Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended SeptemberJune 30,, 2017

OR 2018

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; Form 10-Q 3/31/2017; Form 10-Q 6/30/2017

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 ☐

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, 2017,1, 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 limited operating history, recurring losses from operations and a working capital deficiency at SeptemberAt June 30, 2017.  At September 30, 2017,2018, the Company had an approximate cash balancesbalance of $130,000,$994,000, a working capital deficiency of $(952,000)approximately $(382,000), total stockholders’ deficita loss from operations of $(1,053,000)approximately $(2,644,000), and an accumulated deficitnegative cash flows from operating activities of $(22,112,000)approximately $(1,832,000). 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 SeptemberJune 30, 20172018 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 June 30, 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 offering in connection with its investment banker and through its internal efforts.efforts, as well as raising funds through issuances of debt. Subsequent to June 30, 2018, the Company has raised approximately $1,050,000 in debt financing. 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.

●	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 opportunities that represent potential positive cash flow.

ZERO GRAVITY SOLUTIONS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

SEPTEMBERJune 30, 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 and six months ended June 30, 2018 and 2017, our cash flows for the six months ended June 30, 2018 and 2017, and our financial position as of June 30, 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 unaudited condensed consolidated financial statements. Accordingly, these interim 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 June 30, 2018 and December 31, 2017.

Inventory

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

Concentration of Credit Risk

The Company at September 30, 2017 maintained its cash balance with two major national financial institutions. The bank balance at September 30, 2017 did not exceed the FDIC limits.

ZERO GRAVITY SOLUTIONS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

SEPTEMBERJune 30, 2018, 2017

(Unaudited)

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 believes that its credit risk exposure is limited. The Company has never suffered a loss due to 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

June 30, 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. 

Amounts billed to customers for shipping and (iv) collectability is reasonably assured.handling fees are included in net sales, and 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 threesix months ended June 30, 2018 and nine month periods ended September 30, 2017 and 2016.2017. 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 SeptemberJune 30, 2018, one customer accounted for 94% of total accounts receivable. During the three and six months ended June 30, 2018, one customer accounted for 68.0% of net sales. During the three and six months ended June 30, 2017, three customers accounted for 88.2% 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%67.9% of net sales, each representing 79.1%26.5%, 24.6%, and 14.9%16.8% respectively. During the nine months ended September

At December 31, 2017, three customers accounted for 69.0%100% of net sales, Each of these customers represented 33.6%, 22.9% and 13.0% respectively. At December 31, 2016, five customers accounted for 99.4% oftotal 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 months ended September 30, 2017 one customer accounted for 50% 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.

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 SeptemberJune 30, 20172018 and December 31, 2016.2017 was $0 and $32,663, respectively.

ZERO GRAVITY SOLUTIONS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

June 30, 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(15,512,956, 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 ninesix months ended SeptemberJune 30, 20172018 and 20162017, 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

SEPTEMBERJune 30, 2018, 2017

(Unaudited)

The Company does not have an accrual for uncertain tax positions as of June 30, 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 June 30, 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 three or six months ended June 30, 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 June 30, 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 December 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.

In November 2015,standard effective January 1, 2018, using 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. modified retrospective transition method.

In March 2016, the FASB issued ASU No. 2016-02, Leases. The main difference between the provisions of ASU No. 2016-02 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- 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 determinedfinalized 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

SEPTEMBERJune 30, 2018, 2017

(Unaudited)

