UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934 |
For the quarterly period ended SeptemberJune 30,, 2017 2019
OR
| OR |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934 |
For the transition period from ___________to ____________
Commission File NumberNumber: 000-55345
ZERO GRAVITY SOLUTIONS, INC.
(Exact name of businessregistrant as specified in its charter)
NEVADA | 46-1779352 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.)
|
190 NW SPANISH RIVER BOULEVARD, SUITE 101, BOCA RATON, FLORIDA 33431
(Address, including zip code, of principal executive offices)
(561) 416-0400
(Issuer’sRegistrant’s telephone number)number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None.
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
N/A | N/A | N/A |
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 ☒ The Company has not filed its Quarterly Report on Form 10-Q for the quarterly periods ended September 30, 2019, March 31, 2020, June 30, 2020 and September 30, 2020 and its Annual Report on Form 10-K 12/31/2016; Form 10-Q 3/31/2017; Form 10-Q 6/30/2017for the year ended December 31, 2019.
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.
Large accelerated filer | ☐ | Accelerated filer | ☐ | |
Non-accelerated filer |
| ☒ | Smaller reporting company | ☒ |
| Emerging growth company | ☐ |
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 29, 2020, the issuer had 40,772,59739,690,868 shares of common stock issued and outstanding.
NOTE ABOUTCAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS
Statements in this report may be "forward-looking statements."statements" within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements discuss matters that are not historical facts. Forward-looking statements include, but are not limited to, statements that express our intentions, beliefs, expectations, strategies, predictions, or any other statements relating to our future activities or other future events or conditions. These statements include, among other things, statements regarding:
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as well as other statements regarding our future operations, financial condition and prospects, and business strategies. These statements are based on current expectations, estimates and projections about our business based, in part, on assumptions made by management. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may, and are likely to, differ materially from what is expressed or forecasted in the forward-looking statements due to numerous factors, including those described above and those risks discussed from time to time in this report, including the risks described under "Risk Factors" in our Registration Statement on Form 10-12g filed with the U.S. Securities and Exchange Commission (“SEC”) as amended, and any risks described in any other filings we make with the SEC.SEC, including our Annual Report on Form 10-K for the year ended December 31, 2018.
These factors include, among others:
● current or future financial performance; |
We cannot predict all of the risks and uncertainties. Accordingly, such information should not be regarded as representations that the results or conditions described in such statements or that our objectives and plans will be achieved and we do not assume any responsibility for the accuracy or completeness of any of these forward-looking statements. These forward-looking statements are found at various places throughout this report and include information concerning possible or assumed future results of our operations, including statements about business strategies; future cash flows; financing plans; plans and objectives of management; any other statements regarding future acquisitions, future cash needs, future operations, business plans and future financial results, and any other statements that are not historical facts. These forward-looking statements represent our intentions, plans, expectations, assumptions, and beliefs about future events and are subject to risks, uncertainties, and other factors. Many of those factors are outside of our control and could cause actual results to differ materially from the results expressed or implied by those forward-looking statements. In light of these risks, uncertainties and assumptions, the events described in the forward-looking statements might not occur or might occur to a different extent or at a different time than we have described. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. All subsequent written and oral forward-looking statements concerning other matters addressed in this report and attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this report. Any forward-looking statements speak only as of the date on which they are made, and we do not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date of this report.
Management’sManagement’s discussion and analysis of financial condition and results of operations are based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these unaudited condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses. On an on-going basis, we evaluate these estimates, including those related to useful lives of assets, bad debts, impairment, stock based compensation,property and contingencies.equipment, the allowance for doubtful accounts and stock-based compensation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. There can be no assurance that actual results will not differ from those estimates.
Unless we have indicated otherwise or the context otherwise requires, references in the prospectus to “Zero Gravity,” “ZGSI,” the “Company,” “we,” “us” and “our” or similar terms are to Zero Gravity Solutions, Inc. and its subsidiaries.
Item 1. CONDENSED Consolidated Financial Statements
ZERO GRAVITY SOLUTIONS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
September 30, | December 31, | |||||||
(Unaudited) | ||||||||
ASSETS | ||||||||
CURRENT ASSETS | ||||||||
Cash | $ | 130,309 | $ | 232,394 | ||||
Accounts receivable, trade, net | 34,055 | 121,747 | ||||||
Other current assets | 97,323 | 282,409 | ||||||
Inventory | 82,611 | 33,401 | ||||||
Total current assets | 344,298 | 669,951 | ||||||
Property and equipment - net | 110,055 | 119,057 | ||||||
OTHER ASSETS | ||||||||
Deposit | 4,617 | 3,617 | ||||||
Intellectual property, net | 11,830 | 5,500 | ||||||
Advance on future royalties - related parties | 311,950 | 277,038 | ||||||
Total other assets | 328,397 | 286,155 | ||||||
TOTAL ASSETS | $ | 782,750 | $ | 1,075,163 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) | ||||||||
CURRENT LIABILITIES | ||||||||
Accounts payable and accrued expenses | $ | 681,848 | $ | 480,853 | ||||
Accounts payable- related party | 101,541 | 75,000 | ||||||
Deferred compensation, related party | 12,500 | 12,500 | ||||||
Note payable - related party | 500,000 | 500,000 | ||||||
Note payable | - | 195,355 | ||||||
Total current liabilities | 1,295,889 | 1,263,708 | ||||||
LONG TERM LIABILITIES | ||||||||
Notes payable - related parties net of discount of $59,928 | 540,072 | - | ||||||
Total long term liabilities | 540,072 | - | ||||||
TOTAL LIABILITIES | 1,835,961 | 1,263,708 | ||||||
Commitments | ||||||||
STOCKHOLDERS' DEFICIT | ||||||||
Common stock; 100,000,000 shares authorized, at $0.001 par value, 40,266,264 and 38,973,264 shares issued and outstanding, respectively | 40,473 | 38,973 | ||||||
Additional paid-in capital | 21,018,081 | 16,126,129 | ||||||
Accumulated deficit | (22,111,765 | ) | (16,353,647 | ) | ||||
Total stockholders' deficit | (1,053,211 | ) | (188,545 | ) | ||||
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT | $ | 782,750 | $ | 1,075,163 | ||||
June 30, 2019 | December 31, 2018 | |||||||
(Unaudited) | ||||||||
Assets | ||||||||
Current Assets | ||||||||
Cash and cash equivalents | $ | 1,782,954 | $ | 43,683 | ||||
Accounts receivable - net | 2,275 | 342 | ||||||
Prepaid and other | 264,859 | 314,645 | ||||||
Inventory | 26,326 | 103,142 | ||||||
Total Current Assets | 2,076,414 | 461,812 | ||||||
Property and Equipment - net | 73,406 | 85,523 | ||||||
Other Assets | ||||||||
Inventory | 220,495 | - | ||||||
Deposit | 4,817 | 4,817 | ||||||
Total Other Assets | 225,312 | 4,817 | ||||||
Total Assets | $ | 2,375,132 | $ | 552,152 | ||||
Liabilities and Stockholders' Deficit | ||||||||
Current Liabilities | ||||||||
Accounts payable and accrued expenses | $ | 493,884 | $ | 544,659 | ||||
Accounts payable and accrued expenses - related parties | - | 127,480 | ||||||
Accrued interest | 36,941 | 21,262 | ||||||
Accrued interest - related parties | 141,202 | 100,919 | ||||||
Deferred revenue | - | 250,000 | ||||||
Deferred compensation - related party | - | 12,500 | ||||||
Insurance financing liability | 105,025 | 223,482 | ||||||
Notes payable - net | - | 191,108 | ||||||
Notes payable - related parties - net | 99,214 | 1,058,621 | ||||||
Convertible notes payable - net | 151,503 | 8,947 | ||||||
Convertible notes payable - related parties | - | 500,000 | ||||||
Derivative liability | 216,000 | 114,000 | ||||||
Total Current Liabilities | 1,243,769 | 3,152,978 | ||||||
Long-Term Liabilities | ||||||||
Convertible notes payable - Series A, 10% - net | 339,112 | - | ||||||
Convertible notes payable - Series A, 10% - related parties - net | 1,116,584 | - | ||||||
Convertible notes payable - Series B, 12% - net | 56,013 | - | ||||||
Convertible notes payable - Series B, 12% - related parties - net | 266,104 | - | ||||||
Notes payable - net | - | 96,263 | ||||||
Notes payable - related parties - net | - | 943,621 | ||||||
Convertible notes payable - net | - | 356,794 | ||||||
Convertible notes payable - related parties - net | - | 1,098,649 | ||||||
Total Long-Term Liabilities | 1,777,813 | 2,495,327 | ||||||
Total Liabilities | 3,021,582 | 5,648,305 | ||||||
Commitments (Note 5) | ||||||||
Stockholders' Deficit | ||||||||
Common stock, $0.001 par value, 100,000,000 shares authorized 39,332,310 and 40,954,115 shares issued and outstanding at June 30, 2019 and December 31, 2018 respectively | 39,332 | 40,954 | ||||||
Additional paid-in capital | 32,586,150 | 24,283,509 | ||||||
Accumulated deficit | (33,271,377 | ) | (29,420,616 | ) | ||||
Stockholders' deficit | (645,895 | ) | (5,096,153 | ) | ||||
Non-controlling interest | (555 | ) | - | |||||
Total Stockholders' Deficit | (646,450 | ) | (5,096,153 | ) | ||||
Total Liabilities and Stockholders' Deficit | $ | 2,375,132 | $ | 552,152 | ||||
See accompanying notes to unaudited condensed consolidated financial statements
ZERO GRAVITY SOLUTIONS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months | Three Months | Nine Months | Nine Months | |||||||||||||
September 30, | September 30, | September 30, | September 30, | |||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
REVENUE | ||||||||||||||||
Sale of Goods | $ | 4,355 | $ | 16,174 | $ | 65,545 | $ | 36,488 | ||||||||
Total revenue | 4,355 | 16,174 | 65.545 | 36,488 | ||||||||||||
COST OF REVENUE | ||||||||||||||||
Cost of goods sold | 157 | 1,015 | 10,263 | 3,663 | ||||||||||||
Royalty expense | 218 | 809 | 2,092 | 1,825 | ||||||||||||
Total cost of revenue | 375 | 1,824 | 12,355 | 5,488 | ||||||||||||
GROSS PROFIT | 3,980 | 14,350 | 53,190 | 31,000 | ||||||||||||
OPERATING EXPENSES | ||||||||||||||||
General and administrative | 1,492,884 | 1,583,678 | 5,623,117 | 5,036,518 | ||||||||||||
Research and development | 41,041 | 133,195 | 140,030 | 347,360 | ||||||||||||
Total operating expenses | 1,533,925 | 1,716,873 | 5,763,147 | 5,383,878 | ||||||||||||
LOSS FROM OPERATIONS | (1,529,945 | ) | (1,702,523 | ) | (5,709,957 | ) | (5.352.878 | ) | ||||||||
OTHER INCOME (EXPENSE) | ||||||||||||||||
Other income | - | 441 | - | 2,511 | ||||||||||||
Interest expense | (18,386 | ) | (12,308 | ) | (45,101 | ) | (37,132 | ) | ||||||||
Accretion of debt discount | (2,673 | ) | (9,339 | ) | (2,673 | ) | (122,631 | ) | ||||||||
