annum, required monthly payments of $52,500 which is interest only starting on October 13, 2016 through February
13, 2017, and monthly payments, including interest and principal, of $298,341 starting on March 13, 2017 through maturity on March
13, 2018. Events of default are defined in the Agreement and Convertible Note. In the event of default the Convertible Note balance
will bear interest at 25% per annum. In connection with this Agreement, the Company was obligated to pay additional advisory fees
of $850,000 payable in the form of cash or common stock in accordance with the terms of the Agreement. The Company was also required
to reserve 7,000,000 shares of common stock related to this transaction. The reserved shares will be released upon the satisfaction
of the loan.
In the event the lender makes additional
loans under the Agreement, the Company agreed to pay additional advisory fees under similar terms as the $850,000 fee. As of September
30, 2018, the Company had issued 539,204 shares of common stock in satisfaction of the $850,000 advisory fee in accordance with
the terms of the agreement, such shares being issued in September 2016. The proceeds from the sale of the 539,204 shares were supposed
to be applied towards the $850,000 advisory fee due. Based upon the value of the shares, at the time the lender sells the shares,
the Company may be required to redeem unsold shares for the difference between the $850,000 and the lender’s sales proceeds.
Accordingly, the $850,000 was reflected as a current liability through December 31, 2017. In January 2018, in connection with a
settlement agreement (see below), the accrued advisory fee was reclassified to the principal balance of the replacement Convertible
Note. Through the date of the settlement agreement and through September 30, 2018, the lender had not reported any proceeds from
the sale of these shares (see below). Prior to the settlement agreement in January 2018, notwithstanding anything contained in
the Agreement to the contrary, in the event the Lender has not realized net proceeds from the sale of Advisory Fee Shares equal
to at least the Advisory Fee by the earlier to occur of: (A) the twelve (12) month anniversary of the Effective Date; (B) the occurrence
of an Event of Default; or (C) the Maturity Date, then at any time thereafter, the Lender shall have the right, upon written notice
to the Borrower, to require that the Borrower redeem all Advisory Fee Shares then in Lender’s possession for cash equal to
the Advisory Fee, less any cash proceeds received by the Lender from any previous sales of Advisory Fee Shares, if any. In the
event such redemption notice is given by the Lender, the Borrower shall redeem the then remaining Advisory Fee Shares in Lender’s
possession for an amount of Dollars equal to the Advisory Fee, less any cash proceeds received by the Lender from any previous
sales of Advisory Fee Shares, if any, payable by wire transfer to an account designated by Lender within five (5) Business Days
from the date the Lender delivers such redemption notice to the Borrower.
BANTEK, INC. (f/k/a DRONE USA, INC.) AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2018 AND 2017
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). The Company has paid interest-only totaling $279,940 since September
30, 2017.
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 $168,440 and are therefore not
in accord with that amendment. However TCA has received payments under the 3(a)(10) settlement (below) totaling $308,100 during
the year ended September 30, 2018.
On November 15, 2017, the Company executed
a Liability Purchase Term Sheet with Livingston Asset Management (“Livingston”) under which Livingston agreed to purchase
up to $10,000,000 that the Company owes to its creditors through direct purchase of the debts from the Company’s creditors
in return for a convertible note issued by the Company in the principal amount of $50,000 bearing interest of 10% per year to cover
certain legal fees and other expenses of Livingston. The note matures in six months and is convertible into shares of our common
stock at a 30% reduction off the lowest closing bid price for 20 trading days prior to the date of conversion. Livingston has the
right to retain 30% of any negotiated reduction off the face amount of the liability the Company owes to such creditors. The Company
has accounted for the convertible promissory note as stock settled debt under ASC 480 and recorded a debt premium of $21,428 with
a charge to interest expense. The note and accrued interest were fully converted as of September 30, 2018 for 18,162,608 common
shares. Debt premium of $21,428 was charged to additional paid in capital.
BANTEK, INC. (f/k/a DRONE USA, INC.) AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2018 AND 2017
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 September 30, 2018, there have been
seven issuances under section 3(a)(10) of the Securities Act totaling 101,624,000 shares, which have been recorded at par value
with an equal charge to additional paid-in capital. The value originally recorded as a liability remains in the convertible note
balance, until these shares have been sold and reported to the Company by the lender as part of the Make-Whole provision at which
time the proceeds value of such shares are reclassified to additional paid-in capital. During the year ended September 30, 2018,
proceeds of $308,100 were remitted to TCA by Livingston and applied to reduce the liability with corresponding credits to additional
paid in capital. $204,989 of debt premium was credited to additional paid in capital in conjunction with the payments to TCA. At
September 30, 2018 the balance of $691,100 along with related debt premium is included in convertible notes payable on the balance
sheet.
On March 7, 2018 the Company entered into
a placement agent and advisory agreement with Scottsdale Capital Advisors in connection with the Livingston liability purchase
term sheet executed on November 15, 2017. The placement agent services fee amounted to $15,000 payable to Scottsdale Capital Advisors
in the form of a convertible note. The note matures six months from the date of issuance and shall accrue interest at the rate
of 10% per annum. The $15,000 note is convertible into shares of the Company’s common stock at a discount of 30% of the low
closing bid price for the twenty trading days prior to the conversion and is not subject to any registration rights. The Company
has accounted for the convertible promissory note as stock settled debt under ASC 480 and recorded a debt premium of $6,429 with
a charge to interest expense. The note has not been converted and the principal balance is $15,000 with $1,281 of accrued interest
at September 30, 2018.
Other Convertible Debt
In July 2017, the FASB issued Accounting
Standards Update No. 2017-11 Earnings Per Share (Topic 260) Distinguishing Liabilities from Equity (Topic 480) Derivatives and
Hedging (Topic 815) (“ASU 2017-11”), which changes the classification analysis of certain equity-linked financial instruments
(or embedded features) with down round features. When determining whether certain financial instruments should be classified as
liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument
is indexed to an entity’s own stock. ASU 2017-11 also clarifies existing disclosure requirements for equity-classified instruments.
As a result, a freestanding equity-linked financial instrument (or embedded conversion option) no longer would be accounted for
as a derivative liability at fair value as a result of the existence of a down round feature. For freestanding equity classified
financial instruments, ASU 2017-11 requires entities that present earnings per share (EPS) in accordance with ASC Topic 260 to
recognize the effect of the down round feature when it is triggered. That effect is treated as a dividend and as a reduction of
income available to common shareholders in basic EPS. For the Company, ASU 2017-11 is effective for fiscal years, and interim periods
within those fiscal years, beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period.
The Company adopted this standard on October 1, 2017.
On October 5, 2017, the Company entered
into a Securities Purchase Agreement with Power Up Lending Group Ltd. (“Power Up”) under which the Company received
$78,500, net of $21,500 in fees and expenses to be recorded as a debt discount and amortized to interest expense over the Note
term, in return for issuing a convertible promissory note (the “Note”) in the principal amount of $100,000. Power Up
received a right of first refusal for the first nine months from the date of the Note to provide any debt or equity financing less
than $150,000. The Note bears interest at 10% per annum and has a maturity date of July 15, 2018. The Note may be prepaid at a
premium ranging from 112% to 137% depending on the length of time following the date of the Note. The Note is convertible after
180 days into shares of the Company’s common stock at a discount of 35% of the average of the two lowest closing bid prices
of Drone USA’s common stock 15 days prior to the date of conversion and the maximum number of shares issued to Power Up may
not exceed 4.99% of the issued and outstanding shares of the Company’s common stock. The Note is subject to customary default
provisions, including a cross default provision. The Company’s CEO entered into a confession of judgment in the principal
amount of the Note. The Company has accounted for the convertible promissory note as stock settled debt under ASC 480 and recorded
a debt premium of $53,846 with a charge to interest expense. The note and all accrued interest were fully converted into common
shares as of June 19, 2018. The note holder’s legal counsel has returned the note marked as paid. The debt premium was recognized
as $53,846 as additional paid in capital.
