Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended September 30March 31, , 20172018

OR

For the transition period from ___________to ____________

Commission File Number 000-55345

ZERO GRAVITY SOLUTIONS, INC.
(Exact name of business as specified in its charter)

190 NW SPANISH RIVER BOULEVARD, SUITE 101, BOCA RATON, FLORIDA 33431

(Address, including zip code, of principal executive offices)

(561) 416-0400

(Issuer’sIssuer’s telephone number)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☐ No ☒ Form 10-K 12/31/2016;The Company has not filed its Quarterly Report on Form 10-Q 3/31/2017; Form 10-Q 6/30/2017for the quarterly period ending June 30, 2018.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ☐ No ☒ No ☐See above

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ☒

Indicate the number of shares outstanding of each of the issuer’sissuer’s classes of common stock, as of the latest practicable date: As of November 17, 2017,October 30, 2018, the issuer had 40,772,59740,954,115 shares of common stock issued and outstanding.

TABLE OF CONTENTS

NOTE 1– ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of operations

Zero Gravity Solutions, Inc. (the “Company”) is an agriculturala biotechnology company focused on commercializing technologies technology derived from and designed for spacespaceflight with significant applications on earth.Earth. These technologies are focused on improving world agriculture by providing valuable solutions to challenges facing world agriculture. The Company’s two primary categories of technologies aimed at sustainable agriculture are: 1) BAM-FX, a cost effective, ionic micronutrient delivery system for plants currently being introduced commercially intohumanity including threats to world agriculture markets byand the Company’s wholly owned subsidiary BAM Agricultural Solutions, Inc. and 2) Directed Selection, utilized inability to feed the development and production, in the prolonged zero/micro gravity environment of the International Space Station (“ISS”), of large volumes of non-GMO, novel, patentable stem cells with unique and beneficial characteristics.

The Company’s mission is to improve life on earth by applying its intellectual property and technology designed for and derived from six NASA enabled flights of the ISS. The Company’s initial projects are directed to providing solutions to critical world food crop challenges.world’s rapidly growing population.

The Company owns proprietary technology for its firstinitial commercial product, BAM-FX™ that can boost the nutritional value and enhance the immune system of food crops without the use of Genetic Modification. The Company’s focus is the commercialization of BAM-FX™BAM-FX™ in both domestic and international markets. The Company’s headquarters are located in Boca Raton Florida. 

The Company operates through two wholly owned subsidiaries: BAM Agricultural Solutions, Inc. and Zero Gravity Life Sciences, Inc., both Florida corporations formed by the Company in 2014.

Going Concern and Management’sManagement’s Plans 

The Company has a limitedworking capital deficiency as of March 31, 2018, and a loss from operations and negative cash flows from operating history, recurring losses from operationsactivities for the quarter then ended. At March 31, 2018, the Company had an approximate cash balance of $44,000, and a working capital deficiency at September 30, 2017.  At September 30, 2017,of approximately $(1,186,000), and had a loss from operations of approximately $(1,577,000), and negative cash flows from operating activities of approximately $(1,057,000) for the Company had approximate cash balances of $130,000, a working capital deficiency of $(952,000), total stockholders’ deficit of $(1,053,000) and an accumulated deficit of $(22,112,000).quarter then ended. To date, the Company has in large part relied on equity financing and has entered into related and non-related party promissory notes to fund its operations. The Company has also issued stock-based compensation in exchange for services. Although the Company intends to raise additional capital, the Company expects to continue to incur losses from operations and have negative cash flows from operating activities for the near-term and these losses could be significant as product development, regulatory, contract research, and technical marketing personnel related expenses are incurred. The Company estimates that the costs associated with the execution of its 2017 business plan may exceed $450,000 per month, with limited or no revenue in certain months, or for an extended period of time. Management has evaluated its ability to continue as a going concern for the next twelve months from the issuance of these September 30, 2017March 31, 2018 unaudited condensed consolidated financial statements, and has determined that there is substantial doubt as to its ability to continue as a going concern. The Company has satisfied its obligations using cash from successful capital raising efforts through March 31, 2018, however there are no assurances that such successful efforts will continue for up to a year after these unaudited condensed consolidated financial statements are issued. The unaudited condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result should the Company be unable to continue as a going concern. The Company has executed product distribution agreements with domestic and international commercial agricultural distributors and generated initial product orders. Additional technical and marketing effort must be devoted to those distributors to insure the product is properly utilized and validated by end users. Financial resources are required to carry receivable balances due from the distributors and assist with end user validation and acceptance. To fund these capital needs, the Company has and continues to raise capital through a private placement offeringofferings in connection with its investment banker and through its internal efforts.efforts, as well as raising funds through issuances of debt. Subsequent to March 31, 2018, the Company has raised approximately $2,350,000 in debt financing and approximately $745,000 through the sale of common stock (Note 7). If the Company does not obtain additional capital, the Company would potentially be required to reduce the scope of its business development activities or cease operations. The Company continues to explore obtaining additional capital financing and the Company is closely monitoring its cash balances, cash needs and expense levels. Subsequent to September 30, 2017, the Company raised approximately $300,000 through its private placement and received $500,000 from the issuance of an unsecured promissory note to a trust which a member of its Board of Directors is a beneficiary of (Note 8). 