Foreign currency loss | (387 | ) | - | (387 | ) | - | ||||||||||
Total other income (expense) | (21,446 | ) | (21,206 | ) | (48,161 | ) | (157,252 | ) | ||||||||
NET LOSS | $ | (1,551,391 | ) | $ | (1,723,729 | ) | $ | (5,758,118 | ) | $ | (5,510,130 | ) | ||||
NET LOSS PER SHARE - BASIC AND DILUTED | $ | (0.04 | ) | $ | (0.04 | ) | $ | (0.15 | ) | $ | (0.14 | ) | ||||
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - BASIC AND DILUTED | 40,323,242 | 38,751,597 | 38,948,632 | 38,495,040 | ||||||||||||
For the Three Months Ended June 30, | For the Six Months Ended June 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
| �� | ||||||||||||||||
Sales | $ | 4,923 | $ | 29,600 | $ | 49,418 | $ | 33,070 | ||||||||
Cost of sales | 6,327 | 4,727 | 33,640 | 5,277 | ||||||||||||
Gross profit (loss) | (1,404 | ) | 24,873 | 15,778 | 27,793 | |||||||||||
Operating expenses | ||||||||||||||||
General and administrative expenses | 987,884 | 1,160,825 | 1,874,596 | 2,570,597 | ||||||||||||
Research and development | 63,891 | 16,710 | 64,962 | 101,451 | ||||||||||||
Total operating expenses | 1,051,775 | 1,177,535 | 1,939,558 | 2,672,048 | ||||||||||||
Loss from operations | (1,053,179 | ) | (1,152,662 | ) | (1,923,780 | ) | (2,644,255 | ) | ||||||||
Other income (expense) - net | ||||||||||||||||
Interest expense | (245,181 | ) | (72,403 | ) | (380,333 | ) | (133,502 | ) | ||||||||
Amortization of debt discounts | (1,336,868 | ) | (49,320 | ) | (1,534,203 | ) | (72,962 | ) | ||||||||
Change in fair value of derivative liability | 15,000 | - | (13,000 | ) | - | |||||||||||
Loss on disposal of asset | - | - | - | (343 | ) | |||||||||||
Total other income (expense) - net | (1,567,049 | ) | (121,723 | ) | (1,927,536 | ) | (206,807 | ) | ||||||||
Net loss including non-controlling interest | $ | (2,620,228 | ) | $ | (1,274,385 | ) | $ | (3,851,316 | ) | $ | (2,851,062 | ) | ||||
Non-controlling interest | (283 | ) | - | (555 | ) | - | ||||||||||
Net loss available to common stockholders | $ | (2,619,945 | ) | $ | (1,274,385 | ) | $ | (3,850,761 | ) | $ | (2,851,062 | ) | ||||
Loss per share - basic and diluted | $ | (0.07 | ) | $ | (0.03 | ) | $ | (0.10 | ) | $ | (0.07 | ) | ||||
Weighted average number of shares - basic and diluted | 39,968,574 | 40,808,976 | 40,491,752 | 40,792,224 | ||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements
ZERO GRAVITY SOLUTIONS, INC. AND SUBSIDIARIES
Condensed
Consolidated Statements of Cash Flows Changes in Stockholders’ Deficit
For the Three and Six Months Ended June 30, 2019 and 2018
(Unaudited)
Nine Months Ended | ||||||||
September 30, | ||||||||
2017 | 2016 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
Net loss | $ | (5,758,118 | ) | $ | (5,510,130 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Depreciation expense | 18,414 | 11,441 | ||||||
Amortization expense | 646 | - | ||||||
Common stock issued for services | 150,000 | 25,000 | ||||||
Warrants issued for services | 655,128 | 11,899 | ||||||
Stock options issued as compensation | 108,388 | 1,678,118 | ||||||
Amortization of debt issuance costs | 2,673 | 122,631 | ||||||
Warrant modification expense | 926,885 | - | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | 87,693 | 7,257 | ||||||
Other current assets | (19,685 | ) | (9,180 | ) | ||||
Prepaid expenses | 204,771 | 100,039 | ||||||
Advance on future royalties - related parties | (34,912 | ) | (55,115 | ) | ||||
Inventory | (49,210 | ) | (6,624 | ) | ||||
Deposit | (1,000 | ) | 3,117 | |||||
Accounts payable and accrued expenses | 227,537 | 248,026 | ||||||
Net cash used in operating activities | (3,480,791 | ) | (3,373,521 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
Cash paid to acquire intellectual property | (6,976 | ) | - | |||||
Cash paid to purchase equipment | (9,412 | ) | (73,331 | ) | ||||
Net cash used in investing activities | (16,388 | ) | (73,331 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
Payments of notes payable | (195,355 | ) | (128,481 | ) | ||||
Proceeds from exercise of warrants – related party | 1,185,000 | - | ||||||
Payment of offering costs - related party | (33,750 | ) | - | |||||
Proceeds of notes payable and warrants - related party | 600,000 | - | ||||||
Proceeds from sale of common stock | 1,977,999 | 1,717,500 | ||||||
Payment of offering costs | (138,800 | ) | (151,500 | ) | ||||
Net cash provided by financing activities | 3,395,094 | 1,437,519 | ||||||
NET DECREASE IN CASH | (102,085 | ) | (2,009,333 | ) | ||||
CASH AT BEGINNING OF PERIOD | 232,394 | 2,851,118 | ||||||
CASH AT END OF PERIOD | $ | 130,309 | $ | 841,785 | ||||
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION | ||||||||
CASH PAID FOR: | ||||||||
Interest | $ | 45,101 | $ | 12,086 | ||||
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES: | ||||||||
Warrants issued as direct offering costs | $ | 168,268 | $ | 152,575 | ||||
Additional | Total | |||||||||||||||||||||||
Common Stock | Paid-in | Accumulated | Controlling | Stockholders' | ||||||||||||||||||||
Shares | Amount | Capital | Deficit | Interest | Deficit | |||||||||||||||||||
December 31, 2017 | 40,650,397 | $ | 40,650 | $ | 21,970,266 | $ | (23,980,220 | ) | $ | - | $ | (1,969,304 | ) | |||||||||||
Common stock issued for cash - net of offering costs of $1,680 ($2.97/share) | 55,334 | 56 | 164,266 | - | - | 164,322 | ||||||||||||||||||
Warrants issued for services | - | - | 57,947 | - | - | 57,947 | ||||||||||||||||||
Warrants issued as loan costs (debt discount) | - | - | 70,897 | - | - | 70,897 | ||||||||||||||||||
Stock options issued for services | - | - | 71,254 | - | - | 71,254 | ||||||||||||||||||
Net loss - three months ended March 31, 2018 | - | - | - | (1,576,677 | ) | - | (1,576,677 | ) | ||||||||||||||||
March 31, 2018 | 40,705,731 | 40,706 | 22,334,630 | (25,556,897 | ) | - | (3,181,561 | ) | ||||||||||||||||
Common stock issued for cash - net of offering costs of $24,000 ($3/share) | 248,384 | 248 | 720,904 | - | - | 721,152 | ||||||||||||||||||
Warrants issued for services | - | - | 127,029 | - | - | 127,029 | ||||||||||||||||||
Warrants issued as loan costs (debt discount) | - | - | 475,114 | - | - | 475,114 | ||||||||||||||||||
Stock options issued for services | - | - | 75,023 | - | - | 75,023 | ||||||||||||||||||
Net loss - three months ended June 30, 2018 | - | - | - | (1,274,385 | ) | - | (1,274,385 | ) | ||||||||||||||||
June 30, 2018 | 40,954,115 | $ | 40,954 | $ | 23,732,700 | $ | (26,831,282 | ) | $ | - | $ | (3,057,628 | ) | |||||||||||
December 31, 2018 | 40,954,115 | $ | 40,954 | $ | 24,283,509 | $ | (29,420,616 | ) | $ | - | $ | (5,096,153 | ) | |||||||||||
Common stock issued for services ($1.78/share) | 45,000 | 45 | 79,905 | - | - | 79,950 | ||||||||||||||||||
Common stock issued upon cashless exercise of warrants ($0.001/share) | 306,195 | 306 | (306 | ) | - | - | - | |||||||||||||||||
Warrants issued for services | - | - | 112,651 | - | - | 112,651 | ||||||||||||||||||
Stock issued for loan costs ($1.80/share) | 2,000 | 2 | 3,606 | - | - | 3,608 | ||||||||||||||||||
Non-controlling interest | - | - | - | - | (272 | ) | (272 | ) | ||||||||||||||||
Net loss - three months ended March 31, 2019 | - | - | - | (1,230,816 | ) | - | (1,230,816 | ) | ||||||||||||||||
March 31, 2019 | 41,307,310 | 41,307 | 24,479,365 | (30,651,432 | ) | (272 | ) | (6,131,032 | ) | |||||||||||||||
Common stock issued for services ($1.80/share) | 25,000 | 25 | 44,975 | - | - | 45,000 | ||||||||||||||||||
Cancellation and return of shares from former related party ($0.001/share) | (2,000,000 | ) | (2,000 | ) | 2,000 | - | - | - | ||||||||||||||||
Warrants issued for services | - | - | 26,161 | - | - | 26,161 | ||||||||||||||||||
Warrants issued and benefical conversion feature - debt discount - Series A, 10%, and Series B, 12%, convertible notes | - | - | 8,024,032 | - | - | 8,024,032 | ||||||||||||||||||
Stock options issued for services | - | - | 9,617 | - | - | 9,617 | ||||||||||||||||||
Non-controlling interest | - | - | - | - | (283 | ) | (283 | ) | ||||||||||||||||
Net loss - three months ended June 30, 2019 | - | - | - | (2,619,945 | ) | - | (2,619,945 | ) | ||||||||||||||||
June 30, 2019 | 39,332,310 | $ | 39,332 | $ | 32,586,150 | $ | (33,271,377 | ) | $ | (555 | ) | $ | (646,450 | ) | ||||||||||
See accompanying notes to unaudited condensed consolidated financial statements
ZERO GRAVITY SOLUTIONS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
For the Six Months Ended June 30, | ||||||||
2019 | 2018 | |||||||
Operating activities | ||||||||
Net loss - including non-controlling interest | $ | (3,851,316 | ) | $ | (2,851,062 | ) | ||
Adjustments to reconcile net loss to net cash used in operations | ||||||||
Bad debt | 2,712 | 4,060 | ||||||
Depreciation and amortization | 12,117 | 13,168 | ||||||
Common stock issued for services | 124,950 | - | ||||||
Common stock issued for loan costs | 3,608 | - | ||||||
Warrants issued for services | 138,812 | 223,119 | ||||||
Stock options issued for services | 9,617 | 146,277 | ||||||
Non-cash penalty on convertible note payable | 10,000 | - | ||||||
Loss on disposal of asset | - | 343 | ||||||
Amortization of debt discount and loss on debt extinguishment | 1,534,203 | 72,962 | ||||||
Change in fair value of derivative liability | 13,000 | - | ||||||
Advance on future royalties - related parties reserve | - | 129,580 | ||||||
| Impairment of inventory | 10,286 | - | ||||||
Impairment expense | - | 203,208 | ||||||
Changes in operating assets and liabilities | ||||||||
(Increase) decrease in | ||||||||
Accounts receivable | (4,645 | ) | (26,592 | ) | ||||
Prepaid and other | 49,786 | 106,733 | ||||||
Inventory | (153,965 | ) | 3,887 | |||||
Deposits | - | (200 | ) | |||||
Increase (decrease) in | ||||||||
Accounts payable and accrued expenses | 112,019 | 118,846 | ||||||
Accounts payable and accrued expenses - related party | - | 4,716 | ||||||
Accrued interest | 15,679 | 27,187 | ||||||
Accrued interest - related party | 40,283 | 5,000 | ||||||
Advance on future royalties - related parties | - | (13,347 | ) | |||||
Deferred revenue | (43,200 | ) | - | |||||
Deferred compensation - related party | (12,500 | ) | - | |||||
Net cash used in operating activities | (1,988,554 | ) | (1,832,115 | ) | ||||
Financing activities | ||||||||
Proceeds from issuance of Series B, 12%, convertible notes payable | 762,500 | - | ||||||
Proceeds from issuance of Series B, 12%, convertible notes payable - related parties | 2,299,927 | - | ||||||
Proceeds from convertible note payable | 94,500 | - | ||||||
Proceeds from notes payable | 50,000 | 200,000 | ||||||
Repayments of notes payable | (50,000 | ) | - | |||||
Proceeds from notes payable - related party | 789,000 | 2,200,000 | ||||||
Repayments of notes payable - insurance financing liability | (118,457 | ) | (107,655 | ) | ||||
Repayments of notes payable - related party | - | (300,000 | ) | |||||
Payments of debt offering costs - related parties | (99,645 | ) | (66,000 | ) | ||||
Proceeds from sale of common stock | - | 911,154 | ||||||
Payments of offering costs | - | (25,680 | ) | |||||
Net cash provided by financing activities | 3,727,825 | 2,811,819 | ||||||
Net increase in cash and cash equivalents | 1,739,271 | 979,704 | ||||||
Cash and cash equivalents - beginning of period | 43,683 | 13,862 | ||||||
Cash and cash equivalents - end of period | $ | 1,782,954 | $ | 993,566 | ||||
Supplemental disclosure of cash flow information | ||||||||
Cash paid for interest | $ | 16,043 | $ | 133,502 | ||||
Cash paid for income tax | $ | - | $ | - | ||||
Supplemental disclosure of non-cash investing and financing activities | ||||||||
Conversion of debt into Series A, 10%, convertible notes | $ | 850,000 | $ | - | ||||
Conversion of debt into Series A, 10%, convertible notes - related parties | $ | 4,889,001 | $ | - | ||||