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
(See Note 12).
BANTEK, INC. (f/k/a DRONE USA, INC.) AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2018 AND 2017
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 November 28, 2017, the Company received
a payment of $84,000, net of issue costs of $23,500 which was recorded as a debt discount and is being amortized to interest expense
over the Note term, under the terms of a Securities Purchase Agreement dated November 20, 2017, with Labrys Fund, LP (“Labrys”)
under which Drone USA issued to Labrys (i) a convertible note (the “Note”) in the principal amount of $107,500 that
bears interest of 10% (24% default rate) per annum and (ii) 335,938 shares of the Company’s common stock as a commitment
fee which were to be returned to the Company in the event that it pays all unpaid principal and interest under the Note within
180 days of November 20, 2017. Pursuant to ASC 260, as of December 31, 2017, the 335,938 contingent shares issued under the Financial
Consulting Agreement are not considered outstanding and are not included in basic net loss per share or as potentially dilutive
shares in calculating the diluted EPS. The Note has a maturity date of August 28, 2018 and a conversion rate for any unpaid principal
and interest at a 35% discount to the market price which is defined as the average of the two lowest trading prices (defined as
the lower of the trading price or closing bid price) for the Company’s common stock during the fifteen (15) trading day period
ending on the latest complete trading day prior to the date of conversion. The conversion rate is further reduced if the Company
enters into any section 3(a)(9) or 3(a)(10) transactions under the Securities Act of 1933, as amended, if the terms of those transactions
offer greater discounts on conversion prices or a longer look back period for determining the conversion rate and under certain
other enumerated events, including if the conversion price is less than $.01 per share or if the Company loses the “bid”
price for its common stock ($0.0001 on the “ask” with zero market makers on the “bid” per Level 2 and/or
a market such as OTC Pink). In addition, if the Company issues any shares of its common stock at less than the conversion price
Labrys is entitled to full ratchet anti-dilution in such event. No shares of the Company’s common stock can be issued to
the extent Labrys would own more than 4.99% of the outstanding shares of the Company’s common stock unless Labrys agrees
to increase the ownership to 9.99%. The Company is required at all times to have authorized and reserved six times the number of
shares that is actually issuable upon full conversion of the Note (based on the conversion price of the Note in effect from time
to time). Initially, the Company must instruct its transfer agent to reserve 6,198,049 shares of its common stock. The Note is
subject to customary default provisions and also includes a cross-default provision as well as default being triggered if the Company
loses the “bid” price for its common stock ($0.0001 on the “ask” with zero market makers on the “bid”
per Level 2 and/or a market such as OTC Pink) and a $15,000 penalty if not paid by the maturity date. The Company is entitled to
prepay the Note between the issue date until 180 days from its issuance but not thereafter. In November 2017, the Company
accounted for the convertible promissory note as stock settled debt under ASC 480 and recorded a debt premium of $57,885 with a
charge to interest expense. On February 7, 2018 the Company amended the terms to the Note whereby Labrys waiving certain existing
events of default on the Note and in return will no longer be required, under any circumstances, to return the commitment shares
back to the Company’s treasury. The Company was under default for failing to maintain a market capitalization of at least
$5,000,000 on any trading day. The 335,938 commitment shares were considered issued in February 2018 which was recorded as interest
and financing costs at the then market close price of $0.09 per share for a value of $30,234.
The note holder (Labrys) converted
principal of $73,233 and accrued interest of $7,841 during the year ended September 30, 2018. The Company recognized $15,000
of default charges (technical defaults under note terms) as an addition to the principal amount with a corresponding charge
to debt discount. Additionally, the Company increased debt premium by $8,077 with a charge to interest expense in conjunction
with the principal increase. The principal and accrued interest balance of $49,267 was assigned (under the original terms and
conditions) to GHS Investments LLC (“GHS”) on July 13, 2018 and all principal and interest was converted into common
stock by GHS at September 30, 2018.
BANTEK, INC. (f/k/a DRONE USA, INC.) AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2018 AND 2017
On December 7, 2017, the Company received
a payment of $79,000, net of an original issue discount of $5,800 and issue costs of $20,200 fees which was recorded as a debt
discount which is being amortized into interest expense over the Note term, under the terms of a Securities Purchase Agreement
dated November 21, 2017, with EMA Financial, LLC (“EMA Financial”) under which the Company issued to EMA Financial
a convertible note (the “Note”) in the principal amount of $105,000 that bears interest of 10% (24% default rate) per
annum. The Note has a maturity date of December 7, 2018 and has a conversion rate for any unpaid principal and interest at a conversion
price which is the lower of (i) the closing sales price of the Company’s common stock on the trading day immediately preceding
the date of funding and (ii) a 35% discount to (a) the lowest sales price of the shares of the Company’s common stock within
a 20 day trading period including and immediately preceding the conversion date or (b) the lowest bid price on the conversion date,
whichever is lower, and the conversion shares contain piggy-back registration rights. The conversion rate is further reduced under
certain events, including if the closing sales price is less than $0.095 in which case the conversion rate is a 50% discount under
the terms set forth above. No shares of the Company’s common stock can be issued to the extent EMA Financial would own more
than 4.99% of the outstanding shares of the Company’s common stock. The Company also is required at all times to have authorized
and reserved eight times the number of shares that is actually issuable upon full conversion or adjustment of the Note (based on
the conversion price of the Note in effect from time to time) and initially must instruct its transfer agent to reserve 6,802,000
shares of common stock in the name of EMA Financial for issuance upon conversion. The Note is subject to customary default provisions
and also includes a cross-default provision as well as default being triggered if the Company loses the “bid” price
for its common stock ($0.0001 on the “ask” with zero market makers on the “bid” per Level 2 and/or a market
such as OTC Pink). The Company is entitled to prepay the Note between the issue date until 180 days from its issuance at a premium
of 135% of the unpaid principal and interest if paid within 90 days after the issue date and 150% thereafter. 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. At the end of each period, the Company revalued
the embedded conversion option and warrants derivative liabilities. In connection with this Note, on the initial measurement date
of December 7, 2017, the fair values of the embedded conversion option derivative of $149,028 was recorded as derivative liabilities,
$70,028 was charged to current period operations as initial derivative expense, and $79,000 was recorded as a debt discount and
is being amortized into interest expense over the term of this Note. At each reporting date during the year ended September 30,
2018, the Company revalued the embedded conversion option derivative liability. At September 30, 2018 the Company has fully relieved
the derivative liability as part of the gain (loss) in debt extinguishment in conjunction with the full conversion of the note
into common stock.
A number of terms included in the Securities
Purchase Agreement and Note issued subsequently (see paragraph below) were more favorable than the terms granted to EMA Financial
under its Securities Purchase Agreement and the EMA Note. Accordingly, on December 31, 2017, EMA Financial notified the Company
that pursuant to the EMA Securities Purchase Agreement that the EMA Note was automatically amended by increasing (i) the annual
interest rate to 12% percent and (ii) the Original Issue Discount by $3,650.