Management’sManagement’s strategic plans include the following:

- continuing to advance commercialization of the Company’s principal product, BAM-FX™ in both domestic and international markets;

- pursuing additional capital raising opportunities;

- continuing to explore and execute prospective partnering or distribution opportunities; and

- identifying unique market and product application opportunities that represent potential positive cash flow.

Basis of Presentation

Certain information or footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted, pursuant to the rules and regulations of the Securities and Exchange Commission for interim financial reporting. Accordingly, they do not include all the information and footnotes necessary for complete financial statements. It is management's opinion, however, that all material adjustments (consisting of normal recurring adjustments and an adjustment to prior period results (Note 2)) have been made which are necessary for a fair financial statement presentation. The interim results for the period ended September 30, 2017, are not necessarily indicative of results for the full fiscal year. These unaudited financial statements should be read in conjunction with the audited financial statements and the notes thereto for the year ended December 31, 2016.

ZERO GRAVITY SOLUTIONS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

SEPTEMBER 30March 31, 2018, 2017

(Unaudited)

Interim Financial Statements

The interim unaudited condensed consolidated financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). In the opinion of the Company’s management, all adjustments (consisting of normal recurring adjustments and reclassifications and non-recurring adjustments) necessary to present fairly our results of operations for the three months ended March 31, 2018 and 2017, our cash flows for the three months ended March 31, 2018 and 2017, and our financial position as of March 31, 2018 have been made. The results of operations for such interim periods are not necessarily indicative of the operating results to be expected for the full year.

Certain information and disclosures normally included in the notes to the annual consolidated financial statements have been condensed or omitted from these interim consolidated financial statements. Accordingly, these interim unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Report on Form 10-K for the period ended December 31, 2017 as filed with the SEC on August 13, 2018. The December 31, 2017 balance sheet is derived from those statements.

Use of Estimates

The preparation of the unaudited consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts in the consolidated financial statements. Actual results could differ from those estimates. Significant estimates in the accompanying unaudited consolidated financial statements include the allowance for doubtful accounts and other receivables, inventory reserves and classifications, amortization period and recoverability of intangible assets, valuation of beneficial conversion features in convertible debt, valuation of loss contingencies, valuation of stock-based compensation and the valuation allowance on deferred tax assets.

Segment Reporting

The Company views its operations and manages its business as one reportable segment. As a result the consolidated financial statements presented within, relate to our principal operating segment.  Customers in the United States accounted for 100% of our revenues. We do not have any property or equipment outside of the United States.

Principles of Consolidation

The accompanying unaudited interim condensed consolidated financial statements include the accounts of Zero Gravity Solutions, Inc. and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

Cash and Cash Equivalents

For the purposes of the statement of cash flows, the Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. The Company had no cash equivalents at March 31, 2018 and 2017.

Inventory

Inventory is valued on a lower of first in, first out (FIFO) cost or net realizable value. Inventory consisted of:

Property and Equipment

Property and equipment is stated at cost, less accumulated depreciation. Expenditures for maintenance and repairs are charged to expense as incurred.

Depreciation is computed on a straight-line basis over estimated useful lives. Property and equipment is reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

Impairment of Long Lived Assets

The Company accounts for long-lived assets in accordance with the provisions of ASC 360-10-35-15 “Impairment or Disposal of Long-Lived Assets.”  This guidance requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset.  If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.  Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.

Concentration of Credit Risk

The Company at September 30, 2017 maintainedbelieves that its cash balance with two major national financial institutions.credit risk exposure is limited. The bank balance at September 30, 2017 did not exceed the FDIC limits.

ZERO GRAVITY SOLUTIONS, INC. AND SUBSIDIARIES

NotesCompany has never suffered a loss due to Condensed Consolidated Financial Statements

SEPTEMBER 30, 2017

(Unaudited)excess balances.