Conversion of accrued interest into Series A, 10%, convertible notes | $ | 162,794 | $ | - | ||||
Conversion of accrued interest into Series A, 10%, convertible notes - related parties | $ | 127,480 | $ | - | ||||
Conversion of prior deferred revenue into Series A, 10%, convertible notes - related party | $ | 206,800 | $ | - | ||||
Conversion of Series A, 10%, convertible notes and accrued interest into Series B, 12%, convertible notes | $ | 3,066,573 | $ | - | ||||
Warrants issued as loan costs (debt discount) - Series A, 10%, and Series B, 12%, convertible notes | $ | 8,024,032 | $ | 546,011 | ||||
Debt discount recorded in connection with derivative liability | $ | 89,000 | $ | - | ||||
Cancellation and return of shares from former related party | $ | 2,000 | $ | - | ||||
Common stock issued upon cashless exercise of warrants | $ | 306 | $ | - | ||||
Warrants issued as direct offering costs in the sale of common stock | $ | - | $ | 5,771 | ||||
See accompanying notes to unaudited condensed consolidated financial statements
ZERO GRAVITY SOLUTIONS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
SEPTEMBERJune 30, 2019, 2017
(Unaudited)
NOTENote 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES- Organization and Nature of Operations and Basis of Presentation
Organization and Nature of operationsOperations
Zero Gravity Solutions, Inc. (the “Company”) is an agricultural 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™BAM-FX® that can boost the nutritional value and enhance the immune system of food crops without the use of Genetic Modification.genetic modification. The Company’s focus is the commercialization of 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. a Florida corporation (“BAM”), which was formed in 2014, and Specialty Agricultural Solutions, Inc. (“SASI”), which was formed in 2018 and began operations in 2019. The Company owns 98% of SASI.
Another subsidiary of the Company, Zero Gravity Life Sciences, Inc., botha Florida corporationscorporation (“ZGLS”), was formed by the Company in 2014. ZGLS is currently inactive.
The ongoing COVID-19 global and national health emergency has caused significant disruption in the international and United States economies and financial markets. In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic. The spread of COVID-19 has caused illness, quarantines, cancellation of events and travel, business and school shutdowns, reduction in business activity and financial transactions, labor shortages, supply chain interruptions and overall economic and financial market instability. The COVID-19 pandemic has the potential to significantly impact the Company’s supply chain, distribution centers, or logistics and other service providers.
During the first quarter of 2020, the Company furloughed all employees other than the three executive officers due to the COVID-19 impact on its operations. Beginning in the second quarter of 2020 the Company began to remove certain employees from furlough that are key to ongoing operations. The Company is not able to estimate the duration of the pandemic or the potential impact on the business of disruptions or delays in shipments of product.
To date, the Company has experienced product shipment delays due to import restrictions imposed by countries in which the Company had customer purchase commitments. In addition, a severe prolonged economic downturn could result in a variety of risks to the business, including weakened demand for product and a decreased ability to raise additional capital when needed on acceptable terms, if at all. As the situation continues to evolve, the Company will continue to closely monitor market conditions and respond accordingly.
Basis of Presentation
Management acknowledges its responsibility for the preparation of the accompanying unaudited consolidated financial statements which reflect all adjustments, consisting of normal recurring adjustments, considered necessary in its opinion for a fair statement of its consolidated financial position and the consolidated results of its operations for the periods presented.
The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (the “U.S. GAAP”) for interim financial information and with the instructions to Article 8-03 of Regulation S-X.
Operating results for interim periods are not necessarily indicative of results that may be expected for the fiscal year as a whole. Certain information and note disclosure normally included in financial statements prepared in accordance with U.S. GAAP has been condensed or omitted from these statements pursuant to such accounting principles and, accordingly, they do not include all the information and notes necessary for comprehensive financial statements.
These unaudited consolidated financial statements should be read in conjunction with the summary of significant accounting policies and notes to the consolidated financial statements for the year ended December 31, 2018 of the Company which were included in the Company’s annual report on Form 10-K as filed with the Securities and Exchange Commission on October 17, 2019.
Liquidity, Going Concern and Management’sManagement’s Plans
These consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business.
As reflected in the accompanying unaudited consolidated financial statements, for the six months ended June 30, 2019, the Company had:
Net loss including non-controlling interest of $3,851,316; and
Net cash used in operations was $1,988,554
Additionally, at June 30, 2019, the Company had:
Accumulated deficit of $33,271,377,
Stockholders’ deficit of $646,450; and
Working capital of $832,645
The Company has a limited operating history, recurring lossescash on hand of $1,782,954 at June 30, 2019. Without significant cash collections from operations and a working capital deficiency at September 30, 2017. At September 30, 2017,sale of product, given the Company had approximateCompany’s current monthly 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). To date,used in operations, the Company has in large part relied on equity financingsufficient cash to fundoperate for approximately six months without an additional capital raise or change to its operations. Thebusiness strategy and plan.
Although the Company intends to raise additional capital, the Company expects to continue to incur significant 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 thathas incurred significant losses since its inception and has not demonstrated an ability to generate sufficient revenues from the costs associated with the executionsales of its 2017 business plan may exceed $450,000 per month, with limitedgoods and services to achieve profitable operations. There can be no assurance that profitable operations will ever be achieved, or no revenue in certain months, or for an extended periodif achieved, could be sustained on a continuing basis. In making this assessment we performed a comprehensive analysis of time. Management has evaluated its ability to continue as a going concernour current circumstances including: our financial position, our cash flow and cash usage forecasts for the nextperiod ending June 30, 2019, and our current capital structure including equity-based instruments and our obligations and debts.
The Company has satisfied its obligations using cash from successful capital raising efforts through June 30, 2019, specifically, the issuance notes payable and convertible debt of $3,995,927 during the six months ended June 30, 2019; however, there is no assurance that such successful efforts will continue during the twelve months fromsubsequent to the issuance ofdate these September 30, 2017interim consolidated financial statements and has determined that there is substantial doubt as to its ability to continue as a going concern. are issued.
The Company has executed product distribution agreements with domestic and international commercial agricultural distributors and generated initial product orders. Additional technical and marketing effortefforts must be devoted to those distributors to insureensure 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 through issuances of debt.
If the Company does not obtain additional capital, the Company would potentiallywill 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
These factors create substantial doubt about the Company’s ability to September 30, 2017,continue as a going concern within the twelve month period subsequent to the date that these consolidated financial statements are issued. The consolidated financial statements do not include any adjustments that might be necessary if the Company raised approximately $300,000 through its private placementis unable to continue as a going concern. Accordingly, the consolidated financial statements have been prepared on a basis that assumes the Company will continue as a going concern and received $500,000 fromwhich contemplates the issuancerealization of an unsecured promissory note to a trust which a memberassets and satisfaction of its Boardliabilities and commitments in the ordinary course of Directors is a beneficiary of (Note 8). business.
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;
| • | Continuing to advance commercialization of the Company’s principal product, BAM-FX® in both domestic and international markets, |
- pursuingPursuing additional capital raising opportunities;opportunities,
- continuingContinuing to explore and execute prospective partnering or distribution opportunities;opportunities; and
- identifyingIdentifying unique market and product application opportunities that represent potential positive short-term 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 30Note 2 - , 2017
(Unaudited)Summary of Significant Accounting Policies
Principles of Consolidation and Non-Controlling Interest
The accompanying unaudited interim condensedThese consolidated financial statements have been prepared in accordance with U.S. GAAP and include the accounts of Zero Gravity Solutions, Inc.the Company and its wholly-owned and majority owned subsidiaries. All significant intercompany balancestransactions and transactionsbalances have been eliminatedeliminated.
The non-controlling interest in consolidation.SASI is reported as Non-controlling interest in Total Stockholders’ Deficit of our Consolidated Financial Statements.
Business Segments and Concentrations
The Company uses the “management approach” to identify its reportable segments. The management approach requires companies to report segment financial information consistent with information used by management for making operating decisions and assessing performance as the basis for identifying the Company’s reportable segments. The Company manages its business as one reportable segment and the unaudited consolidated financial statements are presented as one operating business 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.
Use of Estimates
Preparing financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reported period. Actual results could differ from those estimates, and those estimates may be material.
Significant estimates during the six months ended June 30, 2019 include allowance for doubtful accounts and other receivables, inventory reserves and classifications, valuation of beneficial conversion features in convertible debt, valuation of loss contingencies, valuation of derivative liabilities, valuation of stock-based compensation and the valuation allowance on deferred tax assets.
Fair Value of Financial Instruments
The Company accounts for financial instruments under Financial Accounting Standards Board (“FASB”) ASC 820, Fair Value Measurements. ASC 820 provides a framework for measuring fair value and requires disclosures regarding fair value measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, based on the Company’s principal or, in absence of a principal, most advantageous market for the specific asset or liability.