In March 2016,June 2018, the FASBFinancial Accounting Standards Board (“FASB”) issued ASU 2016-09, CompensationNo. 2018-07, “Compensation -”Stock Compensation (Topic 718): Improvements to EmployeeNonemployee Share-Based Payment Accounting, which simplifies several aspectsAccounting.” ASU No 2018-07 expands the scope of the accounting forTopic 718 to include share-based payment transactions. Under ASU 2016-09, excess tax benefitstransactions for acquiring goods and tax deficiencies are recognized as income tax expenseservices from nonemployees. The guidance also specifies that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or benefitservices to be used or consumed in the income statement. ASU 2016-09 also provides entities with the option to elect an accounting policy to continue to estimate forfeitures of stock-based awards over the service period (current GAAP) or account for forfeitures when they occur. Under ASU 2016-09, previously unrecognized excess tax benefits should be recognized using a modified retrospective transition. In addition, amendments requiring recognition of excess tax benefits and tax deficiencies in the income statement, as well as changes in the computation of weighted-average diluted shares outstanding, should be applied prospectively. ASU 2016-09grantor’s own operations by issuing share-based payment awards. This guidance is effective for fiscal years beginning inafter 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 first quarterCompany’s fiscal year beginning January 1, 2019. The Company is currently evaluating the potential effects of 2017. During the first quarter of 2017, the Company adopted ASU 2016-09 and elected to account for the forfeiture of awards as they occur, with no material impact.

NOTE 2 – EMPLOYEE STOCK-BASED COMPENSATION ADJUSTMENT TO PRIOR PERIOD RESULTSthis guidance on its consolidated financial statements.

In preparingJuly 2017, the Company's December 31, 2016 consolidatedFASB 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 statements,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.  Convertible instruments with embedded conversion options that have down round features are now subject to the specialized guidance for contingent beneficial conversion features in ASC 470-20.  For the Company, determined thatASU 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 error was madeinterim period. If an entity early adopts ASU 2017-11 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 estimatean interim period, any adjustments should be reflected as of the fair valuebeginning 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 pricefiscal year 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 determinedincludes 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 interim period in either of the following ways: 1. Retrospectively to outstanding financial statementsinstruments with a down round feature by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the first fiscal year and interim period(s) in which ASU 2017-11 is effective or 2. Retrospectively to outstanding financial instruments with a down round feature for each prior reporting period presented in accordance with the SEC's Staff Accounting Bulletin (SAB) No. 99, Materiality, codifiedguidance on accounting changes in ASC No. 250, Presentation of Financial Statements, and concluded that the misstatement was not material to any interim period. In accordance with SAB 108, theparagraphs 250-10-45-5 through 45-10. The Company has adjustedelected early adoption and the quarter ended September 30, 2016effects of this guidance are reflected in its consolidated financial statements. Therestatements and there was no impact to total stockholders' equity or cash flows.cumulative effect adjustment.

NOTE 4 3 – RELATED PARTY TRANSACTIONS

NotesConvertible Note Payable

In July 2015, a Directormember of the Company’s Board of Directors advanced the Company $500,000.  Interest$500,000 under a note payable for working capital purposes. The unsecured note payable bears interest at a rate of 8.5% per annum, is payable quarterly, and the note was originally due in July 2016. In connection with the note, the Company issued five-year warrants to purchase 350,000 shares of the Company’s common stock at an exercise price of $3 per share. The Company calculated the fair value of the warrants at $416,618 utilizing the Black-Scholes Model with the following assumptions: expected dividends of 0%, volatility of 184.2%, risk free interest rate of 1.66% and expected life of 5 years. The relative fair value of the debt and warrants was recorded resulting in a debt discount of $227,258 upon execution of the agreement. For the three and nine months ended September 30, 2016, accretion of the debt discount was $9,339 and $122,631, respectively. The accretion of debt discount is presented in other expenses on the statements of operations. In July 2016, the maturity date of the note was extended to July 2017, and a conversion feature was added. The conversion feature allows the holder to convert the debt into common shares at his option at a conversion price of $1.25 per share (400,000 shares). The addition of the conversion feature represented a substantial modification to the debt instrument but the modification was determined to not be material. During the three and nine months ended September 30, 2017, $10,625 and $21,014$42,500 was recorded as interest expense respectively, and $10,625 iswas included in accounts payablepayables at September 30,December 31, 2017. In JulyDuring 2017, the maturity date of the note was extended to July 2018 and then extended again in 2018 to July 2019. For the other termssix months ended June 30, 2018 and 2017, the Company recorded interest expense of this$21,250 on the note includingrecorded in accrued interest - related party. The note is included in the current liabilities section of the unaudited consolidated balance sheets.