EMA fully converted all principal, default
charges ($3,650) and accrued interest into common shares during 2018 and surrendered the note. The Company recognized $239,444
of losses on debt extinguishment during July 2018 as a result of the fair market value of the shares issued exceeding the recorded
amount of the derivative liability discussed above.
On December 13, 2017, the Company received
a payment of $60,000, net of original issue discount fees of $7,500 and $15,000 of issue costs recorded as debt discounts and amortized
to interest expense over the Note term under the terms of a Securities Purchase Agreement dated December 8, 2017, with Morningview
Financial, LLC (“Morningview Financial”) under which the Company issued to Morningview Financial a convertible note
(the “Note”) in the principal amount of $82,500 that bears interest of 12% (18% default rate) per annum. The Note has
a maturity date of 12 months and a conversion rate for any unpaid principal and interest and a conversion price which is a 35%
discount to the lowest sales price of the shares of the Company’s common stock within a 20-day trading period including and
immediately preceding the conversion date. The conversion rate is further reduced under certain events, including if the closing
sales price is less than $0.05 in which case the conversion rate is a 45% discount under the terms set forth above. No shares of
the Company’s common stock can be issued to the extent Morningview Financial would own more than 4.99% of the outstanding
shares of the Company’s common stock. The Company also is required at all times to have authorized and reserved eight times
the number of shares that is actually issuable upon full conversion or adjustment of the Note (based on the conversion price of
the Note in effect from time to time). The Note is subject to customary default provisions and also includes a cross-default provision
as well as default being triggered if the Company’s Trading Price as that term is defined in the Note is less than $.0001
or if a money judgment, writ or similar process shall be entered or filed against the Company or any of its subsidiaries for more
than $50,000, and shall remain unvacated, unbonded or unstayed for a period of 20 days unless otherwise consented to by the holder
of the Note. Additionally, upon default and default notice by the lender, the amount immediately due shall be increased to 150%
or 200% of the outstanding principal and interest due depending upon the default provisions, plus default interest. The Company
is entitled to prepay the Note between the issue date until 180 days from its issuance at a premium of 135% of the unpaid principal
and interest. The Company has accounted for the convertible promissory note as stock settled debt under ASC 480 and recorded a
debt premium of $44,423 with a charge to interest expense. Mornningview Financial assessed charges of $20,625 under technical default
terms of the note during the month of June 2018. The Company increased principal and debt discount by $20,625 and recorded additional
premium of $11,106 in connection with the stock settled debt feature discussed above. As of September 30, 2018 Morningview had
converted all principal and accrued interest into common shares. Debt premium $55,529 was recorded as additional paid in capital
on a prorata basis at each conversion date.
BANTEK, INC. (f/k/a DRONE USA, INC.) AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2018 AND 2017
On January 3, 2018, the Company entered
into a Securities Purchase Agreement with Power Up under which the Company received $42,000, net of $11,000 in fees and expenses
which were recorded as a debt discount and amortized to interest expense over the Note term, in return for issuing a convertible
promissory note (the “Note”) in the principal amount of $53,000. Power Up received a right of first refusal for the
first nine months from the date of the Note to provide any debt or equity financing less than $150,000. The Note bears interest
at 10% per annum and has a maturity date of October 15, 2018. The Note may be prepaid at a premium ranging from 112% to 137% depending
on the length of time following the date of the Note. The Note is convertible after 180 days into shares of the Company’s
common stock at a discount of 35% of the average of the two lowest closing bid prices of the Company’s common stock 15 days
prior to the date of conversion and the maximum number of shares issued to Power Up may not exceed 4.99% of the issued and outstanding
shares of Drone USA common stock. The Note is subject to customary default provisions, including a cross default provision. The
Company is required to have authorized for issuance six times the number of shares that would be issuable upon full conversion
of the Note (assuming that the 4.99% limitation is not in effect) and based on the applicable conversion price of the Note in effect
from time to time, initially to be 3,462,355 shares of common stock. The Company has accounted for the convertible promissory note
as stock settled debt under ASC 480 and recorded a debt premium of $28,538 with a charge to interest expense. The principal balance
and accrued interest were fully converted as of September 30, 2018. Debt premium $28,538 was recorded as additional paid in capital
on a prorata basis at each conversion date.
On January 9, 2018, the Company received
a payment of $84,000, net of $23,500 in fees and expenses which was recorded as a debt discount and amortized to interest expense
over the Note term under the terms of a Securities Purchase Agreement dated November 20, 2017, with Labrys under which the Company
issued to Labrys (i) a convertible note (the “Note”) in the principal amount of $107,500 that bears interest of 10%
per annum and (ii) 421,238 shares of the Company’s common stock as a commitment fee which was to be returned to the Company
in the event that it pays all unpaid principal and interest under the Note within 180 days of December 26, 2017. Pursuant to ASC
260, as of January 9, 2018, the 421,238 contingent shares issued under the Financial Consulting Agreement are not considered outstanding
and are not included in basic net loss per share or as potentially dilutive shares in calculating the diluted EPS. The Note has
a maturity date of nine months or September 26, 2018, and a conversion rate for any unpaid principal and interest at a 35% discount
to the market price which is defined as the average of the two lowest trading prices (defined as the lower of the trading price
or closing bid price) for the Company’s common stock during the fifteen trading day period ending on the latest complete
trading day prior to the date of conversion. The conversion rate is further reduced if the Company enters into any section 3(a)(9)
or 3(a)(10) transactions under the Securities Act of 1933, as amended, if the terms of those transactions offer greater discounts
on conversion prices or a longer look back period for determining the conversion rate and under certain other enumerated events,
including if the conversion price is less than $.01 per share or if the Company loses the “bid” price for its common
stock ($0.0001 on the “ask” with zero market makers on the “bid” per Level 2 and/or a market such as OTC
Pink). In addition, if the Company issues any shares of its common stock at less than the conversion price, Labrys is entitled
to full ratchet anti-dilution in such event. No shares of Drone USA common stock can be issued to the extent Labrys would own more
than 4.99% of the outstanding shares of the Company’s common stock unless Labrys agrees to increase the ownership to 9.99%.
The Company is required at all times to have authorized and reserved six times the number of shares that is actually issuable upon
full conversion of the Note (based on the conversion price of the Note in effect from time to time). Initially, the Company must
instruct its transfer agent to reserve 8,535,980 shares of its common stock. The Note is subject to customary default provisions
and also includes a cross-default provision as well as default being triggered if the Company loses the “bid” price
for its common stock ($0.0001 on the “ask” with zero market makers on the “bid” per Level 2 and/or a market
such as OTC Pink). The Company is entitled to prepay the Note between the issue date until 180 days from its issuance but not thereafter.
The Company has accounted for the convertible promissory note as stock settled debt under ASC 480 and recorded a debt premium of
$57,885 with a charge to interest expense. On February 7, 2018 the Company amended the terms to the Note whereby Labrys waives
specified existing events of default on the Note and in return will no longer be required, under any circumstances, to return the
commitment shares back to the Company’s treasury. The Company was under default for failing to maintain a market capitalization
of at least $5,000,000 on any trading day. The 421,238 commitment shares were considered issued in February 2018 at a price of
$0.09 per share based on the then market close price for a total value of $37,911 which was recorded as interest and financing
costs.
During the three months ended June 30,
2018, Labrys assessed charges of $15,000 to be added to principal (and also charged to debt discount) under technical default terms
of the note. The Company increased note principal to $122,500 and added $8,077 to debt premium related to the stock settled debt
feature discussed above.