The Company uses a three-tier fair value hierarchy to classify and disclose all assets and liabilities measured at fair value on a recurring basis, as well as assets and liabilities measured at fair value on a non-recurring basis, in periods subsequent to their initial measurement. The hierarchy requires the Company to use observable inputs when available, and to minimize the use of unobservable inputs, when determining fair value.
The three tiers are defined as follows:
Level 1 —Observable inputs that reflect quoted market prices (unadjusted) for identical assets or liabilities in active markets;
Level 2—Observable inputs other than quoted prices in active markets that are observable either directly or indirectly in the marketplace for identical or similar assets and liabilities; and
Level 3—Unobservable inputs that are supported by little or no market data, which require the Company to develop its own assumptions.
The determination of fair value and the assessment of a measurement’s placement within the hierarchy requires judgment. Level 3 valuations often involve a higher degree of judgment and complexity. Level 3 valuations may require the use of various cost, market, or income valuation methodologies applied to unobservable management estimates and assumptions. Management’s assumptions could vary depending on the asset or liability valued and the valuation method used. Such assumptions could include estimates of prices, earnings, costs, actions of market participants, market factors, or the weighting of various valuation methods. The Company may also engage external advisors to assist us in determining fair value, as appropriate.
Although the Company believes that the recorded fair value of our financial instruments is appropriate, these fair values may not be indicative of net realizable value or reflective of future fair values. See Note 4(D) for level 3 reconciliation of derivative liabilities.
The Company’s financial instruments, including cash, net accounts receivable, accounts payable and accrued expenses, are carried at historical cost. At June 30, 2019 and December 31, 2018, the carrying amounts of these instruments approximated their fair values because of the short-term nature of these instruments.
ASC 825-10 “Financial Instruments”, allows entities to voluntarily choose to measure certain financial assets and liabilities at fair value (“fair value option”). The fair value option may be elected on an instrument-by-instrument basis and is irrevocable unless a new election date occurs. If the fair value option is elected for an instrument, unrealized gains and losses for that instrument should be reported in earnings at each subsequent reporting date. The Company did not elect to apply the fair value option to any outstanding financial instruments.
Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, the Company considers all highly liquid instruments with a maturity of three months or less at the purchase date and money market accounts to be cash equivalents. At June 30, 2019 and December 31, 2018, the Company had cash equivalents of $250,085 and $0, respectively.
Accounts Receivable
Credit is extended to customers based on an evaluation of their financial condition and other factors. The Company does not require collateral. Management periodically assesses the Company’s accounts receivable and, if necessary, establishes an allowance for estimated uncollectible amounts. Accounts determined to be uncollectible are charged to operations when that determination is made. Interest is not accrued on overdue accounts receivable.
Allowance for doubtful accounts was $2,370 and $0 at June 30, 2019 and December 31, 2018, respectively.
At June 30, 2019, two customers accounted for 28.5% of total gross accounts receivable. Each of these customers represented 17.5% and 11%, respectively. At December 31, 2018, two customers accounted for 100% of total accounts receivable. Each of these customers represented 78.1% and 21.9%, respectively.
Inventory
Inventory is valued on a lower of first in, first out (FIFO) cost or net realizable value.
Inventory consisted of:
September 30, | December 31, | |||||||||||||||
2017 | 2016 | |||||||||||||||
Classification | June 30, 2019 | December 31, 2018 | ||||||||||||||
Raw materials | $ | 23,920 | $ | 9,081 | $ | 46,885 | $ | 17,610 | ||||||||
Finished product | 44,741 | 5,082 | ||||||||||||||
Consignment inventory | 13,950 | 19,238 | ||||||||||||||
Finished products | 199,936 | 85,532 | ||||||||||||||
Total Inventory | $ | 82,611 | $ | 33,401 | $ | 246,821 | $ | 103,142 | ||||||||
ConcentrationOf the total inventory balance, the Company had $26,326 classified as a current asset, a portion of Credit Riskwhich was shipped to customers and a portion ready for shipment, however, due to Covid-19 restrictions, remains on hold. The remaining inventory is classified as a non-current asset on the accompanying consolidated balance sheet. This inventory is considered slow moving but it is not obsolete, and no impairment is required. During the three and six months ended June 30, 2019, the Company recognized an impairment charge of $4,003 and $10,286, respectively, which is included in cost of sales. There were no impairment charges taken during the three and six months ended June 30, 2018.
Property and Equipment
Property and equipment is stated at cost less accumulated depreciation. Depreciation is provided on the straight-line basis over the estimated useful lives of the assets ranging from three to ten years.
Expenditures for repair and maintenance which do not materially extend the useful lives of property and equipment are charged to operations. When property or equipment is sold or otherwise disposed of, the cost and related accumulated depreciation are removed from the respective accounts with the resulting gain or loss reflected in operations.
Management reviews the carrying value of its property and equipment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable.
Impairment of Long-lived Assets
Management evaluates the recoverability of the Company’s identifiable intangible assets and other long-lived assets when events or circumstances indicate a potential impairment exists, in accordance with the provisions of ASC 360-10-35-15 “Impairment or Disposal of Long-Lived Assets.” Events and circumstances considered by the Company in determining whether the carrying value of identifiable intangible assets and other long-lived assets may not be recoverable include, but are not limited to: significant changes in performance relative to expected operating results; significant changes in the use of the assets; significant negative industry or economic trends; and changes in the Company’s business strategy. In determining if impairment exists, the Company estimates the undiscounted cash flows to be generated from the use and ultimate disposition of these assets.
If impairment is indicated based on a comparison of the assets’ carrying values and the undiscounted cash flows, the impairment to be recognized is measured as the amount by which the carrying amount of the assets exceeds the fair value of the assets.
Accounting for Derivatives
The Company at September 30, 2017 maintainedevaluates its cashconvertible instruments, options, warrants or other contracts to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for under ASC Topic 815, “Derivatives and Hedging.” The result of this accounting treatment is that the fair value of the derivative is marked-to-market each balance with two major national financial institutions. The bank balance at September 30, 2017 did not exceedsheet date and recorded as a liability. In the FDIC limits.event that the fair value is recorded as a liability, the change in fair value is recorded in the statement of operations as other income (expense).
ZERO GRAVITY SOLUTIONS, INC. AND SUBSIDIARIESUpon conversion of a note where the embedded conversion option has been bifurcated and accounted for as a derivative liability, the Company records the shares at fair value, relieves all related notes, derivatives, and debt discounts, and recognizes a net gain or loss on extinguishment. Equity instruments that are initially classified as equity that become subject to reclassification under ASC Topic 815 are reclassified to liabilities at the fair value of the instrument on the reclassification date.
NotesThe company has adopted FASB ASU 2017-11, which simplifies the accounting for certain equity-linked financial instruments and embedded features with down round features that reduce the exercise price when the pricing of a future round of financing is lower. This allows the company to Condensed Consolidated Financial Statements
SEPTEMBER 30, 2017
(Unaudited)treat such instruments or their embedded features as equity instead of considering them as a derivative. If such a feature is triggered the value is measured pre-trigger and post-trigger. The difference in these two measurements is treated as a dividend, reducing income. The value recognized as a dividend is not subsequently remeasured, but in instances where the feature is triggered multiple times each instance is recognized.
Fair Value of Financial InstrumentsConvertible Notes with Fixed Rate Conversion Options
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, establishesmay enter into convertible notes, some of which may contain fixed rate conversion features, whereby the outstanding principal and accrued interest may be converted, by the holder, into common shares at 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 prioritizesfixed discount to the inputs to valuation techniques used to measure fair value into three levels as follows:
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Observable inputs are based on market data obtained from independent sources, while unobservable inputs are based on the Company’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 levelsprice 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,at the time of conversion. The Company estimatesmeasures the fair value of its common stock (used in its Black Scholes option pricing model) pursuant to ASC 820. This estimation process maximizes the usenotes at the time of observable inputs, includingissuance, which is the quoted priceresult of the Company's common stock in an inactive market,share price discount at the pricetime of conversion and records the Company's common stock determined in connection with transactions inpremium to interest expense on the Company's common stock, and an income approach to valuation (a discounted cash flow technique that takes into account the future cash flows) (Note 2).note issuance date.
The carrying amounts ofBeneficial Conversion Features
For instruments that are not considered liabilities under ASC 480 or ASC 815, the Company’s accounts receivable applies ASC 470-20 to convertible securities with beneficial conversion features that must be settled in stock. ASC 470-20 requires that the beneficial conversion feature be valued at the commitment date as the difference between the effective conversion price and accounts payable approximatethe fair value due to the relatively short period to maturity for these instruments. The carryingmarket value of the Company’s notes payable approximatescommon stock (whereby the conversion price is lower than the fair value duemarket value) into which the security is convertible, multiplied by the number of shares into which the security is convertible limited to their short periodthe amount of the loan. This amount is recorded as a debt discount and amortized to maturityinterest expense in the Consolidated Statements of Operations.
Debt Issue Cost
Debt issuance cost paid to lenders, or third parties are recorded as debt discounts and their statedamortized to interest rates, combined with historic interest rate levels.expense in the Consolidated Statements of Operations, over the life of the underlying debt instrument.
Revenue Recognition and Accounts ReceivableConcentrations
Effective January 1, 2018, the Company adopted ASC 606, “Revenue from Contracts with Customers” to recognize revenues from the sale of agricultural biotechnology products to distributors and customers. There was no cumulative effect of adopting ASC 606.
Pursuant to ASC 606, we recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration or payment the Company expects to be entitled to receive in exchange for those goods or services. Our revenue is recognized by applying the following five steps: 1) identify the contracts with a customer; 2) identify the performance obligations in the contract; 3) determine the transaction price; 4) allocate the transaction price to the performance obligations; and 5) recognize revenue when (or as) we satisfy a performance obligation.
We apply judgment in determining the customer’s ability and intention to pay, which is based on a variety of factors including the customer’s historical payment experience or, in the case of a new customer, published credit or financial information pertaining to the customer. If a contract includes multiple promised goods or services, we apply judgment to determine whether the promised goods or services are capable of being distinct and are distinct within the context of the contract. If these criteria are not met, the promised goods or services are accounted for as a combined performance obligation. We determine the transaction price based on the consideration which we will be entitled to receive in exchange for transferring goods or services to our customer. We recognize revenue at the time that the related performance obligation is satisfied by transferring the promised goods or services to our customer.
Revenue for agricultural biotechnology products is 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 buyerproduct is fixedtransferred which may be upon shipment to or determinable; and (iv) collectability is reasonably assured.receipt by the customer of the product.
The Company determined that no reserveAmounts billed to customers for estimated product returnsshipping and allowances was necessary duringhandling fees are included in net sales, and costs incurred by the three and nine month periods ended September 30, 2017 and 2016. company for the delivery of invoiced goods are classified as cost of goods sold in our Statements of Operations.
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
SEPTEMBERThe Company determined that no reserve for estimated product returns and allowances was necessary during the three and six months ended June 30,, 2017
(Unaudited) 2019 and 2018.
At SeptemberDuring the three and six months ended June 30, 2017, three customers2019, one customer accounted for 88.2%0% and 87% of total accounts receivable each representing 47.9%, 27.3% and 12.9%net sales, respectively. During the three and six months ended SeptemberJune 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, Each of these customers represented 33.6%, 22.9% and 13.0% respectively. At December 31, 2016, five customers accounted for 99.4% of accounts receivable. Each of these five customers represented 40.3%, 24.1%, 13.0%, 11.7%, and 10.3%, respectively. During the three months ended September 30, 20172018, one customer accounted for 50%68% of net sales.