On June 29, 2018, in connection with its June 2018 Offering (as defined in Note 7), the Company received $1,000,000 from an affiliate of a board member, and in exchange the Company issued (a) an unsecured convertible promissory note dated June 29, 2018, and (b) a two-year warrant dated June 29, 2018 to purchase up to 1,000,000 shares of the Company’s common stock. The note bears interest at the rate of ten percent (10%) per annum, payable quarterly in cash. The note is payable in full plus all unpaid interest thereon, by June 28, 2020. The conversion feature remainallows the same.holder to convert the debt into common shares at his option at a conversion price of the lower of $3 per share or the Company's current offering price. Prepayment of all unpaid principal and interest 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, based on the full principal amount. The warrant is exercisable within 2 years of issuance into shares of the Company’s common stock, at $1.00 per share. The relative fair value of the note and warrant recorded resulted in debt discount of $414,416 upon execution. The Company also incurred $30,000 of lender fees.

ZERO GRAVITY SOLUTIONS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

June 30, 2018

(Unaudited)

In August 2017, the Company issued an unsecured promissory note to its in-house corporate councilcounsel in the principal face amount of $100,000.  The promissory note bears interest at a rate of 10.0%, per annum, payable quarterly. The promissory note shall be repaidis payable in full plus all unpaid interest by August 2019. In connection with the note, the Company issued five-year warrants to purchase up to 10,000 shares of the Company’s common stock at an exercise price of $3.00 per share. The relative fair value of the debt and warrants was recorded resultingresulted in debt discount of $10,435 upon execution of the promissory note. For the three and nine months ended SeptemberJune 30, 2017,2018, accretion of debt discount was $1,301. For the six months ended June 30, 2018, accretion of the debt discount was $529. The accretion$2,587. Accretion of debt discount is presentedincluded in other expenses on the statements of operations.

In September 2017, the Company issued an unsecured promissory note to a member of its Board of Directors in the principal face amount of $500,000.  The promissory note bears interest at a rate of 10.0%, per annum, payable quarterly. The promissory note shall be repaidis payable in full plus all unpaid interest by September 2019. In connection with the note, the Company issued five-year warrants to purchase up to 50,000 shares of the Company’s common stock at an exercise price of $3.00 per share. The relative fair value of the debt and warrants was recorded resultingresulted in a debt discount of $52,166 upon execution of the promissory note. For the three and ninesix months ended SeptemberJune 30, 2017,2018, accretion of the debt discount was $2,144. The accretion of debt discount is presented$6,503 and $12,934 respectively, included in other expenses on the statements of operations.

In October 2017, the Company issued to Rio Vista Investments, LLC, a Nevada limited liability company (“Rio Vista”), (i) an unsecured promissory note in the principal face amount of $500,000 and (ii) a warrant to purchase up to 50,000 shares of the Company’s common stock (the “Warrant”). The note issued to Rio Vista bears interest at the rate of ten percent (10%) per annum, such interest being payable by the Company to Rio Vista quarterly accruedin cash. The Note is payable in full by the Company, plus all unpaid interest, payment forby October 26, 2019. Prepayment of all unpaid principal and interest may be made by the Company prior to the date of maturity without penalty or premium. Additionally, 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. The relative fair value of the debt and warrants recorded resulted in debt discount of $50,229 upon execution of the promissory note.  For the three and six months ended June quarter end30, 2018, accretion of the debt discount was not paid timely$6,261 and $12,454 respectively, included in other expenses on the July 2015statements of operations. A member of the Company’s Board of Directors is a beneficiary of certain trusts that own Rio Vista.

In January 2018, the Company issued an unsecured note to its in-house corporate counsel in the principal face amount of $100,000.  The note bears interest at a Director.rate of 10.0%, per annum, payable quarterly. The Director has waivedpromissory note was paid during the provisionthree month period ended March 31, 2018. In connection with the note, the Company issued five-year warrants to purchase up to 5,000 shares of the agreementCompany’s common stock at an exercise price of $3.00 per share. The relative fair value of the debt and warrants recorded resulted in regardsdebt discount of $3,831 upon execution of the note. For the period ended March 31, 2018, accretion of the debt discount was $3,831, included in other expenses on the statements of operations.