Fair Value of Financial Instruments

The Company accounts for financial instruments under Financial Accounting Standards Board (FASB) Accounting Standards Codification Topic (ASC) 820, Fair Value Measurements.  This statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements.  To increase consistency and comparability in fair value measurements, ASC 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three levels as follows:

ZERO GRAVITY SOLUTIONS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2018

(Unaudited)

Observable inputs are based on market data obtained from independent sources, while unobservable inputs are based on the Company’sCompany’s market assumptions.  Unobservable inputs require significant management judgment or estimation.  In some cases, the inputs used to measure an asset or liability may fall into different levels of the fair value hierarchy.  In those instances, the fair value measurement is required to be classified using the lowest level of input that is significant to the fair value measurement.  Such determination requires significant management judgment. 

As the Company's common stock is not traded in an active market, the Company estimates the fair value of its common stock (used in its Black Scholes option pricing model) pursuant to ASC 820. This estimation process maximizes the use of observable inputs, including the quoted price of the Company's common stock in an inactive market, the price of the Company's common stock determined in connection with transactions in the Company's common stock, and an income approach to valuation (a discounted cash flow technique that takes into accountconsiders the future cash flows) (Note 2).

The carrying amounts of the Company’sCompany’s accounts receivable and accounts payable approximate fair value due to the relatively short period to maturity for these instruments. The carrying value of the Company’s notes payable approximates fair value due to their short period to maturity and their stated interest rates, combined with historic interest rate levels.

Revenue Recognitionrecognition and Accounts Receivableaccounts receivable

Revenue isWe recognize revenues from the sale of agricultural biotechnology products to distributors and customers pursuant to the provisions of ASC 606, “Revenue Recognition”.

Revenues for agricultural chemical products are recognized when the following four basic criteria have been met: (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred and risk of loss has passed; (iii) the seller's pricetitle to the buyerproducts is fixedtransferred which may be upon shipment to the customer or determinable;receipt by the customer of the product. We recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration (that is, payment) to which the company expects to be entitled in exchange for those goods or services.

When amounts are billed to customers for shipping and (iv) collectability is reasonably assured.handling fees they are included in net sales, and the related costs incurred by the company for the delivery of invoiced goods are classified as cost of goods sold in our Statements of Operations.

The Company determined that no reserve for estimated product returns and allowances was necessary during the three months ended March 31, 2018 and nine month periods ended September 30, 2017 and 2016.. Determination of the reserve for estimated product returns and allowances is based on management's analyses and judgments regarding certain conditions. Should future changes in conditions prove management's conclusions and judgments on previous analyses to be incorrect, revenue recognized for any reporting period could be materially affected. 

ZERO GRAVITY SOLUTIONS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

SEPTEMBER 30, 2017

(Unaudited)

At September 30, 2017, threeMarch 31, 2018, two customers accounted for 88.2%100% of total accounts receivable each representing 47.9%, 27.3% and 12.9% respectively. During the three months ended September 30, 2017, two customers accounted for 94.0% of net sales, each representing 79.1%, and 14.9% respectively. During the nine months ended September 31 2017 three customers accounted for 69.0% of net sales,receivable. Each of these customers represented 33.6%85.8%, 22.9% and 13.0%14.2%, respectively. At DecemberDuring the period ended March 31, 2016, five2018, two customers accounted for 99.4%100% of net sales 75% and 25% respectively. 0% of sales for the quarter were to customers outside of the U.S.

At December 31, 2017, three customers accounted for 100% of total accounts receivable. Each of these fivethree customers represented 40.3%46.5%, 24.1%, 13.0%, 11.7%,34.9% and 10.3%18.6%, respectively. During the three monthsperiod ended September 30,March 31, 2017, one customer accounted for 50%22.8% of net sales for the nine months ended September 30, 2016, two customers accounted for 40.3% of net sales, each representing 22.0% and 18.4%, respectively.sales.

The Company extends credit to customers generally without requiring collateral. The Company monitors its exposure for credit losses and maintains allowances for anticipated losses. The Company records an allowance for doubtful accounts when it is probable that the accounts receivable balance will not be collected. When estimating the allowance, the Company takes into consideration such factors as its day-to-day knowledge of the financial position of specific clients, and the industry and size of its clients. The Company has an allowance for doubtful accounts of $0 and $83,697 as of September 30, 2017 March 31, 2018 and December 31, 2016.2017 was $0 and $32,663, respectively.

ZERO GRAVITY SOLUTIONS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2018

(Unaudited)

Cost of sales

Cost of sales is comprised of material costs, invoiced shipping costs and royalty expense.  

Warrants

The Company recognizes the cost of warrants issued with debt as debt discount in the consolidated financial statements which is recorded at the warrants relative fair value which is measured based on the grant date fair value of the award. The Company estimates the fair value of each warrant at the grant date by using the Black-Scholes option pricing model.