Cost of Sales
Cost of sales forrepresents costs directly related to the nineproduction, manufacturing and freight-in of the Company’s product inventory purchased from third-party manufacturers as well as royalty expense and any declines in inventory values.
Research and Development
Research and development costs are charged to expense as incurred.
For the three and six months ended SeptemberJune 30, 2016, two customers accounted for 40.3%2019, the Company recognized $63,891 and $64,962 in research and development costs in the consolidated statements of net sales, each representing 22.0%operations.
For the three and 18.4%, respectively.six months ended June 30, 2018, the Company recognized $16,710 and $101,451 in research and development costs in the consolidated statements of operations.
Warranty Expense
The Company extends credit to customers generally without requiring collateral. The Company monitors its exposureCompany's distribution agreements provide for credit lossesa warranty on products sold. Sales under such distribution agreements have been nominal during the three 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,six months ended 2019 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 and December 31, 2016.2018, respectively.
Stock Based Compensation
The Company recognizes theA provision for estimated future warranty costs is to be recorded as a component or cost of employee services received in exchange for an award of equity instruments in the financial statementssales when products are shipped, and is measuredwarranty costs are to be based on the grant date fair valuehistorical trends in warranty charges as a percentage of the award. Stock based compensationgross product shipments. A resulting accrual is to be reviewed regularly, and periodically adjusted to reflect changes in warranty cost estimates. There has been no related warranty 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 share-based payments is recorded in general and administrative expense. We have elected to account for the forfeiture of awards as they occur.
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’s net loss applicable to common shareholders by the weighted average number of common sharesaccrued during the period. Diluted loss per share is calculated by dividing the Company’s net loss available to common shareholders 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. 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 warrantsthree and stock options are not considered in the calculation as the impact of the potential common shares (the weighted average being approximately 12,944,000 shares and 12,205,000 three-months ended September 30, 2017 and 2016 respectively and 12,581,000 and 11,279,000 shares for the ninesix months ended SeptemberJune 30, 20172019 and 2016 respectively), would be to decrease the net loss per share.2018, respectively.
Income Taxes
The Company accounts for income taxes undertax using the asset and liability method in whichprescribed by ASC 740, “Income Taxes”. Under this method, deferred tax assets and liabilities are recognized fordetermined based on the future tax consequences attributable to differencesdifference between the financial statement carrying amountsreporting and tax bases 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 incomethat will be in effect in the yearsyear in which those temporarythe differences are expected to reverse. The Company records a valuation allowance to offset deferred tax assets if based on the weight of available evidence, it is more-likely-than-not that some portion, or all, of the deferred tax assets will not be recovered or settled.realized. The effect on deferred tax assets and liabilitiestaxes of a change in tax rates is recognized in operationsas income or loss in the period that includes the enactment date. A valuation allowance is required
The Company follows the accounting guidance for uncertainty in income taxes using the provisions of ASC 740 “Income Taxes”. Using that guidance, tax positions initially need to the extent any deferred tax assets may not be realizable. The differencerecognized in the expectedfinancial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. As of June 30, 2019, and December 31, 2018, the Company had no uncertain tax positions that qualify for either recognition or disclosure in the financial statements. The Company recognizes interest and penalties related to uncertain income tax benefitpositions in other expense. No interest and no benefitpenalties related to uncertain income tax positions were recorded for the three and ninesix months ended SeptemberJune 30, 20172019 and 2016 is due to an increase in the valuation allowance. 2018.
ZERO GRAVITY SOLUTIONS, INC. AND SUBSIDIARIESAdvertising Costs
Notes to Condensed Consolidated Financial Statements
SEPTEMBER 30, 2017
(Unaudited)Advertising costs are expensed as incurred. Advertising costs are included as a component of general and administrative expense in the consolidated statements of operations.
Recently Issued Accounting PronouncementsThe Company recognized $8,794 and $0 in marketing and advertising costs during the three months ended June 30, 2019 and 2018, respectively and $44,904 and $1,897 in marketing and advertising costs during the six months ended June 30, 2019 and 2018, respectively, which is included in general and administrative expense in the accompanying consolidated statements of operations.
In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers, which supersedes the revenue recognition guidance in Revenue Recognition (Topic 605), and requires entities to recognize revenue in a way that depicts the transfer of potential goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. This new standard, as amended, is now effective for annual reporting periods beginning after December 15, 2017, and interim reporting periods within that reporting period. 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. The implementation of this standard did not have a material impact on the Company’s consolidated financial statements. The Company's disclosures reflect the adoption of this new standard.
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. Leases
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- 022016-02 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 hasCompany’s adoption January 1, 2019 did not yet determinedhave a material impact on the effect of the standard on its ongoing reporting.
ZERO GRAVITY SOLUTIONS, INC. AND SUBSIDIARIESconsolidated financial statements.
NotesThe Company leases its office, building and laboratory space under separate short term leases (month-to-month) with no long term commitment. The Company has no capitalizable right of use assets or liabilities.
The Company incurred rent expense of $117,432 and $106,900 for the six months ended June 30, 2019 and 2018, respectively. These amounts are included as a component of general and administrative expenses.
Stock-Based Compensation
The Company recognizes the cost of employee services received in exchange for an award of equity instruments in the consolidated financial statements which 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 Condensed Consolidated Financial Statementsprovide 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 using the simplified method to determine the term.
SEPTEMBER
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 in the three and six months ended June 30,, 2017 2019 and 2018.
(Unaudited)
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 consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable.
In March 2016,June 2018, the 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 quarter 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 noCompany’s fiscal year beginning January 1, 2019. The implementation did not have a material impact.
NOTE 2 – EMPLOYEE STOCK-BASED COMPENSATION ADJUSTMENT TO PRIOR PERIOD RESULTS
In preparing the Company's December 31, 2016effect on its 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 interim period financial statements in accordance with the SEC's Staff Accounting Bulletin (SAB) No. 99, Materiality, codified 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, the Company has adjusted the quarter ended September 30, 2016 financial statements. There was no impact to total stockholders' equity or cash flows.
Three Months Ended September 30, 2016 | ||||||||||||
As Originally Reported | Adjustment | As Corrected | ||||||||||
General and administrative expenses | $ | 1,846,000 | $ | (263,000 | ) | $ | 1,583,000 | |||||
Loss from operations | $ | (1,965,000 | ) | $ | 263,000 | $ | (1,702,000 | ) | ||||
Net loss | $ | (1,986,000 | ) | $ | 263,000 | $ | (1,723,000 | ) | ||||
Basic and diluted earnings (loss) per share | $ | (0.05 | ) | $ | 0.01 | $ | (0.04 | ) | ||||
Nine months Ended September 30, 2016 | ||||||||||||
As Originally Reported | Adjustment | As Corrected | ||||||||||
General and administrative expenses | $ | 6,640,000 | $ | (1,604,000 | ) | $ | 5,036,000 | |||||
Loss from operations | $ | (6,956,000 | ) | $ | 1,604,000 | $ | (5,352,000 | ) | ||||
Net loss | $ | (7,114,000 | ) | $ | 1,604,000 | $ | (5,510,000 | ) | ||||
Basic and diluted earnings (loss) per share | $ | (0.18 | ) | $ | 0.04 | $ | (0.14 | ) | ||||
Basic and Diluted Earnings (Loss) per Share
Pursuant to ASC 260-10-45, basic earnings (loss) per common share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding for the periods presented. Diluted earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during the period.
Potentially dilutive common shares consist of common stock issuable for stock options and warrants (using the treasury stock method), convertible notes and common stock issuable.
The following potentially dilutive equity securities outstanding as of June 30, 2019 and 2018 were not included in the computation of diluted loss per common share because the effect would have been anti-dilutive:
June 30, 2019 | June 30, 2018 | |||||||
Convertible notes payable (exercise price $0.59 - $2/share) | 8,124,861 | 1,487,291 | ||||||
Warrants (exercisable - $0.50 - $6/share) | 19,603,785 | 12,145,665 | ||||||
Stock options (vested - $1.25 - $3/share) | 1,685,000 | 1,880,000 | ||||||
Total common stock equivalents | 29,413,646 | 15,512,956 | ||||||
Two of the convertible notes payable contain exercise prices that have a discount to market equal to 65% of the market price (See Note 4(D)). As a result, the amount computed for common stock equivalents could change given the quoted closing trading price at each reporting period.
Investments
We have an equity investment in a privately held entity. We account for investments either under the equity method or cost method of accounting depending on our ownership interest and the level of our influence in each joint venture. Investments accounted for under the equity method are recorded based upon the amount of our investment and adjusted each period for our share of the investee's income or loss. Cost method investments are recorded at cost less any impairments. All investments are reviewed for changes in circumstance or the occurrence of events that suggest an other than temporary event where our investment may not be recoverable. All investments were carried at a zero value as of June 30, 2019 and December 31, 2018 (See Note 5).
Recent Accounting Standards
Changes to accounting principles are established by the FASB in the form of ASU’s to the FASB’s Codification. We consider the applicability and impact of all ASU’s on our consolidated financial position, results of operations, stockholders’ deficit, cash flows, or presentation thereof.
Management has considered all recent accounting pronouncements and believes that these recent pronouncements will not have a material effect on the company’s financial statements.
NOTENote 3 – PROPERTY AND EQUIPMENTProperty and Equipment
Property and equipment are summarized as follows: consisted of the following:
September 30, 2017 | December 31, 2016 | |||||||
Computer equipment | $ | 15,332 | $ | 15,332 | ||||
Equipment and furniture | 132.929 | 123,517 | ||||||
Leasehold improvements | 7,593 | 7,593 | ||||||
| 155,854 | 146,442 | |||||||
Accumulated depreciation | (45,799 | ) | (27,385 | ) | ||||
Property and equipment - net | $ | 110,055 | $ | 119,057 | ||||
Estimated Useful | |||||||||||||
June 30, 2019 | December 31, 2018 | Lives (Years) | |||||||||||
Furniture and equipment | $ | 151,796 | $ | 151,796 | 3 | - | 10 | ||||||
Leasehold improvements | 7,593 | 7,593 | 10 | ||||||||||
| 159,389 | 159,389 | ||||||||||||
Accumulated depreciation | (85,983 | ) | (73,866 | ) | |||||||||
Total propery and equipment - net | $ | 73,406 | $ | 85,523 | |||||||||
Depreciation expense for the three-month periodsthree months ended SeptemberJune 30, 20172019 and 20162018 was $6,274$5,786 and $4,803,$6,190, respectively.
Depreciation expense for the nine-month periodssix months ended SeptemberJune 30, 20172019 and 20162018 was $18,414$12,117 and $11,441,$12,425, respectively.
Depreciation expense is recorded as a component of general and administrative expenses in the accompanying consolidated statements of operations.