On or about January 17, 2018, the Company received $500,000 from an accredited investor, and in exchange the Company issued to the investor (a) an unsecured promissory note dated January 16, 2018, maturing on October 26, 2019, in the principal face amount of $500,000, and (b) a warrant dated January 18, 2018 to purchase up to 50,000 shares of the Company’s common stock. A member of the Company’s Board of Directors is a beneficiary of certain trusts that own Rio Vista, the holder of this note and warrant. The note bears interest at the rate of ten percent (10%) per annum, such interest being payable by the Company to the holder thereof quarterly in cash. The note is payable in full by the Company, plus all unpaid interest thereon, by October 26, 2019. 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 such note, based on the full principal amount. In addition to the foregoing, the Company must repay the note to Rio Vista within 30 days of the date the Company possesses an amount of cash equal to the outstanding balance of principal and interest due under the note plus an amount reasonably anticipated to be necessary to operate the Company over the succeeding 6 months. 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 note and warrant recorded resulted in debt discount of $35,590 upon execution.  The Company also incurred $15,000 of lender fees. For the three and six months ended June 30, 2018, accretion of the debt discount was $7,260 and $12,896 respectively, included in other expenses on the statements of operations.

ZERO GRAVITY SOLUTIONS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

June 30, 2018

(Unaudited)

On or about March 8, 2018, the Company received $200,000 from an accredited investor and member of our Board of Directors, and in exchange the Company issued (a) an unsecured promissory note dated March 8, 2018 and (b) a warrant dated March 9, 2018 to purchase up to 20,000 shares of the Company’s common stock. The note bears interest at the rate of ten percent (10%) per annum, such interest being payable by the Company to the holder quarterly in cash. The note is payable in full by the Company, plus all unpaid interest thereon, by March 7, 2020. Prepayment of all unpaid principal due on the note may be made by the Company prior to the note’s maturity date, provided that the holder thereof shall receive a minimum amount of interest equal to one year of interest due under the note, based on the note’s principal balance as of the origination date. The note contains customary provisions for events of default and acceleration of sums due. The warrant is 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 note and warrant recorded resulted in debt discount of $14,281 upon execution.  The Company also incurred $6,000 of lender fees. For the six months ended June 30, 2018, accretion of the debt discount and lender fees was $3,139, included in other expenses on the statements of operations.

On or about March 12, 2018, the Company received $200,000 from Boies Partners, Inc. (“BPI”), an accredited investor, and in exchange the Company issued to BPI (a) an unsecured promissory note dated March 12, 2018, and (b) a warrant dated March 12, 2018 to purchase up to 20,000 shares of the Company’s common stock. Alex Boies, a member of our Board of Directors, has no financial interest paymentsin or control over BPI and does not otherwise have beenany beneficial ownership in any securities owned by BPI, but BPI is owned by a family member of Alex Boies. The note bears interest at the rate of ten percent (10%) per annum, such interest being payable by the Company to the holder thereof quarterly in cash. The note is payable in full by the Company, plus all unpaid interest thereon, by March 11, 2020. Prepayment of all unpaid principal due on the note may be made by the Company prior to the note’s maturity date, provided that the holder thereof shall receive a minimum amount of interest equal to one year of interest due under the note, based on the note’s principal balance as of the origination date. The note contains customary provisions for events of default and brought current. acceleration of sums due. 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 note and warrant recorded resulted in debt discount of $14,279 upon execution.  The Company also incurred $6,000 of lender fees. For the three and six months ended June 30, 2018, accretion of the debt discount and lender fees was $19,781 and $20,279 respectively, included in other expenses on the statements of operations. This note further provides that within 30 days of receipt of payment of any amount principal outstanding under the note, (the "Conversion Window") the note holder shall have the right to convert any portion of such payment into the Company’s common stock at the lesser of $3.00 per share or the lowest price per share of any sale by the Company of its common stock occurring between the date of the note and the end of the Conversion Window. This note was repaid during the quarter ended June 30, 2018. 