Labrys charged additional default penalties
of $15,000 on July 25, 2018 and $50,000 on July 26, 2018. The Company recognized the additional principal and charged interest
expense. Put premiums for stock settled debt were also recognized for $22,500 ($15,000 default penalty) and $26,293 ($50,000 default
penalty) with charges to interest expense based on the common stock price discounts associated with the respective conversions
of the default amounts. All principal, default amounts and interest due were fully converted into common stock at September 30,
2018. The put premiums for all principal (including default penalties) were credited to additional paid in capital on a prorata
basis on the dates of conversions.
BANTEK, INC. (f/k/a DRONE USA, INC.) AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2018 AND 2017
On January 31, 2018 the Company received
a payment of $95,000, net of $2,750 for legal fees and $7,250 for due diligence to be recorded as a debt discount and amortized
to interest expense over the Note term under the terms of a Securities Purchase Agreement dated January 31, 2018, with Auctus Fund,
LLC (“Auctus”) under which the Company issued to Auctus a convertible note (the “Note”) in the principal
amount of $105,000 that bears interest of 10% per annum. The Note has a maturity date of nine months or October 26, 2018, and a
conversion rate for any unpaid principal and interest at a 35% discount to the market price which is defined as the average of
the two lowest trading prices (defined as the lower of the trading price or closing bid price) for the Company’s common stock
during the fifteen trading day period ending on the latest complete trading day prior to the date of conversion. The conversion
rate is further reduced if the Company enters into any section 3(a)(9) or 3(a)(10) transactions under the Securities Act of 1933,
as amended, if the terms of those transactions offer greater discounts on conversion prices or a longer look back period for determining
the conversion rate and under certain other enumerated events, including if the conversion shares cannot be delivered by DWAC.
In addition, if the Company issues any shares of its common stock at less than the conversion price, Auctus is entitled to full
ratchet anti-dilution in such event. No shares of the Company’s common stock can be issued to the extent Auctus would own
more than 4.99% of the outstanding shares of the Company’s common stock unless Auctus agrees to increase the ownership to
9.99%. The Company is required at all times to have authorized and reserved ten times the number of shares that is actually issuable
upon full conversion of the Note (based on the conversion price of the Note in effect from time to time). The Note is subject to
customary default provisions and also includes a cross-default provision as well as default being triggered if the Company loses
the “bid” price for its common stock ($0.0001 on the “ask” with zero market makers on the “bid”
per Level 2 and/or a market such as OTC Pink). The Company is entitled to prepay the Note between the issue date until 180 days
from its issuance but not thereafter. 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. Auctus assessed a default penalty of $15,000
which along with $15,000 of additional debt premium was recorded on August 20, 2018. The principal (including the default assessment)
and accrued interest were fully converted at September 30, 2018. Total debt premium of $71,538 was recorded as additional paid
in capital on a prorata basis at each conversion date.
On March 5, 2018, the Company entered into
a Securities Purchase Agreement with Power Up under which the Company received $42,000, net of $11,000 in fees and expenses to
be recorded as debt discount and amortized to interest expense over the Note term, in return for issuing a convertible promissory
note (the “Note”) in the principal amount of $53,000. Power Up received a right of first refusal for the first nine
months from the date of the Note to provide any debt or equity financing less than $150,000. The Note bears interest at 10% per
annum and has a maturity date of December 15, 2018. The Note may be prepaid at a premium ranging from 112% to 137% depending on
the length of time following the date of the Note. The Note is convertible after 180 days into shares of the Company’s common
stock at a discount of 35% of the average of the two lowest closing bid prices of the Company’s common stock 15 days prior
to the date of conversion and the maximum number of shares issued to Power Up may not exceed 4.99% of the issued and outstanding
shares of Drone USA common stock. The Note is subject to customary default provisions, including a cross default provision. The
Company is required to have authorized for issuance six times the number of shares that would be issuable upon full conversion
of the Note (assuming that the 4.99% limitation is not in effect) and based on the applicable conversion price of the Note in effect
from time to time, initially to be 13,046,154 shares of common stock. The Company has accounted for the convertible promissory
note as stock settled debt under ASC 480 and recorded a debt premium of $28,538 with a charge to interest expense. The principal
balance and accrued interest were fully converted as of September 30, 2018. Debt premium $28,538 was recorded as additional paid
in capital on a prorata basis at each conversion date.
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 September 30, 2018 the following notes had been issued:
June 1, 2018, $12,500 principal, maturing December 31, 2018;
July 1, 2018, $12,500 principal, maturing January 31, 2019;
August 1, 2018, $12,500 principal maturing January 31, 2019;
September 1, 2018, $12,500 principal, maturing February 28, 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%, 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 September 30,
2018 the derivative fair value was determined to have decreased to $9,474 with a credit to derivative expense of $961. At September
30, 2018 $1,000 of debt discount was charged to interest expense.
BANTEK, INC. (f/k/a DRONE USA, INC.) AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2018 AND 2017
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 senior secured credit facility note
balance and convertible debt balances consisted of the following at September 30, 2018 and September 30, 2017:
|
|
September 30,
2018
|
|
|
September 30,
2017
|
|
Principal
|
|
$
|
5,568,566
|
|
|
$
|
3,500,000
|
|
Premiums
|
|
|
1,380,175
|
|
|
|
617,647
|
|
Unamortized discounts
|
|
|
(5,000
|
))
|
|
|
(338,075
|
)
|
|
|
|
6,943,741
|
|
|
|
3,779,572
|
|
Non-current
|
|
|
-
|
|
|
|
-
|
|
Current
|
|
$
|
6,943,741
|
|
|
$
|
3,779,572
|
|
For the year ended September 30, 2018 and
2017, amortization of debt discount on the above convertible notes amounted to $756,291 and $737,640, 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. 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 each ($125,000 total put premium) of the assigned and restated
notes.
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 September 30, 2018.
NOTE 12 -
STOCKHOLDERS’ DEFICIT
Preferred Stock
As of September 30, 2018, the Company is
authorized to issue 5,000,000 shares of $0.0001 par value preferred stock, with designations, voting, and other rights and preferences
to be determined by the Board of Directors of which 4,999,750 remain available for designation and issuance.
As of September 30, 2018 and 2017, 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.
BANTEK, INC. (f/k/a DRONE USA, INC.) AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2018 AND 2017
Common Stock
On April 17, 2018 the Company’s shareholders
approved an increase in authorized common stock to 1,500,000,000 from 200,000,000, which became effective upon the filing of an
amendment to the articles of incorporation with the State of Delaware on April 24, 2018. As of September 30, 2018 and 2017 there
were 767,160,077 and 43,104,692 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 September 30, 2018, 81,495,000 awards remain available for grant under the Plan.
Common Stock Issued for Settlement Payable
Conversion
In October and November 2016, the Company
issued an aggregate of 460,200 common shares upon conversion of the remaining settlement payable - vendor of $48,998 and the remaining
premium of $26,384 was reclassified to equity.
Shares Issued for non-employee Services
In October 2016, the Company issued 115,000
shares of common stock to an entity as payment for acquisition-related services valued at $57,500.
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 September 1, 2017, the Company entered
into a consulting agreement with an individual. In connection with this agreement, the Company agreed to issue 10,000 common shares
per month until the agreement is terminated. As of September 30, 2017, 10,000 common shares were issuable pursuant to the agreement.
These shares were valued on the vesting date of September 1, 2017 at $1,764, or $0.1764 per shares based on the quoted trading
price. In connection with these shares, during the year ended September 30, 2017, the Company recorded professional fees of $1,764.
This agreement was terminated in December 2017.