Stock Based Compensationbased compensation

The Company recognizes the cost of employee services received in exchange for an award of equity instruments in the consolidated financial statements andwhich is measured based on the grant date fair value of the award. Stock based compensation expense is recognized over the period during which an employee is required to provide service in exchange for the award (generally the vesting period). The Company estimates the fair value of each stock award at the grant date by using the Black-Scholes option pricing model.

ZERO GRAVITY SOLUTIONS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

SEPTEMBER 30, 2017

(Unaudited)

Costs equal to these fair values are recognized ratably over the requisite service period based on the number of awards that are expected to vest, or in the period of grant for awards that vest immediately and have no future service condition. The expense resulting from employee and share-based payments is recorded in general and administrative expense. We have elected to account for the forfeiture of awards as they occur.expense in 2018 and 2017.

The Company also grants share-based compensation awards to non-employees for service provided to the Company. The Company measures and recognizes the fair value of such transactions based on the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable.

Loss per Common Share

Loss per share is calculated by dividing the Company’sCompany’s net loss applicable to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings loss per share is calculated by dividing the Company’s net loss available to common shareholdersincome (loss) by the diluted weighted average number of shares outstanding during the year. The diluted weighted average number of shares outstanding is the basic weighted number of shares adjusted for any potentially dilutive debt or equity.equity instruments. The effect of the inclusion of the dilutive shares would have resulted in a decrease in loss per share. Accordingly, the weighted average shares outstanding have not been adjusted for dilutive shares. Outstanding warrants, and stock options and convertible debt are not considered in the calculation as the impact of the potential common shares (the weighted average being approximately 12,944,000(totaling 13,550,332, shares and 12,205,000 three-months ended September 30, 2017 and 2016 respectively and 12,581,000 and 11,279,00014,044,842 shares for the nine monthsperiods ended September 30,March 31, 2018 and December 31, 2017, and 2016 respectively), would be to decrease the net loss per share.

Research and Development

Research and development costs are charged to expense as incurred.

Warranty Expense

The Company's distribution agreements provide for a warranty on products sold. As sales under such distribution agreements have been nominal through 2018 and 2017, there has been no warranty expense in 2018 or 2017. A provision for estimated future warranty costs is to be recorded as cost of sales when products are shipped, and warranty costs are to be based on historical trends in warranty charges as a percentage of gross product shipments. A resulting accrual is to be reviewed regularly, and periodically adjusted to reflect changes in warranty cost estimates.

Income Taxes

The Company accounts for income taxes under the asset and liability method, in which 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 basis and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period that includes the enactment date. A valuation allowance is required to the extent any deferred tax assets may not be realizable. The difference in the expected income tax benefit and no benefit recorded for the three and nine months ended September 30, 2017 and 2016 is due to an increase in the valuation allowance. 

ZERO GRAVITY SOLUTIONS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

SEPTEMBER 30March 31, 2018, 2017

(Unaudited)

The Company does not have an accrual for uncertain tax positions as of March 31, 2018 and December 31, 2017.  The Company files corporate income tax returns with the Internal Revenue Service and the States where the Company determines it is required to do so.  The Company’s policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. At March 31, 2018, the Company did not have any accrued interest or penalties associated with any unrecognized tax benefits, nor was any interest expense recognized during the periods ended March 31, 2018 or 2017.

Reclassifications

Certain amounts in the December 31, 2017 balance sheet have been reclassified from accounts payable, related party to accrued interest, related party to conform to the March 31, 2018 presentation.  This reclassification had no effect on current liabilities in either period presented.

Recently Issued Accounting Pronouncements

In May 2014, the FASB issuedFinancial Accounting Standards UpdateBoard (“ASU”FASB”) No. 2014-09, Revenueissued ASC 606, “Revenue from Contracts with Customers,Customers” which supersedeshas been further clarified and amended. The core principle of the revenue recognition guidance in Revenue Recognition (Topic 605), and requires entitiesnew standard is for companies to recognize revenue in a way that depictsto depict the transfer of potential goods or services to customers in an amountamounts that reflectsreflect the consideration (that is, payment) to which the entitycompany expects to be entitled to in exchange for those goods or services. ThisThe new standard as amended, is now effectivealso will result in enhanced disclosures about revenue, provide guidance for annualtransactions that were not previously addressed comprehensively (for example, service revenue and contract modifications) and clarify guidance for multiple-element arrangements. Entities have the option to apply the new guidance under a retrospective approach to each prior reporting periods beginning after December 15, 2017, and interim reporting periodsperiod presented or a modified retrospective approach with the cumulative effect of initially applying the new guidance recognized at the date of initial application within that reporting period.the Statement of Financial Position. The standard permits the use of either retrospective or cumulative effect transition methods, and expects to use the retrospective transition method. Based upon Managements' current assessment of the standard, the Company does not anticipate any material impact upon the adoption of this standard.