On May 2, 2018, the Company received $300,001 from an accredited investor and member of our Board of Directors, and in exchange the Company issued (a) an unsecured promissory note dated May 2, 2018, and (b) a warrant dated May 2, 2018 to purchase up to 30,000 shares of the Company’s common stock. The note bears interest at the rate of ten percent (10%) per annum, payable quarterly in cash. The note is payable in full plus all unpaid interest thereon, by May 1, 2020. The note contains a contingent conversion feature that allows the value of the note to be converted at $3 per share or such lower price at which the Company has issued stock subsequent to May 2, 2018, if any part of the principle balance is paid. The intrinsic value of contingent conversion will be determined and recognized when the contingency occurs. Prepayment of all unpaid principal and interest 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, based on the full principal amount. The warrant is 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 note and warrant recorded resulted in debt discount of $21,452 upon execution. The Company also incurred $9,000 of lender fees. For the three and six months ended June 30, 2018, accretion of the debt discount and lender fees was $1,731, included in other expenses on the statements of operations.

ZERO GRAVITY SOLUTIONS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

June 30, 2018

(Unaudited)

Royalty Agreement

In 2013, the Company entered into a royalty agreement, which was amended in 2015, with a key employee and principal stockholder of the Company and a current Director of the Company. The agreement has a term of 25 years, requires payments of royalties equal to 5% of gross sales of products derived from certain patents held or licensed by the Company, including the BAM-FX™ product, and also a minimum monthly payment of $2,500 to be offset against future royalty obligations of the Company. In addition certain other costs the Company incurredmade that were necessary for the maintenance and protection of the Company’s rights in the underlying patents were applied against future royalty obligations of the Company.

Sales subject to thethe royalty agreement were $4,355$29,600 and $16,174$60,935 for the three-month periods ended September 30, 2017three months and 2016, respectively,$33,070 and $65,545 and $36,488$61,190 for the ninesix months ended SeptemberJune 30, 20172018 and September 30, 2016,2017, respectively. As of SeptemberJune 30, 2017,2018, and December 31, 2016, $311,9502017, $0 and $277,038$319,441 of prepaid royalties, respectively, are available to be offset against future royalty obligations. Management recorded an allowance for collectability of $6,020 during the three months ended June 30, 2018 and $129,580 during the six months ended June 30, 2018 which is included in general and administrative expenses.

ExerciseIncluded in advance of Warrantsfuture royalties was $203,208 in legal fees relating to patent defense.  During the six months ended June 30, 2018, this amount was reclassified to an intangible asset patent defense fees and was determined to be impaired and charged to general and administrative expenses.

OnConsulting Agreement

In March 1, 2017,2015, the Company entered into ana consulting agreement with a memberformer Director. The agreement had a term of its Boardsix months and required payments of Directors whereby 350,000 previously issued warrants were exercised$200,000 of which $200,000 was recorded as a component of general and administrative expense in exchange for the issuance2015 statement of 350,000 shares of the Company's common stock and a cash payment to the Company of $525,000. In connection with the transaction, the Company issued a new five-year warrant to purchase up to 350,000 shares of the Company's common stock at an exercise price of $4.50 per share.

On March 16, 2017, the Company also entered into an agreement with a second member of its Board of Directors whereby 400,000 previously issued warrants were exercised in exchange for the issuance of 400,000 shares of the Company's common stock and a cash payment to the Company of $600,000. In connection with the transaction, the Company issued a new five-year warrant to purchase up to 400,000 shares of the Company's common stock at an exercise price of $4.50 per share.

Inducement charges of $926,885 relating to these transactions were expensed in March 2017 (Note 7).

Payable to Former Director

operations. An obligation of $65,000 and $75,000 iswas payable to athe former Director for past consulting services. This obligation is unsecured and non-interest bearing and is included in accounts payable at SeptemberJune 30, 20172018 and December 31, 2016,2017 respectively.

ZERO GRAVITY SOLUTIONS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

SEPTEMBER 30, 2017

(Unaudited)

NOTE 5 4 – COMMITMENTS

Lease Commitments

The Company leases its officesoffice, building and buildinglaboratory space under short term leases. These leases are renewable either monthly or annually. The Company also has a two-year lease for its warehouse in Okeechobee, which began September 1, 2016 and will expire August 31, 2018. The future minimum lease payments are $43,551 for 2017 and $27,734 for 2018. Lease expense was $26,521$106,900 and $19,097$46,625 for the three monthsperiods ended SeptemberJune 30, 2018 and 2017, respectively.