On September 1, 2017, the Company entered
into a consulting agreement with an individual. In connection with this agreement, the Company agreed to issue 10,000 common shares
per month until the agreement is terminated. As of September 30, 2017, 10,000 common shares were issuable and valued on the vesting
date of September 1, 2017 at $1,764, or $0.1764 per shares based on the quoted trading price. During the year ended September 30,
2017, the Company recorded professional fees of $1,764. During the year ended September 30, 2018, an aggregate of 20,000 common
shares were issuable pursuant to the agreement. Such shares were valued on the vesting dates of October 1, 2017 and November 1,
2017 at $3,950, or $0.20 and $0.195 per share, respectively, based on the quoted trading price. During the year ended September
30, 2018, the Company recorded professional fees of $3,950. This agreement was terminated in December 2017.
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.
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.
On July 12, 2018 150,000 vested common
shares were issued to a consultant. The shares were valued at the market price of $0.0083 per share on the day of the grant. The
value of $1,245 was charged to professional fees on issuance.
On July 12, 2018 1,500,000 vested common
shares were issued to a financial advisory consultant. The shares were valued at the market price of $.0083 per share on the day
of the grant. The value of $12,450 was charged to professional fees on issuance.
On July 12, 2018 150,000 vested common
shares were issued to a consultant. The shares were valued at the market price of $0.0083 per share on the day of the grant. The
value of $1,245 was charged to professional fees on the date on issuance.
BANTEK, INC. (f/k/a DRONE USA, INC.) AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2018 AND 2017
On August 6, 2018 125,000 vested common
shares were issued to a consultant. The shares were valued at the market price of $0.0105 per share on the day of the grant. The
value of $1,318 was charged to professional fees on issuance.
On September 24, 2018 2,387,302 common
shares were issued to Tysadco Partners for the Company’s investor relations firm as per the agreement for monthly payments
in shares of $4,000 per month totaling $16,000, which was fully recognized as expense as of September 30, 2018. The issuance settled
the amounts due for June 21, 2018 through October 20, 2018.
Shares Issued for Settlement
On August 27, 2018 the Company settled
outstanding accounts payable with a vendor by issuing 2,307,693 common shares. On September 27, 2018, the Company agreed to issue
2,692,307 shares for a total of 5,000,000 shares to settle the payable balance of $15,000. These shares were valued at the market
price of $0.0058 and $0.004 on the grant date and settlement date respectively, resulting in a loss on settlement of $9,154.
Shares Issued for debt issuance costs
On November 28, 2017, pursuant to a Securities
Purchase Agreement and Convertible Note Agreement with Labrys (see Note 10), the Company considered issued to Labrys 335,938 shares
of the Company’s common stock, as a commitment fee which was to be returned to the Company in the event that it pays all
unpaid principal and interest under the Note within 180 days of November 20, 2017. Prior to the February 7, 2018 amendment discussed
below, pursuant to ASC 260 the 335,938 shares were considered contingent shares and not considered outstanding and not accounted
for due to the contingency. On February 7, 2018 the Company amended the terms of the convertible note dated November 28, 2017 whereby
the holder waives all existing events of default to date and in return shall no longer be required to return, under any circumstances,
the commitment shares back to the Company’s treasury. On February 16, 2018 the Company issued the 335,938 shares at the then
market close price of $0.09 per share for a value of $30,234 which was expensed.
On February 16, 2018, pursuant to a Securities
Purchase Agreement and Convertible Note Agreement with Labrys (see Note 10), the Company issued to Labrys 421,238 shares of the
Company’s common stock, as a commitment fee which was to be returned to the Company in the event that it pays all unpaid
principal and interest under the Note within 180 days of December 26, 2017. Prior to the February 7, 2018 amendment discussed below,
pursuant to ASC 260 the 421,238 shares were considered contingent shares and not considered outstanding and not accounted for due
to the contingency. On February 7, 2018 the Company amended the terms to the convertible note dated December 26, 2017 whereby the
holder waives all existing events of default to date and in return shall no longer be required to return, under any circumstances,
the commitment shares back to the Company’s treasury. On February 16, 2018 the Company issued the 421,238 shares at the then
market close price of $0.09 per share for a value of $37,911 which was expensed.
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 August 24, 2018,
101,624,000 common shares were issued and 30,000,000 of those issued common shares remain unsold by Livingston at September 30,
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.
Shares Issued for Conversion of
Convertible Notes
During the year ended September 30, 2018
the Company issued 605,808,574 common shares to convertible note holders upon contractual conversion of principal, default charges
and accrued interest totaling $1,537,184. The credit to equity of $2,135,815 includes the fair value of shares issued upon conversion
of convertible notes with embedded conversion option derivatives and the reclassification of debt premiums on convertible notes
treated as stock settled debt.
Shares Issued to Employees
On July 15, 2018 the Company issued 2,000,000
common shares to Matthew Wiles, Vice President of Business Operations at the Company’s wholly-owned subsidiary, Howco. The
shares were valued based on the market price of $0.00747 per share on the date of the grant at $14,940, and the shares vest on
August 6, 2018. The shares were issued as compensation for his pending Board of Directors membership. The value of the shares will
be expensed as director fees on August 6, 2018 since they have vested.
BANTEK, INC. (f/k/a DRONE USA, INC.) AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2018 AND 2017
Stock Options
On July 1, 2016, the Company granted options
under the 2016 Stock Incentive Plan to purchase 22,500,000 shares of its common stock to several employees, and an additional 4,300,000
to certain non-employees for services at an exercise price of $0.20 per share. The fair value of the shares of the underlying common
stock at the date of grant based on the quoted trading price was $0.20 per share. 20,000,000 of the options issued to certain employees
and 4,000,000 of the options issued to one consultant vested immediately and have a ten year term. The remaining 2,800,000 options
cliff vest 50% per year over the following two year period and have a ten year term. Assumptions related to the estimated fair
value of these stock options on their date of grant, which the Company estimated using the Black-Scholes option pricing model,
are as follows: risk-free interest rate of approximately 1.46%; expected divided yield of 0%; expected option life of 5 years for
the shares that vest immediately; expected option life of 5.75 years for the shares that vest over a two year period using the
simplified method; and expected volatility of approximately 841%. The value of the options granted to non-employees which vested
over time are remeasured at each reporting date until vesting occurs. The aggregate grant date fair value of these awards, as adjusted
to apply variable measurement date accounting for non-employee awards, amounted to $5,579,990 as of September 30, 2016. The Company
recognizes compensation cost for unvested stock-based incentive awards on a straight-line basis over the requisite service period.
For the year ended September 30, 2017,
the Company granted options under the 2016 Stock Incentive Plan to purchase 15,566,200 shares of its common stock to several employees,
and 10,485,000 shares of its common stock to certain non-employees at exercise prices ranging from $0.20 to $0.24 per share with
vesting terms ranging from immediately vesting to 5 years to employees and certain consultants, respectively. The options were
valued at the grant date and remeasurement date using a Black-Scholes option pricing model with the following assumptions; risk-free
interest rate of 1.46%, expected dividend yield of 0%, expected option term of 1.75 to 5 years for the shares that vested immediately
and 5.75 to 6.5 years for those with vesting terms using the simplified method and expected volatility ranging from 117% to 125%.
The value of the options granted to non-employees which vested over time are remeasured at each reporting date until vesting occurs.
The aggregate grant date fair value of these awards, as adjusted to apply variable measurement date accounting for non-employee
awards, amounted to $3,863,388 as of September 30, 2017. The Company recognizes compensation cost for unvested stock-based incentive
awards on a straight-line basis over the requisite service period.