In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory. ASU 2015-11 requires that inventory within the scope of the guidance be measured at the lower of cost and net realizable value. Inventory measured using last-in, first-out (LIFO) and retail inventory method (RIM) are excluded from this new guidance. This ASU replaces the concept of market with the single measurement of net realizable value and is intended to create efficiencies for preparers and more closely align U.S. GAAP with IFRS. This ASU is effective for public business entities in fiscal years, and interim periods within those years, beginning after DecemberDec. 15, 2016. 2017. The implementationCompany has finalized its assessment of this standard did not have aASC 606 and determined there will be no material impacteffect on our financial position and results of operations. The timing and amount of revenue recognized based on the Company’s consolidatednew standard is consistent with the revenue recognition policy under previous guidance, however, certain additional financial statements. The Company'sstatement disclosures reflectwill be required beginning with 2018 reporting, including additional disaggregated view of revenue. We have adopted the adoption of this new standard.standard effective January 1, 2018, using the modified retrospective transition method.

In November 2015, the FASB issued ASU. No. 2015-17, Balance Sheet Classification of Deferred Taxes. ASU No. 2015-17 simplifies the presentation of deferred taxes on the balance sheet by requiring classification of all deferred tax items as noncurrent including valuation allowances by jurisdiction. The ASU is effective for public entities for annual and interim periods beginning after December 15, 2016, and interim periods within those annual reporting periods. The Company adopted this standard in the first quarter of 2017. The implementation of this standard did not have a material impact on the Company’s consolidated financial statements. 

In March 2016, the FASB issued ASU No. 2016-02, 2016-02,Leases. The main difference between the provisions of ASU No. 2016-022016-02 and previous U.S. GAAP is the recognition of right-of-use assets and lease liabilities by lessees for those leases classified as operating leases under previous U.S. GAAP. ASU No. 2016- 2016- 02 retains a distinction between finance leases and operating leases, and the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee have not significantly changed from previous U.S. GAAP. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize right-of-use assets and lease liabilities. The accounting applied by a lessor is largely unchanged from that applied under previous U.S. GAAP. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. This ASU is effective for public business entities in fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted as of the beginning of any interim or annual reporting period. The Company has not yet determined finalized the analysis to determine the effect of the standard, but believes that it will not have a material impact on its ongoing reporting.the statement of operations.

ZERO GRAVITY SOLUTIONS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

SEPTEMBER 30March 31, 2018, 2017

(Unaudited)

In March 2016,June 2018, the Financial Accounting Standards Board (“FASB”) issued ASU No.2018-07, “Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting.” ASU No2018-07 expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The guidance also specifies that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. This guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than an entity’s adoption date of Topic 606. This guidance is applicable to the Company’s fiscal year beginning January 1,2019. The Company is currently evaluating the potential effects of this guidance on its consolidated financial statements.

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 2016-09, Compensation -”Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting2017-11”), which simplifies several aspectschanges 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 accountingexistence 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.  Convertible instruments with embedded conversion options that have down round features are now subject to the specialized guidance for share-based payment transactions. Undercontingent beneficial conversion features in ASC 470-20.  For the Company, ASU 2016-09, excess tax benefits2017-11 is effective for fiscal years, and tax deficiencies are recognized as income tax expense or benefitinterim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted, including adoption in the income statement.an interim period. If an entity early adopts ASU 2016-09 also provides entities with the option to elect2017-11 in an accounting policy to continue to estimate forfeitures of stock-based awards over the serviceinterim period, (current GAAP) or account for forfeitures when they occur. Under ASU 2016-09, previously unrecognized excess tax benefitsany adjustments should be recognized usingreflected as of the beginning of the fiscal year that includes that interim period in either of the following ways: 1. Retrospectively to outstanding financial instruments with a modified retrospective transition. In addition, amendments requiring recognitiondown round feature by means of excess tax benefitsa cumulative-effect adjustment to the balance sheet as of the beginning of the first fiscal year and tax deficienciesinterim period(s) in the income statement, as well as changes in the computation of weighted-average diluted shares outstanding, should be applied prospectively.which ASU 2016-092017-11 is effective beginning in the first quarter of 2017. During the first quarter of 2017, the Company adopted ASU 2016-09 and electedor 2. Retrospectively to accountoutstanding financial instruments with a down round feature for the forfeiture of awards as they occur, with no material impact.