License and 2016, respectively. Lease expense was $46,626Business Development Agreement

On February 20, 2018, BAM Agricultural Solutions, Inc. (“BAM”), a wholly-owned subsidiary of the Company, and $37,433Pedro Lichtinger Waisman, Isaac Lichtinger Waisman and Victor Lichtinger Waisman (the “Lichtinger Group”) entered into a License and Business Development Agreement Mexico, effective as of February 13, 2018 (the “Agreement”). Following consummation of the Agreement, the Lichtinger Group began to form a company in Mexico, Agro Space Tech SA de CV de RV (“Agro Space”), to which BAM will receive a twenty percent (20%) equity ownership interest. The Lichtinger Group will contribute up to $500,000 in capital into Agro Space, with BAM having no initial capital requirement. If Agro Space requires more than the initial $500,000 capital contribution, BAM will have a right to contribute capital pro rata and maintain its ownership percentage. As of June 30, 2018 the formation of Agro Space has not been completed and the investment has not been made.

The Agreement provides Agro Space with the exclusive right to import, package, sell and distribute BAM’s product lines and promote its brand, as well as other “white label” brands as they are introduced, in the Mexican markets, and a limited manufacturing right to modify the presentation of BAM’s products and dilute such products, all during the term of the Agreement. BAM will retain the right to all of its intellectual property, including any materials produced in connection with the Agreement and BAM’s products, and Agro Space will have a royalty-free right to reproduce, translate, summarize or otherwise use such materials for the nine months ended Septembersole purpose of performing pursuant to the Agreement. The exclusivity of the rights licensed to Agro Space are conditioned upon (i) Agro Space meeting specified revenue targets beginning on the third anniversary following the successful completion of specified local trials through the tenth anniversary thereof; and (ii) the ability for Agro Space to expand the business to target and add a specified number of crops during each of the five (5) years following the successful completion of specified local trials.

ZERO GRAVITY SOLUTIONS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

June 30, 20172018

(Unaudited)

In addition to BAM receiving an ownership interest in Agro Space, Zero Gravity Solutions, Inc. ("Company") received $100,000 from the Lichtinger Group following the execution of the Agreement, to purchase shares of the Company pursuant to the Company’s 2016 private offering of shares of its common stock for $3.00 per share. The Agreement further provides that Agro Space will pay to BAM up to $900,000, in the aggregate, upon reaching specified milestones based on completing government/academic trials and 2016, respectively.revenue hurdles.

Research Commitment

In January 2016, the Company entered into a Reimbursable Space Act Agreement (the “SAA”) with the National Aeronautics and Space Administration Ames Research Center (“NASA ARC”).  Pursuant to the SAA, NASA ARC will evaluate the Company’s nutrient delivery system for commercial agriculture and NASA applications and the potential development of new agricultural technologies and products.  The Company shall provideprovides funding and reimbursement for the costs incurred by NASA ARC under the SAA, but shall ownand owns any resulting intellectual property created pursuant to the SAA.  The Company paid NASA ARC a total of $373,750 in fiscal 2016, which served as reimbursement for NASA ARC’s estimated expenses to carry out its first-year responsibilities pursuant to the SAA.  The SAA remains in effect until the earlier of completion of all obligations contemplated in the SAA or five years from the date of the agreement. For the three-monthsperiod ended SeptemberJune 30, 20172018 and 2016,2017, $0 and $94,205$29,610 respectively, werewas expensed underto research and development expense pursuant to the agreement. For the nine months ended September 30, 2017 and 2016, $29,610 and $249,934 respectively, were expensed under the agreement.SAA.

NOTE 6 – EQUITY

2018 transactions:

Common Stock

Common stock issued for servicesPrivate placement offerings

During the nine months ended September 30, 2017,2016, the Company received services valued at $150,000, and issued 50,000 sharescommenced a private offering of up to $10,000,000 of the Company’s securities for $3.00 per share of common stock.  This expense is included in general and administrative expenses.