There were no options granted under the
2016 Stock Incentive Plan for the year ended September 30, 2018
For the years ended September 30, 2018
and 2017, the Company recorded $137,969 and $1,836,514 of compensation and consulting expense related to stock options, respectively.
Total unrecognized compensation and consulting expense related to unvested stock options at September 30, 2018 amounted to $618,378.
The weighted average period over which share-based compensation expense related to these options will be recognized is approximately
2 years.
For the years ended September 30, 2018
and 2017, 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, 2016
|
|
|
26,800,000
|
|
|
$
|
0.20
|
|
|
|
9.80
|
|
|
$
|
-
|
|
|
$
|
19,564,000
|
|
Granted
|
|
|
26,051,200
|
|
|
|
0.21
|
|
|
|
-
|
|
|
|
0.15
|
|
|
|
-
|
|
Forfeited
|
|
|
(8,500,000
|
)
|
|
|
0.20
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
Outstanding at September 30, 2017
|
|
|
44,351,200
|
|
|
$
|
0.21
|
|
|
|
9.27
|
|
|
$
|
-
|
|
|
$
|
0
|
|
Forfeited
|
|
|
(25,846,200
|
)
|
|
|
0.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2018
|
|
|
18,505,000
|
|
|
|
.22
|
|
|
|
8.46
|
|
|
|
-
|
|
|
|
0
|
|
Exercisable at September 30, 2018
|
|
|
7,544,000
|
|
|
$
|
0.21
|
|
|
|
7.18
|
|
|
$
|
-
|
|
|
$
|
0
|
|
All options were issued at an options price equal to the market
price of the shares on the date of the grant.
BANTEK, INC. (f/k/a DRONE USA, INC.) AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2018 AND 2017
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 September 30, 2018 the warrant was evaluated and revalued. At
September 30, 2018 the warrant holder is entitled to exercise its warrants for 69,078,947 common shares and the related derivative
liability is $248,822.
For the years ended September 30, 2018
and 2017, 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, 2016
|
|
|
500,000
|
|
|
$
|
0.01
|
|
|
|
-
|
|
|
|
0.36
|
|
|
$
|
-
|
|
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 at September 30, 2018
|
|
|
69,578,947
|
|
|
$
|
0.00158
|
|
|
|
4.1
|
|
|
$
|
-
|
|
|
$
|
185,822
|
|
Exercisable at September 30, 2018
|
|
|
69,578,947
|
|
|
$
|
0.000158
|
|
|
|
4.1
|
|
|
$
|
-
|
|
|
$
|
185,822
|
|
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 years ended September 30, 2018 and 2017 was $0
and $9,230, 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 years ended September 30, 2018 and 2017
was $2,080 and $25,621, respectively.
BANTEK, INC. (f/k/a DRONE USA, INC.) AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2018 AND 2017
NOTE
14 -
RELATED PARTY TRANSACTIONS
On October 1, 2016, the Company entered
into employment agreements with two of its officers. The employment agreement with the company’s President and CEO provides for
annual base compensation of $370,000 for a period of three years, which can, at the Company’s election, be paid in cash or Common
Stock or deferred if insufficient cash is available, and provides for other benefits, including a discretionary bonus and equity
a provision for the equivalent of 12 months’ base salary, and an additional one-time severance payment of $2,500,000 upon
termination under certain circumstances, as defined in the agreement. The employment agreement with the Company’s Treasurer and
CFO provides for annual base compensation of $250,000 for a period of three years, which can, at the Company’s election, be paid
in cash or Company Common Stock or deferred if insufficient cash is available, and provides for other benefits, including a discretionary
bonus and equity grants, a provision for the equivalent of 12 months’ base salary and an additional one-time severance payment
of $1,500,000 upon termination under certain circumstances, as defined in the agreement. On July 10, 2017, the CFO of the Company
who also a member of the Board resigned. Pursuant to the employment agreement, this employee is not eligible for the one-time severance
payment of $1,500,000 and accordingly, the final balance of accrued wages due to this former CFO as of September 30, 2017 due of
approximately $93,000 which is included in accrued expenses on the accompanying consolidated balance sheet at September 30, 2018
and 2017.
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. As of September 30, 2018 and 2017, the bonus has not been paid and is included in
accrued expenses. On July 7, 2017, the former Chief Strategy Officer and member of the Board was terminated for cause and his 7,500,000
options were immediately forfeited (See Notes 12, 16 and 18).
On March 28, 2017, we entered into an at-will
employment agreement with Matthew Wiles as General Manager of Howco. Under the terms of employment agreement, Mr. Wiles’
compensation is $140,000 per annum and he also will be eligible for a bonus of 10% of Howco’s gross profits over $1.25 million
to be paid in cash after the annual financial statements have been completed and, if applicable, audited for filing with the SEC.
Mr. Wiles will also receive options to acquire 250,000 shares of Drone USA’s common stock vesting over five years in equal
amounts on the anniversary date of his Employment Agreement.
From July 2017 to August 2018, the Company utilized as its corporate
headquarters the office space and equipment of an entity in West Haven, Connecticut related to the Company’s CEO at no cost.
Since September 30, 2018 the Company leases space in New Jersey as its corporate headquarters.
The Company has certain convertible notes payable to related
parties (see Note 9).
NOTE 15 -
INCOME
TAXES
The Company recognizes deferred tax assets and liabilities for the
tax effects of differences between the financial statement and tax basis of assets and liabilities. A valuation allowance is established
to reduce the deferred tax assets if it is more likely than not that a deferred tax asset will not be realized.
On December 22, 2017, the United States
signed into law the Tax Cuts and Jobs Act (the “Act”), a tax reform bill which, among other items, reduces the current
federal income tax rate to 21% from 34%. The rate reduction is effective for the Company on October 1, 2018, and is permanent.
The Act has caused the Company’s
deferred income taxes to be revalued. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted
through income tax expense. Pursuant to the guidance within SEC Staff Accounting Bulletin No. 118 (“SAB 118”), as of
September 30, 2018, the Company recognized the provisional effects of the enactment of the Act for which measurement could be reasonably
estimated. Since the Company has provided a full valuation allowance against its deferred tax assets, the revaluation of the deferred
tax assets did not have a material impact on any period presented. The ultimate impact of the Act may differ from these estimates
due to the Company’s continued analysis or further regulatory guidance that may be issued as a result of the Act.
As of September 30, 2018, the Company has
net operating loss carryforwards of approximately $15,789,654 to reduce future taxable income through 2038. A valuation allowance
for the entire deferred tax assets has been established as of September 30, 2018 and 2017.