NOTE 2 – EMPLOYEE STOCK-BASED COMPENSATION ADJUSTMENT TO PRIOR PERIOD RESULTS

In preparing the Company's December 31, 2016 consolidated financial statements, the Company determined that an error was made in the calculation of stock-based compensation expense under ASC 718 for certain awards granted after January 1, 2016. The error related to management's estimate of the fair value of the Company's common stock used in its Black-Scholes option pricing model. The Company had recorded non-cash compensation expense based upon the then current private placement price of $1.25 per share.  The $1.25 price that was used during 2016 did not fully consider other observable inputs and valuation techniques to determine a supportable price per share; therefore, management re-evaluated such inputs and determined that the fair value per common share should have been a range of $0.78 - $1.25 for those awards throughout the third quarter of 2016 and $0.63 - $1.25 for the nine months ended September 30, 2016. The error resulted in an approximate overstatement of stock-based compensation expense of $263,000 in the third quarter of 2016 and $1,604,000 for the nine months ended September 30, 2016. The Company assessed the materiality of this misstatement in the 2016 interimeach prior reporting period financial statementspresented in accordance with the SEC's Staff Accounting Bulletin (SAB) No. 99, Materiality, codifiedguidance on accounting changes in ASC No. 250, Presentationparagraphs 250-10-45-5 through 45-10. The Company is currently evaluating the potential effects of Financial Statements, and concluded that the misstatement was not material to any interim period. In accordance with SAB 108, the Company has adjusted the quarter ended September 30, 2016this guidance on its consolidated financial statements. There was no impact to total stockholders' equity or cash flows.

NOTE 5 – NOTES PAYABLE

The Company has an outstanding note payable for financing corporate insurance premiums. The original principle value was $223,707. The note carries a rate of interest of 7.5% and is due in November 2018. The note calls for eleven payments of $19,353. The balance at March 31, 2018 was $154,822.

In December 2017, the Company received $200,000 from an investor, and in exchange the Company issued the investor (a) an unsecured promissory note dated December 14, 2017, maturing on December 13, 2019, in the principal face amount of $200,000, and (b) a warrant dated December 18, 2017 to purchase up to 50,000 shares of the Company’s common stock. The note bears interest at the rate of ten percent (10%) per annum, payable quarterly. The note is repayable in full by the Company, plus all unpaid interest thereon, by the maturity date. Prepayment of all unpaid principal and interest on the note may be made by the Company prior to the maturity date, provided that the holder thereof shall receive a minimum amount of interest equal to one year of interest under the agreement.note, based on the full principal amount. The warrants are exercisable within 5 years of issuance into shares of the Company’s common stock, at $3.00 per share. The relative fair value of the debt and warrants recorded resulted in a debt discount of $18,652 upon execution of the promissory note. For the nine monthsperiod ended September 30, 2017March 31, 2018, accretion of the debt discount was $2,300, included in other expenses on the statements of operations.

On or about January 18, 2018, the Company received $100,000 from an accredited investor, and 2016, $29,610in exchange the Company issued to the investor (a) an unsecured promissory note dated January 19, 2018, maturing on January 18, 2020, in the principal face amount of $100,000, and $249,934 respectively, were expensed(b) a warrant dated January 19, 2018 to purchase up to 10,000 shares of the Company’s common stock. The note bears interest at the rate of ten percent (10%) per annum, payable quarterly. The note is repayable in full by the Company, plus all unpaid interest thereon, by the maturity date (the “Maturity Date”). Prepayment of all unpaid principal and interest on the note may be made by the Company prior to the Maturity Date, provided that the holder thereof shall receive a minimum amount of interest equal to one year of interest under the agreement.note, based on the full principal amount. The warrants are exercisable within 5 years of issuance into shares of the Company’s common stock, at $3.00 per share. The relative fair value of the debt and warrants recorded resulted in a debt discount of $7,124 upon execution of the promissory note. For the period ended March 31, 2018, accretion of the debt discount was $703, included in other expenses on the statements of operations.

ZERO GRAVITY SOLUTIONS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

SEPTEMBER 30March 31, 2018, 2017

(Unaudited)

NOTE 6– NOTE PAYABLEEQUITY

The Company had an outstanding note payable from financing corporate insurance premiums. The note carried a rate of interest of 6.5% and was fully paid during September 2017.