Note 4 – Debt
The Company has various debt arrangements with third parties and related parties. The following represents a summary of the Company’s debt, key terms and outstanding balances at June 30, 2019 and December 31, 2018, respectively:
A. | Series A and B Convertible Notes Payable, Convertible Notes Payable – Related Parties and Warrants |
Series A and B Debt
In May 2019, the Company offered new convertible notes to its existing debt holders. Under the terms of the arrangement, all debt holders could exchange their outstanding debt and accrued and unpaid interest for new 10% Series A Secured Convertible Promissory Notes (“Series A Note”). The Company did not receive additional cash proceeds upon conversion of the existing debt into Series A Notes. The amount of existing debt and related accrued interest converted into Series A Notes was $6,029,275. The transaction was accounted for as a debt extinguishment and the Company recorded a loss on debt extinguishment of approximately $650,000. The loss on debt extinguishment has been included as a component of interest expense in the accompanying consolidated statements of operations. Upon conversion, Series A Note holders, at their option, could exchange up to fifty percent (50%) of their Series A Notes as partial consideration paid for a 12% Series B Secured Convertible Promissory Notes (“Series B Note”), by matching the amount of Series A Notes converted with an equal amount in cash.
In connection with the Series B round, the Company recognized gross proceeds of $3,062,427. The Company also paid related commissions totaling $99,645 (accounted for as a debt discount), resulting in net proceeds of $2,962,782.
Series A and B Warrants
In connection with the Series A and B rounds, debt holders also received fully vested, non-forfeitable warrants.
The Company issued a total of 9,499,600 warrants (See Note 6). Of the total, 3,045,600 were for Series A in exchange for the same quantity of existing warrants held by the debt holders related to the old debt with additional warrants being issued for the capitalized interest, and 6,454,000 were for newly issued Series B debt. Of the Series A warrants, 2,548,200 were issued to related parties, and of the of the Series B warrants, 5,421,400 were issued to related parties.
Under Series A and B, the warrants are exercisable for three (3) years, at $1/share through April 1, 2020, and then, for the Series B warrants, the exercise price is reduced to $0.50 for any warrants exercised after April 1, 2020. No such exercises have occurred either before of after April 1, 2020, in relation to Series A or B debt holders and their related warrants.
All relative fair values for warrants issued in connection with Series A and B are treated as a debt discount, computed based on a Black-Scholes option pricing model.
The inputs used to compute the fair value of the warrants of which the relative fair values are based were as follows:
| Exercise price | $ | 1 | ||
| Expected term (in years) | 3 | |||
| Expected volatility | 103 | % | ||
| Expected dividends | 0 | % | ||
| Risk free interest rate | 2.3 | % |
ZERO GRAVITY SOLUTIONS, INC. AND SUBSIDIARIESSeries A Debt Summary:
Series A, 10% | Series A, 10% | |||||||
Convertible Notes | Convertible Notes | |||||||
Terms | Related Parties | Third Parties | ||||||
Issuance dates of notes |
| May 2019 |
| May 2019 | ||||
Term (in years) | 3 | 3 | ||||||
Maturity dates |
| May 2022 |
| May 2022 | ||||
Interest rate | 10% | 10% | ||||||
| Collateral (Series A is subordinated to Series B) | All assets | All assets | ||||||
Conversion price | $2 | $2 | ||||||
Prepayment penalty (P&I) |
| None |
| None | ||||
Note Date | May 2019 | May 2019 | Total | |||||||||
Principal | $ | 2,548,200 | $ | 621,300 | $ | 3,169,500 | ||||||
Quantity of warrants | 2,548,200 | 497,400 | 3,045,600 | |||||||||
Warrants/Fees - debt discount (Black-Scholes) | $ | 1,510,487 | $ | 298,561 | $ | 1,809,048 | ||||||
Balance - December 31, 2018 | $ | - | $ | - | $ | - | ||||||
Conversion from prior debt into Series A | 4,889,001 | 850,000 | 5,739,001 | |||||||||
Conversion of accrued interest into Series A | 127,480 | 162,794 | 290,274 | |||||||||
Conversion of deferred revenue into Series A | 206,800 | - | 206,800 | |||||||||
Conversion from Series A into Series B | (2,675,079 | ) | (391,494 | ) | (3,066,573 | ) | ||||||
Warrant debt discount recorded for new notes | (1,510,487 | ) | (298,561 | ) | (1,809,048 | ) | ||||||
Amortization of debt discount | 78,869 | 16,373 | 95,242 | |||||||||
Balance - June 30, 2019 | $ | 1,116,584 | $ | 339,112 | $ | 1,455,696 | ||||||
Series B Debt Summary:
Series B, 12% | Series B, 12% | |||||||
Convertible Notes | Convertible Notes | |||||||
Terms | Related Parties | Third Parties | ||||||
Issuance dates of notes |
| May 2019 |
| May 2019 | ||||
Term (in years) | 3 | 3 | ||||||
Maturity dates |
| May 2022 |
| May 2022 | ||||
Interest rate | 12% | 12% | ||||||
Collateral (Series A is subordinated to Series B) |
| All assets |
| All assets | ||||
Conversion price | $1 | $1 | ||||||
Prepayment penalty (P&I) |
| None |
| None | ||||
Note Date | May 2019 | May 2019 | Total | |||||||||
Principal | $ | 5,096,400 | $ | 1,032,600 | $ | 6,129,000 | ||||||
Quantity of warrants | 5,421,400 | 1,032,600 | 6,454,000 | |||||||||
Warrants/Fees - debt discount (Black-Scholes) | $ | 3,184,793 | $ | 645,289 | $ | 3,830,082 | ||||||
Balance - December 31, 2018 | $ | - | $ | - | $ | - | ||||||
Proceeds | 2,299,927 | 762,500 | 3,062,427 | |||||||||
Conversion from Series A into Series B | 2,796,473 | 270,100 | 3,066,573 | |||||||||
Warrant and BCF debt discount recorded for new notes | (5,096,400 | ) | (1,032,600 | ) | (6,129,000 | ) | ||||||
Amortization of debt discount | 266,104 | 56,013 | 322,117 | |||||||||
Balance - June 30, 2019 | $ | 266,104 | $ | 56,013 | $ | 322,117 | ||||||
B. | Notes Payable |
Terms | Note Payable | Note Payable | Note Payable | ||||||
Issuance dates of notes |
| December 2017 |
| January 2018 | March 2019 | ||||
Term (in years) | 2 | 2 | None | ||||||
Maturity dates |
| December 2019 |
| January 2020 | Due on Demand | ||||
Interest rate | 10% | 10 | None | ||||||
Collateral |
| Unsecured |
| Unsecured | Unsecured | ||||
Note Date | December 2017 | January 2018 | March 2019 | Total | ||||||||||||
Principal | $ | 200,000 | $ | 100,000 | $ | 100,000 | $ | 400,000 | ||||||||
Quantity of warrants | 50,000 | 10,000 | - | 60,000 | ||||||||||||
Warrants/Fees - debt discount (Black-Scholes) | $ | 18,652 | $ | 7,124 | $ | - | $ | 25,776 | ||||||||
Balance - December 31, 2017 | $ | 181,348 | $ | - | $ | - | $ | 181,348 | ||||||||
Proceeds | - | 100,000 | - | 100,000 | ||||||||||||
Debt discount recorded for new notes | - | (7,124 | ) | - | (7,124 | ) | ||||||||||
Amortization of debt discount | 9,760 | 3,387 | - | 13,147 | ||||||||||||
Balance - December 31, 2018 | 191,108 | 96,263 | - | 287,371 | ||||||||||||
Proceeds | - | - | 50,000 | 50,000 | ||||||||||||
Repayments | - | - | (50,000 | ) | (50,000 | ) | ||||||||||
Amortization of debt discount | 8,892 | 3,737 | - | 12,629 | ||||||||||||
Conversion to Series A, 10%, convertible notes payable | (200,000 | ) | (100,000 | ) | - | (300,000 | ) | |||||||||
Balance - June 30, 2019 | $ | - | $ | - | $ | - | $ | - | ||||||||
C. | Notes Payable – Related Parties |
Notes Payable | Notes Payable | Notes Payable | ||||||||||||||
Terms | Related Parties | Related Parties | Related Parties | |||||||||||||
Issuance dates notes |
| August 2017 | - | October 2017 |
| January 2018 | - | May 2018 | April 2019 | |||||||
Term (in years) | 2 | 2 | None | |||||||||||||
Maturity dates |
| July 2020 |
| March 2018 | - | May 2020 | Due on Demand | |||||||||
Interest rate | 10% | % | 10% | None | ||||||||||||
Collateral |
| Unsecured |
| Unsecured | Unsecured | |||||||||||
Note Date | August 2017 - October 2017 | January 2018 - May 2018 | April 2019 | Total | ||||||||||||
Principal | $ | 1,100,000 | $ | 1,300,001 | $ | 789,000 | $ | 3,189,001 | ||||||||
Quantity of warrants | 110,000 | 75,000 | 325,000 | 510,000 | ||||||||||||
Warrants/Fees - debt discount (Black-Scholes) | $ | 112,830 | $ | 125,433 | $ | 185,629 | $ | 423,892 | ||||||||
Balance - December 31, 2017 | $ | 1,002,204 | $ | - | $ | - | $ | 1,002,204 | ||||||||
Proceeds | - | 1,300,001 | - | 1,300,001 | ||||||||||||
Debt discount recorded for new notes | - | (125,433 | ) | - | (125,433 | ) | ||||||||||
Amortization of debt discount | 56,417 | 69,053 | - | 125,470 | ||||||||||||
Repayments | (300,000 | ) | - | (300,000 | ) | |||||||||||
Balance - December 31, 2018 | 1,058,621 | 943,621 | - | 2,002,242 | ||||||||||||
Proceeds | - | - | 789,000 | 789,000 | ||||||||||||
Warrant debt discount recorded for new notes | - | - | (185,629 | ) | (185,629 | ) | ||||||||||
Amortization of debt discount | 40,593 | 56,380 | 185,629 | 282,602 | ||||||||||||
Conversion to Series A, 10%, convertible notes payable | (1,000,000 | ) | (1,000,001 | ) | (789,000 | ) | (2,789,001 | ) | ||||||||
Balance - June 30, 2019 | $ | 99,214 | * | $ | - | $ | - | $ | 99,214 | |||||||
* Amount was repaid in August 2019. |
D. | Convertible Notes Payable and Derivative Liability |
Convertible | Convertible Note | Convertible Note | ||||||||||
Terms | Notes | (Derivative Liability) | (Derivative Liability) | |||||||||
Issuance dates of notes | July 2018 | December 2018 | January 2019 | |||||||||
Term | 2 years | 9 months | 8 months | |||||||||
Maturity dates | July 2020 | September 2019 | September 2019 | |||||||||
Interest rate | 10% | 8% | 8% | |||||||||
Collateral | Unsecured | Unsecured | Unsecured | |||||||||
Conversion price | $3 | Lower of $3 or 65% of market price | Lower of $3 or 65% of market price | |||||||||
Note Date | July 2018 | December 2018 | January 2019 | Total | ||||||||||||
Principal | $ | 550,000 | $ | 136,000 | $ | 104,500 | $ | 790,500 | ||||||||
Quantity of warrants | 550,000 | 100,000 | 100,000 | 750,000 | ||||||||||||
Warrants/Fees - debt discount (Black-Scholes) | $ | 244,549 | $ | 136,000 | $ | 94,500 | $ | 475,049 | ||||||||
Balance - December 31, 2017 | $ | - | $ | - | $ | - | $ | - | ||||||||
Proceeds | 550,000 | 136,000 | - | 686,000 | ||||||||||||
Debt discount recorded for new notes | (244,549 | ) | (136,000 | ) | - | (380,549 | ) | |||||||||
Amortization of debt discount | 51,343 | 8,947 | - | 60,290 | ||||||||||||
Balance - December 31, 2018 | 356,794 | 8,947 | - | 365,741 | ||||||||||||
Proceeds | - | - | 94,500 | 94,500 | ||||||||||||
Debt discount recorded for new notes | - | - | (94,500 | ) | (94,500 | ) | ||||||||||
Amortization of debt discount | 193,206 | 85,856 | 56,700 | 335,762 | ||||||||||||
Conversion to Series A, 10%, convertible notes payable | (550,000 | ) | - | - | (550,000 | ) | ||||||||||
Balance - June 30, 2019 | $ | - | $ | 94,803 | * | $ | 56,700 | ** | $ | 151,503 | ||||||
Penalty classified as additional interest expense | $ | - | $ | - | $ | 10,000 | $ | 10,000 | ||||||||
* Amount was repaid in September 2019. | ||||||||||||||||
** Amount was repaid in October 2019. |
Derivative Liability
NotesThe above convertible notes for December 2018 and January 2019 contained an embedded conversion option with a conversion price that could result in issuing an undeterminable amount of future shares. Accordingly, the embedded conversion option is required to Condensedbe bifurcated from the host instrument (convertible note) and treated as liabilities, which are calculated at fair value, and marked to market at each reporting period.