BANTEK, INC. (f/k/a DRONE USA, INC.) AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2018 AND 2017
The provision for (benefit from) income
taxes consists of the following:
|
|
Year Ended
September 30,
2018
|
|
|
Year Ended
September 30,
2017
|
|
Current
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
State
|
|
|
-
|
|
|
|
50
|
|
|
|
|
-
|
|
|
|
50
|
|
Deferred
|
|
|
|
|
|
|
|
|
Federal
|
|
|
-
|
|
|
|
-
|
|
State
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
-
|
|
Total income tax provision (benefit)
|
|
$
|
-
|
|
|
$
|
50
|
|
A reconciliation of the provision for income
taxes at the federal statutory rate of 35% to the Company’s provision for income tax is as follows:
|
|
Year Ended
September 30,
2018
|
|
|
Year Ended
September 30,
2017
|
|
U.S. Federal (tax benefit) provision at statutory rate
|
|
$
|
(2,021,203
|
)
|
|
$
|
(2,739,427
|
)
|
State (tax benefit) income taxes, net of federal benefit
|
|
|
(473,129
|
)
|
|
|
(624,516
|
)
|
Permanent differences
|
|
|
61,491
|
|
|
|
152,532
|
|
Change in Federal tax rate
|
|
|
2,499,867
|
|
|
|
|
|
Changes in valuation allowance
|
|
|
(67,026
|
)
|
|
|
3,211,461
|
|
Total
|
|
$
|
-
|
|
|
$
|
50
|
|
Deferred income taxes reflect the net tax
effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes. The following table presents the significant components of the Company’s deferred tax
assets and liabilities for the periods presented:
|
|
September 30,
2018
|
|
|
September 30,
2017
|
|
Deferred Tax Assets
|
|
|
|
|
|
|
Stock-based compensation
|
|
$
|
760,339
|
|
|
$
|
1,986,087
|
|
Net operating losses
|
|
|
4,650,053
|
|
|
|
3,678,613
|
|
Other
|
|
|
-
|
|
|
|
-
|
|
Total deferred tax assets
|
|
|
5,410,392
|
|
|
|
5,664,700
|
|
Valuation allowance
|
|
|
(5,258,641
|
)
|
|
|
(5,325,667
|
)
|
Net deferred tax assets
|
|
|
151,751
|
|
|
|
339,033
|
|
|
|
|
|
|
|
|
|
|
Deferred Tax Liabilities
|
|
|
|
|
|
|
|
|
Identifiable intangibles - HowCo Purchase
|
|
|
(151,751
|
)
|
|
|
(339,033
|
)
|
Total deferred tax liabilities
|
|
|
(151,751
|
)
|
|
|
(339,033
|
)
|
Net deferred tax
|
|
$
|
-
|
|
|
$
|
-
|
|
BANTEK, INC. (f/k/a DRONE USA, INC.) AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2018 AND 2017
The Company determines its valuation allowance
on deferred tax assets by considering both positive and negative evidence in order to ascertain whether it is more likely than
not that deferred tax assets will be realized. Realization of deferred tax assets is dependent upon the generation of future taxable
income, if any, the timing and amount of which are uncertain. Due to the history of losses the Company has generated in the past,
the Company believes that it is not more likely than not that all of the deferred tax assets in the U.S. can be realized as of
September 30, 2018 and 2017, accordingly, the Company has recorded a full valuation allowance on its U.S. deferred tax assets.
The Company files income tax returns in
the United States on federal basis and various states. The Company is not currently under any international or any United States
federal, state and local income tax examinations for any taxable years. All of the Company’s net operating losses are subject
to tax authority adjustment upon examination.
NOTE 16 -
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 September 30, 2018.
In connection with the merger in fiscal
2016, with Texas Wyoming Drilling, Inc., a vendor has a claim for unpaid bills of approximately $75,000 against the Company. The
Company and its legal counsel believe the Company is not liable for the claim pursuant to its indemnification clause in the merger
agreement.
Settlements
During the quarter ended June 30, 2017,
the Company received demands for non-payment of five months of rent for its New York location. In July 2017, the Company vacated
the New York premises. Subsequent to June 30, 2017, a lawsuit was filed in the Supreme Court of the State of New York for an alleged
breach of a Service Agreement for approximately $63,000 in connection with the lease the Company entered into for its former office
space in New York. As of September 30, 2017, the Company accrued into accounts payable approximately $63,000 pursuant to ASC 420-10-30
“Cost to Terminate an Operating Lease”. In October 2017, the Company entered into a settlement agreement with the New
York lease landlord and paid $30,000 in full settlement and recorded a settlement gain of $33,361.
On August 9, 2017, a lawsuit was filed
by an investor relations firm against the Company in the Supreme Court, Westchester County (Index No. 61772/2017). The complaint
alleged two causes of action, one for goods and services furnished and one for an account stated, in the amount of $74,325. The
plaintiff obtained a default judgment. The Company has filed an Order to Show Cause to vacate the default judgment on the grounds
that the service of the complaint was invalid. The court granted the Company’s Order to Show Cause on December 19, 2017 and
set the hearing on the Order to Show Cause for January 12, 2018. At December 31, 2017, $68,544 was accrued in accounts payable.
On February 14, 2018 the Company entered into a stipulation agreement with the investor relations firm which settled the amount
due at $20,000 if payment was made by February 21, 2018. The lump sum payment was made on February 16, 2018 and a gain on extinguishment
of debt of $48,544 was recorded.
On January 29, 2018, the Company entered
into a settlement agreement and mutual release with a vendor who had provided public relations and other consulting services whereby
the Company shall pay to this vendor an aggregate amount of $60,000 of which $30,000 was paid on February 2, 2018. Additionally,
the Company shall pay ten monthly payments of $3,000 per month beginning on February 29, 2018. Additionally, the vendor returned
400,000 common shares of the Company’s common stock which will be cancelled upon satisfaction of the liability. The liability
is recorded at $21,000 as of September 30, 2018.
BANTEK, INC. (f/k/a DRONE USA, INC.) AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2018 AND 2017
The Company has filed a lawsuit
against the former Chief Strategy Officer and member of the Board, who was terminated for cause on July 7, 2017, for breach
of contract, breach of the covenant of good faith and fair dealing, and violation of the California Business &
Professions Code. On July 31, 2017, the former Chief Strategy Officer and member of the Board subsequently filed a
counterclaim against the Company seeking, among other items, damages in excess of $900,000, prejudgment interest, and
reimbursement of legal fees. Prior to the termination and as of September 30, 2018 and September 30, 2017, there was accrued
a 401(k) matching contribution of $9,230 and a $100,000 sign on bonus. This lawsuit was settled in November 2018 (see
Note 18).
As of September 30, 2018, the Company has
received demand for payment of past due amounts for services by several consultants and service providers.
Commitments
Exclusive Agreement
On June 1, 2016, the
Company entered into an exclusive agreement with a Brazilian entity in the drone technology market. The agreement provides that
the Company will acquire exclusive rights to this entity’s UAV technology and intellectual property that includes research
and development efforts completed by this entity. The Company will also secure exclusive export and representation rights to this
entity’s products along with the non-binding option to acquire full ownership of this entity for $1 million should the companies
agree at a later date it would be in the best interest of both businesses. As consideration for this agreement, the Brazilian entity
CEO was appointed to the position of Chief Technology Officer of the Company and granted an option for 2,000,000 shares of common
stock.
Consulting Agreements
In June 2017, the Company entered into
an agreement with an investment bank to provide placement agent services on an exclusive basis as it relates to a private placement
(“the placement”). The agreement calls for the investment bank to receive 9% of the gross proceeds of the placement
and 2.5% warrant coverage of the amount raised. The warrants shall entitle the investment bank to purchase securities of the Company
at a purchase price equal to 110% of the implied price per share of the placement or 100% of the public market closing price of
the Company’s common stock on the date of the placement, whichever is lower. The warrants shall have a term of five years
after the closing of the placement. The agreement expired on September 30, 2017 but the terms of the agreement remains effective
for previously introduced investors for capital raised during the year ended September 30, 2018.
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 September 30, 2018, the Company has not made any of the required monthly rent payments in connection
with this agreement. During fiscal 2017, the Company had expensed and accrued into accounts payable the remaining amounts due under
the term of the lease for a total accrual of $360,000 pursuant to ASC 420-10-30. This balance remains accrued as of September 30,
2018 and 2017.