DuringPursuant to the nine2016 offering, during the six months ended SeptemberJune 30, 2016,2018, the Company issued for services, 20,000sold 303,718 shares of common stock, with a valuereceived gross proceeds of $25,000.

The Company measured$911,154, paid cash offering costs of $25,680, 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 555,0007,490 shares of common stock with an exercise price of $3.00 per share to the placement agent. These warrants are netted in additional paid in capital as non-cash offering costs of the placement of $5,771.  Effective on June 28, 2018, the Company terminated its 2016 private offering.

Warrants

Warrants issued for services

During the six months ended June 30, 2018, the Company issued fully vested, non-forfeitable five-year warrants to purchase up to 290,000 common shares at an exercise price of $3.00 per common share to employees and consultants for services.services rendered. The estimated fair value of $655,128those services 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%,$223,119, which was recorded as general and expected life of the warrants of 5 years.administrative expense.

DuringWarrants issued with debt

In connection with the nine months ended September 30, 2016,issuance of a $100,000 unsecured promissory note dated January 18, 2018, the Company issued fully vested, non-forfeitable warrantsa 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 an exercise price of $2.00$3.00 per common share to employees and consultants for services.share. The estimatedrelative fair value of $11,899 was basedthe debt and warrants recorded resulted in debt discount of $7,124 upon the following management assumptions: expected dividends of 0, volatility of 184.2%, risk-free interest rates of 1.38%, and expected lifeexecution of the warrants of 5 years.promissory note.

On July 16, 2015, Michael Smith,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 Board member, received a 5-year cashlessfive-year 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 350,0005,000 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'sCompany’s common stock at an exercise price of $4.50$3.00 per share. The estimatedrelative fair value of thisthe warrant of approximately $402,000recorded was based on the following assumptions: expected dividends of 0, volatility of 148.4%, risk-free interest rate of 1.89%, and expected life$3,831 upon execution of the warrants of 5 years.promissory note. 

On February 19, 2016, Diamond B Capital, LLC (“Diamond B”) received fromIn January 2018, the Company issued to Rio Vista a five-year warrant to purchase up to 400,00050,000 shares of the Company’sCompany’s common stock at an exercise price of $2.00$3.00 per share (the “Prior Diamond B Warrant”). Alexander M. Boies,in connection with a $500,000 unsecured promissory note. 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 the Company’sits 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 400,00020,000 shares of the Company'sCompany’s common stock at an exercise price of $4.50$3.00 per share. The estimatedrelative fair value of thisthe debt and warrant recorded resulted in debt discount 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$14,281 upon execution of the warrants of 5 years.promissory note.

On February 27, 2017,In March 2018, in connection with issuance of a $200,000 unsecured promissory note to 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,accredited investor, the employee was given aCompany issued five-year warrant to purchase up to 40,00020,000 shares of the Company’s common stock withat an exercise price of $4.50$3.00 per share. The estimatedrelative fair value of thisthe debt and warrant recorded resulted in debt discount 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$14,279 upon execution of the warrants of 5 years.promissory note.

The modificationsIn May 2018, in connection with issuance of a $300,000 unsecured promissory note to an accredited investor, the Company issued five-year warrant to purchase up to 30,000 shares of the Company’s common stock at an exercise price of the warrants are considered a conversion incentive, resulting in an expense (including the expense$3.00 per share. The relative fair value of the new warrants)debt and warrant recorded resulted in debt discount of $926,885,$21,452 upon execution of the promissory note.

In June 2018, in connection with issuance of a $1,000,000 unsecured convertible promissory note to an accredited investor made pursuant to the June 2018 Offering, the Company issued a two-year warrant to purchase up to 1,000,000 shares of the Company’s common stock at an exercise price of $1.00 per share. The relative fair value of the debt and warrant recorded as general and administrative expense and additional paidresulted in capital indebt discount of $414,416 upon execution of the period ended June 30, 2017.promissory note. 