The Company used the Monte Carlo simulation to estimate the fair value of its embedded conversion option liabilities with the following inputs:
Commitment Date | Remeasurement Date | Remeasurement Date | ||||||||||
Convertible Note Date | December 11, 2018 | December 31, 2018 | June 30, 2019 | |||||||||
Maturity date | August 11, 2019 | August 11, 2019 | August 11, 2019 | |||||||||
Expected term (years) | 0.67 | 0.61 | 0.12 | |||||||||
Expected volatility | 117 | % | 149 | % | 138 | % | ||||||
Expected dividends | 0 | % | 0 | % | 0 | % | ||||||
Risk free interest rate | 2.56 | % | 2.63 | % | 2.18 | % | ||||||
Fair value | $ | 125,000 | $ | 114,000 | $ | 126,000 | ||||||
Commitment Date | Remeasurement Date | |||||||
Convertible Note Date | January 14, 2019 | June 30, 2019 | ||||||
Maturity date | October 14, 2019 | October 14, 2019 | ||||||
Expected term (years) | 0.75 | 0.29 | ||||||
Expected volatility | 130 | % | 150 | % | ||||
Expected dividends | 0 | % | 0 | % | ||||
Risk free interest rate | 2.55 | % | 2.12 | % | ||||
Fair value | $ | 89,000 | $ | 90,000 | ||||
The following is a summary of the Company’s derivative liabilities for the six months ended June 30, 2019 and the year ended December 31, 2018:
Convertible Note Date | December 11, 2018 | January 14, 2019 | Total | |||||||||
Derivative liability - December 31, 2017 | $ | - | $ | - | $ | - | ||||||
Fair value at commitment date | 125,000 | - | 125,000 | |||||||||
Fair value mark to market adjustment | (11,000 | ) | - | (11,000 | ) | |||||||
Derivative liability - December 31, 2018 | 114,000 | - | 114,000 | |||||||||
Fair value at commitment date | - | 89,000 | 89,000 | |||||||||
Fair value mark to market adjustment | 12,000 | 1,000 | 13,000 | |||||||||
Derivative liability - June 30, 2019 | $ | 126,000 | $ | 90,000 | $ | 216,000 | ||||||
The Company evaluates its financial assets and liabilities subject to fair value measurements on a recurring basis to determine the appropriate level in which to classify them for each reporting period. This determination requires significant judgments to be made. Liabilities measured at fair value on a recurring basis consisted of the following at June 30, 2019 and December 31, 2018:
Quoted Prices in | Significant Other | Significant | ||||||||||||||
Active Markets for | Observable | Unobservable | ||||||||||||||
Identical Assets | Inputs | Inputs | ||||||||||||||
June 30, 2019 | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Derivative liabilities | $ | 216,000 | $ | - | $ | - | $ | 216,000 | ||||||||
Quoted Prices in | Significant Other | Significant | ||||||||||||||
Active Markets for | Observable | Unobservable | ||||||||||||||
Identical Assets | Inputs | Inputs | ||||||||||||||
December 31, 2018 | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Derivative liabilities | $ | 114,000 | $ | - | $ | - | $ | 114,000 | ||||||||
A reconciliation of the beginning and ending balances for the derivative liability measured at fair value on a recurring basis using significant unobservable inputs (Level 3) is noted above for the six months ended June 30, 2019 and the year ended December 31, 2018.
Changes in fair value of derivative liabilities are included in other income (expense) in the accompanying Consolidated Financial Statements of Operations.
SEPTEMBER 30, 2017
E. | Convertible Notes Payable – Related Parties |
Convertible | Convertible | |||||||||
Note Payable | Notes Payable | |||||||||
Terms | Related Party | Related Parties | ||||||||
Issuance dates of notes |
| July 2015 |
| June 2018 | - | December 2018 | ||||
Term (in years) | 2 | 2 | ||||||||
Maturity dates |
| July 2019 |
| June 2020 | - | December 2020 | ||||
Interest rate | 8.5% | 10% | - | 12% | ||||||
Collateral |
| Unsecured |
| Unsecured | ||||||
Conversion price | $1.25 | $3 | ||||||||
Note Date | July 2015 | June 2018 - December 2018 | Total | |||||||||
Principal | $ | 500,000 | $ | 1,600,000 | $ | 2,100,000 | ||||||
Quantity of warrants | 350,000 | 1,500,000 | 1,850,000 | |||||||||
Warrants/Fees - debt discount (Black-Scholes) | $ | 227,258 | $ | 666,638 | $ | 893,896 | ||||||
Balance - December 31, 2017 | $ | 500,000 | $ | - | $ | 500,000 | ||||||
Proceeds | - | 1,600,000 | 1,600,000 | |||||||||
Debt discount recorded for new notes | - | (666,638 | ) | (666,638 | ) | |||||||
Amortization of debt discount | - | 165,287 | 165,287 | |||||||||
Balance - December 31, 2018 | 500,000 | 1,098,649 | 1,598,649 | |||||||||
Amortization of debt discount | - | 501,351 | 501,351 | |||||||||
Conversion to Series A, 10%, convertible notes payable | (500,000 | ) | (1,600,000 | ) | (2,100,000 | ) | ||||||
Balance - June 30, 2019 | $ | - | $ | - | $ | - | ||||||
| F. | Insurance Financing Liability |
The Company has an outstanding note payable for financing corporate insurance premiums. The note carries a rate of interest of 8.75% and is due in November 2019. The note calls for eleven payments of $21,254. The balance at June 30, 2019 and December 31, 2018 was $105,025 and $223,482, respectively.
(Unaudited)Note 5 – Commitments and Contingencies
NOTE 4 – RELATED PARTY TRANSACTIONSLicense and Business Development Agreement
Notes PayableOn February 20, 2018, BAM and Pedro Lichtinger Waisman, Isaac Lichtinger Waisman and Victor Lichtinger Waisman (together 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 formed a company in Mexico, Agro Space Tech SA de CV de RV (“Agro Space”), to which BAM was allocated 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.
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 sole 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.
In July 2015, a Director advancedaddition to BAM receiving an ownership interest in Agro Space, the Company $500,000. Interest at a ratereceived $100,000 from the Lichtinger Group following the execution of 8.5% is payable quarterly, and the note was originally due in July 2016. In connection with the note, the Company issued five-year warrantsAgreement, to purchase 350,000 shares of the Company’s common stock at an exercise price of $3 per share. 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 modificationpursuant 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 was recorded as interest expense, respectively, and $10,625 is included in accounts payable at September 30, 2017. In July 2017, the maturity dateCompany’s 2016 private offering of the note was extended to July 2018, the other terms of this note including the conversion feature remain the same.
In August 2017, the Company issued an unsecured promissory note to its in-house corporate council 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 repaid 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’sits common stock at an exercise price offor $3.00 per share. The relative fair value ofAgreement further provides that Agro Space will pay to BAM up to $900,000, in the debtaggregate, upon reaching specified milestones based on completing government/academic trials and warrants was recorded resulting in debt discount of $10,435 upon execution of the promissory note. For the three and nine months ended September 30, 2017, accretion of the debt discount was $529. The accretion of debt discount is presented in other expenses on the statements of operations.revenue hurdles.
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 repaid 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 resulting in a debt discount of $52,166 upon execution of the promissory note. For the three and nine months ended September 30, 2017, accretion of the debt discount was $2,144. The accretion of debt discount is presented in other expenses on the statements of operations.
The quarterly accrued interest payment for the June quarter end was not paid timely on the July 2015 note to a Director. The Director has waived the provision of the agreement in regards to default, and the interest payments have been made and brought current.
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 a minimum monthly payment of $2,500 to be offset against future royalty obligations of the Company. In addition, certain other costs the Company incurred 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 the royalty agreement were $4,355 and $16,174 for the three-month periods ended September 30, 2017 and 2016, respectively, and $65,545 and $36,488 for the nine months ended September 30, 2017 and September 30, 2016, respectively. As of September 30, 2017, and December 31, 2016, $311,950 and $277,038 of prepaid royalties, respectively, are available to be offset against future royalty obligations.
Exercise of Warrants
On March 1, 2017, the Company entered into an agreement with a member of its Board of Directors whereby 350,000 previously issued warrants were exercised in exchange for the issuance 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
An obligation of $75,000 is payable to a former Director for past consulting services. This obligation is unsecured and non-interest bearing and is included in accounts payable at September 30, 2017 and December 31, 2016, respectively.
ZERO GRAVITY SOLUTIONS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
SEPTEMBER 30, 2017
(Unaudited)
NOTE 5 – COMMITMENTS
Lease Commitments
The Company leases its offices and building 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 and $19,097 for the three months ended September 30, 2017 and 2016, respectively. Lease expense was $46,626 and $37,433 for the nine months ended September 30, 2017 and 2016, respectively.
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-monthsthree and six month ended SeptemberJune 30, 20172019 and 2016, $02018, there have been no amounts expensed to research and $94,205 respectively, weredevelopment expense pursuant to the SAA.
NOTE 6 – STOCKHOLDERS’ DEFICIT
Equity Transactions for the Six Months Ended June 30, 2019
Stock Issued for Services
The Company issued 70,000 shares of common stock for services rendered, having a fair value of $124,950 ($1.78 - $1.80/share), based upon the quoted closing trading price of the Company’s common stock, which was expensed underduring the agreement. For the ninesix months ended SeptemberJune 30, 2017 and 2016, $29,610 and $249,934 respectively, were expensed under2019.
Stock Issued Upon Cashless Exercise of Warrants
The Company issued 306,195 shares of common stock upon the agreement.cashless exercise of 475,500 warrants. The transaction was accounted for at par value $306 ($0.001/share) with a net effect on equity of $0.