In May 2017, the Company extended Howco’s
office lease through May 30, 2020. The lease requires monthly payments including base rent plus CAM with annual increases. Future
minimum lease payments under non-cancelable operating leases at September 30, 2018 are as follows:
Years ending September 30,
|
|
Amount
|
|
2019
|
|
$
|
60,137
|
|
2020
|
|
|
40,737
|
|
Total minimum non-cancelable operating lease payments
|
|
$
|
100,874
|
|
For the years ended September 30, 2018
and 2017, rent expense amounted to $55,225 and $496,352, respectively.
BANTEK, INC. (f/k/a DRONE USA, INC.) AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2018 AND 2017
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 September 30, 2018 no inventory was required to be held under the terms
of these arrangements.
Profit Sharing Plan (for Howco)
On April 13, 2018, Howco Distributing announced
to its employees a Company-wide profit sharing program. In fiscal year 2018, Howco Distributing, will redistribute the total of
ten-percent of the Company’s net income. The employee profit is equal to their annual salary divided by the Company’s
total annual payroll and multiplied by 10% of net income for the fiscal year. During 2018 the employees earned approximately $21,000
under this plan.
NOTE 17 -
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 September 30, 2018, cash in bank did not
exceeded the federally insured limits of $250,000. The Company has not experienced any losses in such accounts through September
30, 2018.
Economic Concentrations
With respect to customer concentration,
three customers accounted for approximately 52%, 17%, and 10%, of total sales for the year ended September 30, 2018. Three customers
accounted for approximately 65%, 12% and 11% of total sales for the period ended September 30, 2017.
With respect to accounts receivable concentration,
three customers accounted for approximately 50%, 20% and 20% of total accounts receivable at September 30, 2018. Three customers
accounted for approximately 59%, 15% and 13% of total accounts receivable at September 30, 2017.
With respect to supplier concentration,
two suppliers accounted for approximately 34% and 10% of total purchases for the year ended September 30, 2018. Two suppliers accounted
for approximately 41% and 15% of total purchases for the year ended September 30, 2017.
With respect to accounts payable concentration,
three suppliers accounted for approximately 18%, 13%, and 11% of total accounts payable at September 30, 2018. Two suppliers accounted
for approximately 42% and 11% of total accounts payable at September 30, 2017.
With respect to foreign sales, it totaled
approximately $60,000 for the year ended September 30, 2018.
NOTE 18 -
SUBSEQUENT
EVENTS
Settlements
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 Company
will recognize a gain on extinguishment of debt of approximately $71,700 during the three months ended December 31, 2018. The
note (also discussed below) bears interest at 5% and matures in July 2019 and has a fixed discount conversion feature.
During November 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 (See Note 16). 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 September
30, 2018 the Company recorded $600,000 as accrued expense of which $500,000 was expensed during the fiscal year 2018.
BANTEK, INC. (f/k/a DRONE USA, INC.) AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2018 AND 2017
Convertible Notes Issued
On October 1, 2018 the Company issued a
convertible promissory note for $12,500 to Livingston Asset Management under the services agreement mentioned above. The note bears
interest at 10%, matures in six months and is convertible into the Company’s common stock at 50% of the lowest closing bid
price on the 30 trading days immediately preceding the notice of conversion.
On 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.
On November 1, 2018 the Company issued
a convertible promissory note for $12,500 to Livingston Asset Management under the services agreement mentioned above. The note
bears interest at 10%, matures in six months and is convertible into the Company’s common stock at 50% of the lowest closing
bid price on the 30 trading days immediately preceding the notice of conversion.
On November 13, 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 immeadiately preceding the notice of conversion.
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.
On December 1, 2018 the Company issued
a convertible promissory note for $12,500 to Livingston Asset Management under the services agreement mentioned above. The note
bears interest at 10%, matures in six months and is convertible into the Company’s common stock at 50% of the lowest closing
bid price on the 30 trading days immediately preceding the notice of conversion.
On 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.
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.
On October 20, the balance of the note
principal of $62,500 due to Porta Pellex was in default. This default was cured when the final assignment to Jefferson Street Capital
LLC was executed (see below).
On October 23, 2018 Porta Pellex
assigned $62,500 of the remaining principal balance of its note to Jefferson Street Capital LLC along with $7,500 of accrued
interest. The assigned portion of the note was restated to provide for conversion of interest and principal into common
shares at the lower of: 50% discount to the lowest bid price over the 20 trading days prior to conversion notification; or
50% of the lowest bid price during the 20 trading days prior to the closing date of the related assignment. This modification
was treated as a debt extinguishment. In connection with the issuance of this Note, the Company determined that the terms of
the modified Note contain a conversion formula that caused variations in the conversion price resulting in the treatment of
the conversion option as a bifurcated derivative to be accounted for at fair value. Accordingly, under the provisions of FASB
ASC Topic No. 815-40, “Derivatives and Hedging – Contracts in an Entity’s Own Stock”, the
embedded conversion option contained in the convertible instruments were accounted for as derivative liabilities at the date
of assignment and shall be adjusted to fair value through earnings at each reporting date. The fair value of the
embedded conversion option derivatives were determined using the Binomial valuation model. In connection with this Note, on
the initial measurement date of October 23, 2018, the fair values of the embedded conversion option derivative of $72,609
was recorded as derivative liabilities, $70,000 was charged to current period operations as initial derivative expense,
and $2,609 was recorded as a debt discount and is being amortized into interest expense over the expected holding period of
the restated note.
BANTEK, INC. (f/k/a DRONE USA, INC.) AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2018 AND 2017
On October 30, 2018 TCA the
Company’s senior lender amended its credit facility which had been restructured in January 2018 when fees due for
advisory and other matters along with accrued but unpaid interest were capitalized and separated into two notes, Note A
having $1,000,000 principal and Note B having $4,788,642 both having the same maturity terms, interest rates and conversion
rights. Under the current amendment total amounts outstanding under the notes along with accrued interest have been
capitalized with the principal amount due of $6,018,192.42. 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.
Related Party Promissory Note Issued
On December 20, 2018 the Company issued
a, promissory note to the CEO for $400,000. The note bears interest at 12% per annum, matures in 5 years on December
20, 2023 and requires monthly payment of interest and principal of $5,000 with a balloon payment at maturity.
Common Stock Issued
On October 17, 2018 Crown Bridge Partners
was issued 35,420,168 common shares in exchange for the same number of warrants surrendered.
On November 1, 2018 Jefferson Street Capital
was issued 30,000,000 common for conversion of principal related to the Porta Pellex note assignment and restatement cited above.
On November 6, 2018 Trillium Partners LLC
was issued 58,721,488 common shares for conversion of principal related to the Porta Pellex note assignment and restatement cited
above.
On November 6, 2018 Jefferson Street
Capital was issued 32,307,692 common shares for conversion of principal related to the Porta Pellex note assignment and
restatement cited above.
On November 19, 2018 Jefferson Street Capital
was issued 45,952,267 common shares for conversion of principal related to the Porta Pellex note assignment and restatement cited
above.
On November 27, 2018 Trillium Partners
LLC was issued 56,947,133 common shares for conversion of principal related to the Porta Pellex note assignment and restatement
cited above. Following this conversion principal, interest and fees due were fully settled.
On December 5, 2018 Jefferson Street Capital
was issued 20,360,000 common for conversion of principal related to the Porta Pellex note assignment and restatement cited above.
Following this conversion principal, interest and fees due were fully settled.
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 $45,320.02 in partial settlement of TCA Note
A under the terms of the 3(a)(10) agreement.