ZERO GRAVITY SOLUTIONS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

SEPTEMBERJune 30, 2018, 2017

(Unaudited)

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

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 SeptemberJune 30, 20172018 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 SeptemberJune 30, 2017.2018.

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 ninesix months ended SeptemberJune 30, 2017,2018 the Company granted options to purchase up to 60,00025,000 shares of common stock each, to two employees with an exercise price of $3.00 per share and officers.a term of 10 years. The estimated fair value of $70,411$38,441 of the grants for the six months ended June 30, 2108 was based upon the following management assumptions: For the period June 30, 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 - 2.69%, and expected lifeterm of the options of 5 years.

The Company recognizes compensation expense for stock option grants based on the fair value at the date of grant using the Black-Scholes option pricing model. As the Company does not currently have reliably determined historic stock prices, the Company uses management estimates of stock value. The Company uses historical data, among other factors, to estimate the expected option life and the expected forfeiture rate. The Company estimates expected term considering factors such as historical exercise patterns and the recipients of the options granted. The risk-free rate is based on the United States Treasury Department yield curve in effect at the time of grant for the expected life of the option. The Company assumes an expected dividend yield of zero for all periods.  For employee, consultant and director stock based compensation, the Company used management's fair value estimates of $1.21 for the period June 30, 2018.

ZERO GRAVITY SOLUTIONS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

SEPTEMBERJune 30, 2018, 2017

(Unaudited)

The Company has elected to account for forfeitures as they occur.

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 June 30, 2018 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders, had all option holders been able to, and in fact had, exercised their options on June 30, 2018.

ZERO GRAVITY SOLUTIONS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

June 30, 2018

(Unaudited)

NOTE 8 7 – SUBSEQUENT EVENTS

On June 29, 2018, the Company initiated a new private offering of its securities (the “June 2018 Offering”) to certain prospective accredited investors, including certain members of the Board of Directors and/or their respective affiliates, consisting of up to $2,000,000 of 10% secured convertible promissory notes (the “June 2018 Offering Notes”), and two-year warrants to purchase up to 2,000,000 shares of Common Stock at an exercise price of $1.00 per share (the “June 2018 Offering Warrants”). The June 2018 Offering terminated on July 31, 2018, and consisted of one or more closings.

An accredited investor and member of our Board of Directors provided additional funding of $250,000 on July 2, 2018 and an additional $250,000 on July 17, 2018 and the Company issued June 2018 Offering Notes in exchange therefore, with maturity dates of July 2, 2020 and July 17, 2020, respectively, and June 2018 Offering Warrants to purchase, in the aggregate, up to 500,000 shares of the Company’s common stock. In addition, the Company received, in the aggregate, $550,000 from seven other current shareholders and issued June 2018 Offering Notes in exchange therefore, and June 2018 Offering Warrants to purchase, in the aggregate, up to 550,000 shares of the Company’s common stock. Pursuant to the June 2018 Offering, in the aggregate, the Company issued June 2018 Offering Notes having an aggregate principal balance of $2,050,000, and June 2018 Offering Warrants to purchase  up to 2,050,000 shares of the Company’s common stock.

Subsequent to SeptemberJune 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,2018, the Company issued fully vested, non-forfeitable five - year warrants to purchase 7,000135,000 common shares withat an exercise price of $3.00 per common share to the placement agent.

On October 30, 2017, the Company issued to Rio Vista Investments, LLC, a Nevada limited liability company (“Rio Vista”), (i) an unsecured promissory note in the principal face amount of $500,000 (the “Note”) and (ii) a warrant to purchase up to 50,000 shares of the Company’s common stock (the “Warrant”). The Note issued to Rio Vista bears interest at the rate of ten percent (10%) per annum, such interest being payable by the Company to Rio Vista quarterly in cash. The Note shall be repaid in full by the Company, plus all unpaid interest, by October 26, 2019 (“Maturity Date”). Prepayment of all unpaid principal and interest may be made by the Company prior to the Maturity Date, without penalty or premium.

Additionally, 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.

Mr. Alexander Boies, a member of the Company’s board of directors, is a beneficiary of certain trusts that own Rio Vista.

consultants for services rendered.