NOTE 7 – EQUITY2018 transactions:

Common Stock

Private placement offerings

During the nine months ended September 30, 2017,2016, the Company issued 659,333commenced a private offering of up to $10,000,000 of the Company’s securities for $3.00 per share of common stock. Pursuant to the 2016 offering, the Company sold 55,334 shares of common stock pursuant to its October 2016 private offering for $3.00 per share. Proceedsduring the period ended March 31, 2018. Gross proceeds from the offering were $1,977,999$166,002, with offering costs of $138,800.$1,680. In connection with the offering, the Company issued fully vested, non-forfeitable warrants to purchase up to 44,916490 shares of common sharesstock with an exercise price of $3.00$3.00 per common share to the placement agent. These warrants are includednetted in additional paid in capital as non-cash offering costs of $52,762.the placement of $377.

Warrants

Warrants issued for services

During the period ended March 31, 2018, the Company issued fully vested, non-forfeitable five-year warrants to purchase up to 75,000 common shares at an exercise price of $3.00 per common share to consultants for services rendered. The value of those services was $57,570, which was recorded as general and administrative expense.

Warrants issued with debt

In connection with the issuance of a $100,000 unsecured promissory note dated January 18, 2018, the Company issued a warrant dated January 19, 2018 to purchase up to 10,000 shares of the Company’s common stock. The warrants are exercisable within 5 years of issuance into shares of the Company’s common stock, at $3.00 per share. The relative fair value of the debt and warrants recorded resulted in debt discount of $7,124 upon execution of the promissory note. 

Warrants issued with debt – related party

In January 2018, the Company issued to its in-house counsel, in connection with the issuance of an unsecured promissory note in the principal face amount of $100,000, a five-year warrant to purchase up to 5,000 shares of the Company’s common stock at an exercise price of $3.00 per share. The relative fair value of the warrant recorded was $3,831 upon execution of the promissory note. 

In January 2018, the Company issued to Rio Vista a five-year warrant to purchase up to 50,000 shares of the Company’s common stock at an exercise price of $3.00 per share in connection with a $500,000 unsecured promissory note to its in-house corporate counsel. The relative fair value of the debt and warrants recorded resulted in debt discount of $35,590 upon execution of the promissory note. 

In March 2018, in connection with issuance of a $200,000 unsecured promissory note to a member of its Board of Directors, the Company issued five-year warrant to purchase up to 20,000 shares of the Company’s common stock at an exercise price of $3.00 per share. The relative fair value of the debt and warrant recorded resulted in debt discount of $14,281 upon execution of the promissory note. 

In March 2018, in connection with issuance of a $200,000 unsecured promissory note to an accredited investor, the Company issued five-year warrant to purchase up to 20,000 shares of the Company’s common stock at an exercise price of $3.00 per share. The relative fair value of the debt and warrant recorded resulted in debt discount of $14,279 upon execution of the promissory note. 

ZERO GRAVITY SOLUTIONS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

SEPTEMBER 30, 2017

(Unaudited)

Common stock issued for services

During the nine months ended September 30, 2017, the Company received services valued at $150,000, and issued 50,000 shares of common stock.  This expense is included in general and administrative expenses.

During the nine months ended September 30, 2016, the Company issued for services, 20,000 shares of common stock with a value of $25,000.

The Company measured and recognized the fair value of the transactions described above based upon the fair value of the non-employee consideration received, which was determined to be more reasonably measurable.

Warrants

During the nine months ended September 30, 2017, the Company issued fully vested, non-forfeitable warrants to purchase up to 555,000 common shares at an exercise price of $3.00 per common share to employees and consultants for services. The estimated fair value of $655,128 was based upon the following management assumptions: expected dividends of 0, volatility of 138.4-148.4%, risk-free interest rates of 1.63% - 2.05%, and expected life of the warrants of 5 years.

During the nine months ended September 30, 2016, the Company issued fully vested, non-forfeitable warrants to purchase up to 10,000 common shares at an exercise price of $2.00 per common share to employees and consultants for services. The estimated fair value of $11,899 was based upon the following management assumptions: expected dividends of 0, volatility of 184.2%, risk-free interest rates of 1.38%, and expected life of the warrants of 5 years.

On July 16, 2015, Michael Smith, a Board member, received a 5-year cashless warrant to purchase up to 350,000 shares of common stock (at $3.00 per share) as additional consideration for a loan he made to the Company. On March 1, 2017, the Company and Mr. Smith entered into an Amendment No. 1 to the prior warrant, pursuant to which (a) the exercise price was decreased to $1.50 per share for that portion of the prior warrant to be exercised by Mr. Smith on such date and (b) the exercise of the prior warrant was to be on a cash basis. Subsequent to the execution of Amendment No.1, on March 1, 2017, Mr. Smith fully exercised the prior warrant. As a result of the prior warrant exercise, Mr. Smith received 350,000 shares of the Company's common stock in exchange for a cash payment of $525,000. As additional consideration for Mr. Smith's entry into Amendment No. 1 and exercise of the prior warrant, on March 1, 2017, the Company issued to Mr. Smith another five-year warrant (the "New Smith Warrant") to purchase up to 350,000 shares of the Company's common stock at an exercise price of $4.50 per share. The estimated fair value of this warrant of approximately $402,000 was based on the following assumptions: expected dividends of 0, volatility of 148.4%, risk-free interest rate of 1.89%, and expected life of the warrants of 5 years.

On February 19, 2016, Diamond B Capital, LLC (“Diamond B”) received from the Company a five-year warrant to purchase up to 400,000 shares of the Company’s common stock at an exercise price of $2.00 per share (the “Prior Diamond B Warrant”). Alexander M. Boies, a member of the Company’s Board of Directors, holds membership interests representing a 12% ownership interest in Diamond B. On March 16, 2017, the Company also entered into an Amendment No. 1 to the Prior Diamond B Warrant (the “Prior Diamond B Warrant Amendment”), pursuant to which the exercise price was decreased to $1.50 per share for that portion of the Prior Diamond B Warrant to be exercised by Diamond B on such date. Subsequent to the execution of the Prior Diamond B Warrant Amendment, on March 16, 2017, Diamond B fully exercised the Prior Diamond B Warrant (the “Prior Diamond B Warrant Exercise”). As a result of the Prior Diamond B Warrant Exercise, Diamond B received 400,000 shares of the Company’s common stock in exchange for a cash payment of $600,000. As additional consideration for Diamond B's entry into the Prior Diamond B Warrant Amendment and exercise of the Prior Diamond B Warrant, on March 9, 2017, the Company issued to Diamond B another five-year warrant (the "New Diamond B Warrant") to purchase up to 400,000 shares of the Company's common stock at an exercise price of $4.50 per share. The estimated fair value of this warrant of approximately $463,000 was based on the following assumptions: expected dividends of 0, volatility of 148.4%, risk-free interest rate of 1.89%, and expected life of the warrants of 5 years.

On February 27, 2017, an employee exercised a five-year warrant to purchase 40,000 shares of common stock, which had an original exercise price of $2.00 per share, at an exercise price of $1.50 per share for a cash payment of $60,000.  In addition, the employee was given a five-year warrant to purchase up to 40,000 shares of common stock with an exercise price of $4.50 per share. The estimated fair value of this warrant of approximately $46,000 was based on the following assumptions: expected dividends of 0, volatility of 148.4%, risk-free interest rate of 2.05%, and expected life of the warrants of 5 years.

The modifications to the exercise price of the warrants are considered a conversion incentive, resulting in an expense (including the expense of the new warrants) of $926,885, recorded as general and administrative expense and additional paid in capital in the period ended June 30, 2017.

ZERO GRAVITY SOLUTIONS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

SEPTEMBER 3031, 2018, 2017

(Unaudited)

The following is a summary of the Company’sCompany’s warrant activity for the nine monthsyear ended September 30, 2017:March 31, 2018:

The aggregate intrinsic value in the table above represents the total intrinsic value (the difference between the estimated fair value of the Company’s stock price on September 30, 2017 March 31, 2018 and the exercise price, multiplied by the number of in-the-money warrants) that would have been received by the warrant holders, had all warrant holders been able to, and in fact had, exercised their warrants on September 30, 2017.March 31, 2018.

Stock incentive plan options

In November 2015, the Company adopted its 2015 Equity Incentive Plan. The Plan provides stock based compensation to employees, directors and consultants, as more fully described in the Plan. The Company has reserved 4,000,000 shares under the Plan. During the ninethree months ended September 30, 2017,March 31, 2018 the Company granted options to purchase up to 60,00025,000 shares of common stock, to employeesan employee with an exercise price of $1.25 per share and officers.a term of 10 years. The estimated fair value of $70,411$19,208 of the grants for the three months ended March 31, 2108 was based upon the following management assumptions: For the period March 31, 2018, expected dividends of $0, volatility of 148.4%, risk-free101.7% based on comparative volatility, risk free interest rates of 1.89%-1.93%2.58%, and expected lifeterm of the options of 5 years.

NOTE 8 7– SUBSEQUENT EVENTS

Subsequent to September 30, 2017, the Company issued 100,000 shares of common stock pursuant to its October 2016 private offering. Proceeds from the issuance were $300,000 with offering costs of $24,000. In connection with the offering, the Company issued fully vested, non-forfeitable warrants to purchase 7,000 common shares with an exercise price of $3.00 per common share to the placement agent.