ZERO GRAVITY SOLUTIONS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
SEPTEMBER 30, 2017
(Unaudited)Stock Issued for Loan Costs
NOTE 6 – NOTE PAYABLEIn March 2019, a shareholder loaned the Company $50,000. The loan was non-interest bearing, unsecured and due on demand. The loan was repaid in April 2019. As consideration for the loan, the Company paid 2,000 shares of common stock, having a fair value of $3,608 ($1.80/share). Fair value is based upon the quoted closing trading price of the Company’s common stock.
Cancellation and Return of Shares from Former Related Party
In April 2019, the Company entered into an agreement with its former Chief Science Officer and former Board Director, whereby the Company would assign certain intellectual property (expensed in prior years, and which the Company no longer intended to pursue) in exchange for the return of 2,000,000 shares of common stock. The transaction was accounted for at par value $2,000 ($0.001/share) with a net effect on equity of $0.
Warrants Issued for Services
The Company had an outstanding note payable from financing corporate insurance premiums.granted warrants to purchase 105,000 common shares for services rendered, having a fair value of $138,812, which were expensed during the six months ended June 30, 2019. Fair value is based upon the use of a Black-Scholes option pricing model. Inputs used ranged as follows:
Exercise price | $3/share | ||||
Expected term (in years) | 3 | - | 5 | ||
Expected volatility | 102% | - | 103% | ||
Expected dividends | 0% | ||||
Risk free interest rate | 1.76% | - | 2.49% |
Warrant activity for the Six Months Ended June 30, 2019 and the Year Ended December 31, 2018 are summarized as follows:
Weighted | ||||||||||||||||
Average | ||||||||||||||||
Weighted | Remaining | Aggregate | ||||||||||||||
Number of | Average | Contractual | Intrinsic | |||||||||||||
Warrants | Warrants | Exercise Price | Term (Years) | Value | ||||||||||||
Outstanding and exercisable - December 31, 2017 | 10,738,595 | $ | 1.86 | 2.81 | $ | 23,947,175 | ||||||||||
Granted | 2,732,490 | 1.46 | ||||||||||||||
Exercised | (718,400 | ) | 0.50 | |||||||||||||
Cancelled/Forfeited | - | - | ||||||||||||||
Outstanding and exercisable - December 31, 2018 | 12,752,685 | $ | 1.85 | 2.02 | $ | 4,613,125 | ||||||||||
Outstanding and exercisable - December 31, 2018 | 12,752,685 | $ | 1.85 | 2.02 | $ | 4,613,125 | ||||||||||
Granted | 9,704,600 | 1.03 | ||||||||||||||
Exercised | (475,500 | ) | 0.50 | |||||||||||||
Cancelled/Forfeited | (2,378,000 | ) | 1.16 | |||||||||||||
Outstanding and exercisable - June 30, 2019 | 19,603,785 | $ | 1.56 | 2.34 | $ | 686,800 | ||||||||||
Of the total 9,704,600 warrants granted during the six months ended June 30, 2019; 9,499,600 warrants were issued with the Series A and B Debt Financings; all of these warrants were treated as a debt discount (See Note 4(A)). The note carried a rate of interest of 6.5%remaining 205,000 warrants were issued with debt (100,000 – see Note 4(D)) and was fully paid during September 2017.for services rendered (105,000 – see above).
NOTE 7 – EQUITY
Common Stock
Private placement offerings Options Issued for Services
During the nine months ended September 30, 2017, the Company issued 659,333 shares of common stock pursuant to its October 2016 private offering for $3.00 per share. Proceeds from the offering were $1,977,999 with offering costs of $138,800. In connection with the offering, the Company issued fully vested, non-forfeitable warrants to purchase up to 44,916 common shares with an exercise price of $3.00 per common share to the placement agent. These warrants are included in additional paid in capital as non-cash offering costs of $52,762.
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 30, 2017
(Unaudited)
The following is a summary of the Company’s warrant activity for the nine months ended September 30, 2017:
Weighted | ||||||||||||||||
Remaining | ||||||||||||||||
Number of | Weighted Average | Contractual | Aggregate | |||||||||||||
Warrants | Exercise Price | (in Years) | Value | |||||||||||||
Outstanding – January 1, 2017 | 9,664,733 | $ | 1.44 | 3.5 | $ | 2,606,698 | ||||||||||
Granted | 599,916 | 3.00 | ||||||||||||||
Granted | 790,000 | 4.50 | ||||||||||||||
Exercised | (790,000 | ) | (1.50 | ) | ||||||||||||
Cancelled/Forfeited | - | - | ||||||||||||||
Outstanding and exercisable - September 30, 2017 | 10,264,649 | $ | 2.97 | 3.0 | $ | 2,861,010 | ||||||||||
The aggregate intrinsic value in the table above represents the total intrinsic value (the difference between the estimated stock price on September 30, 2017 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.
Stock incentive plan options
In November 2015, the Company adopted itsthe Company’s 2015 Equity Incentive Plan.Plan (the “Plan"). The Plan provides stock based compensation to employees, directors, and consultants, as more fully described in the Plan.consultants. The Company has reserved 4,000,000 shares under the Plan. During the nine months ended September 30, 2017, the Company granted options to purchase up to 60,000 shares of common stock to employees and officers. The estimated fair value of $70,411 was based upon the following management assumptions: expected dividends of $0, volatility of 148.4%, risk-free interest rates of 1.89%-1.93%, and expected life of the options of 5 years.
Weighted | ||||||||||||||||
Remaining | ||||||||||||||||
Number of | Weighted Average | Contractual | Aggregate | |||||||||||||
Options | Exercise Price | (in Years) | Value | |||||||||||||
Outstanding – January 1, 2017 | 2,755,000 | $ | 1.25 | 8.7 | $ | 192,850 | ||||||||||
Granted | 60,000 | 3.00 | ||||||||||||||
Exercised | - | - | ||||||||||||||
Cancelled/Forfeited | - | - | ||||||||||||||
Outstanding - September 30, 2017 | 2,815,000 | $ | 1.29 | 9.5 | $ | 412,500 | ||||||||||
Exercisable - September 30, 2017 | 2,752,500 | $ | 1.22 | 9.4 | $ | 412,500 | ||||||||||
ZERO GRAVITY SOLUTIONS, INC. AND SUBSIDIARIESIn May 2019, the Company issued 100,000 options for services to be rendered. The options vest after one (1) year of service. The options have a grant date fair value of $84,244, based upon the use of a Black-Scholes option pricing model. Inputs used were as follows:
Exercise price | $3/share | |||
Expected term (in years) | 5 | |||
Expected volatility | 103 | % | ||
Expected dividends | 0 | % | ||
Risk free interest rate | 1.93 | % |
The Company recognized compensation expense of $7,020 in connection with the options granted in 2019 and an additional $2,597 related to the vesting of prior year stock option grants for total stock based compensation of $9,617 recognized in 2019.
NotesStock option transactions under the Company’s plans as of June 30, 2019 and the year ended December 31, 2018 are summarized as follows:
Weighted | Weighted | |||||||||||||||||||
Average | Average | |||||||||||||||||||
Weighted | Remaining | Aggregate | Grant | |||||||||||||||||
Number of | Average | Contractual | Intrinsic | Date | ||||||||||||||||
Stock Options | Options | Exercise Price | Term (Years) | Value | Fair Value | |||||||||||||||
Outstanding - December 31, 2017 | 3,165,000 | $ | 1.49 | 8.50 | $ | 192,850 | $ | - | ||||||||||||
Exercisable - December 31, 2017 | 2,750,000 | $ | 1.27 | 8.20 | $ | 192,850 | $ | - | ||||||||||||
Granted | 50,000 | $ | 3.00 | $ | 0.77 | |||||||||||||||
Exercised | - | $ | - | |||||||||||||||||
Cancelled/Forfeited | (1,630,000 | ) | $ | - | ||||||||||||||||
Outstanding - December 31, 2018 | 1,585,000 | $ | 1.70 | 7.63 | $ | 587,500 | ||||||||||||||
Vested and Exercisable - December 31, 2018 | 1,535,000 | $ | 1.66 | 7.58 | $ | 587,500 | ||||||||||||||
Unvested and non-exercisable - December 31, 2018 | 50,000 | $ | 3.00 | 9.23 | $ | - | ||||||||||||||
Outstanding - December 31, 2018 | 1,585,000 | $ | 1.70 | 7.63 | $ | 587,500 | ||||||||||||||
Vested and Exercisable - December 31, 2018 | 1,535,000 | $ | 1.66 | 7.58 | $ | 587,500 | ||||||||||||||
Unvested and non-exercisable - December 31, 2018 | 50,000 | $ | 3.00 | 9.23 | $ | - | ||||||||||||||
Granted | 100,000 | $ | 3.00 | $ | 0.84 | |||||||||||||||
Exercised | - | $ | - | |||||||||||||||||
Cancelled/Forfeited | - | $ | - | |||||||||||||||||
Outstanding - June 30, 2019 | 1,685,000 | $ | 1.78 | 7.30 | $ | - | $ | - | ||||||||||||
Vested and Exercisable - June 30, 2019 | 1,593,333 | $ | 1.71 | 7.15 | $ | - | $ | - | ||||||||||||
Unvested and non-exercisable - June 30, 2019 | 91,667 | $ | 3.00 | 9.92 | $ | - | $ | - | ||||||||||||
Compensation expense recorded for stock-based compensation for the Six Months Ended June 30, 2019 and 2018 is as follows:
2019 | 2018 | |||||
| $ | 9,617 | $ | 146,277 | |||
As of June 30, 2019, compensation cost related to Condensed Consolidated Financial Statementsthe unvested options not yet recognized was as follows:
SEPTEMBER 30, 2017
| $ | 77,224 | ||||
Weighted average period in which compensation will vest (years) | 0.84 | (Expected to be recognized through May 2020) |
(Unaudited)
NOTE 8 –7 - SUBSEQUENT EVENTS
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,2019, the Company issued fully vested, non-forfeitable warrants to purchase 7,000120,000 common shares withat an exercise price of $3.00 per common share to the placement agent.employees for services.
On OctoberSubsequent to June 30, 2017,2019, 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 warrantfully vested, non-forfeitable warrants to purchase up358,500 common shares at exercise prices of $1.50 to 50,000 shares$3.00 per common share to consultants for services. The term of the Company’s common stock (the “Warrant”). The Note issuedwarrants ranges from one 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.five years.
Additionally,Subsequent to June 30, 2019, the Company issued 10 year stock incentive plan options to Rio Vista a five-year Warrantemployees to purchase up to 50,000190,000 shares of the Company’s common stock, of which 40,000 options were issued at an exercise price of $3.00$2.00 per common share and 150,000 options were issued at an exercise price of $1.50 per common share.
Mr. Alexander Boies,Subsequent to June 30, 2019, the Company issued 262,500 shares of common stock to consultants for services.
Subsequent to June 30, 2019, certain consultants and former employees exercised 263,000 warrants in a membercashless exercise resulting in the issuance of 146,248 shares of the Company’s board of directors, is a beneficiary of certain trusts that own Rio Vista.
common stock.
|
Subsequent to June 30, 2019, the Company paid $100,000 of related party notes payable and $230,500 of convertible notes payable.
During October 2019, the Company commenced an offering up to $5,000,000 of 10%, Series C Convertible Secured Promissory Notes (the “Series C Notes”) with an initial closing date of December 31, 2019, which was extended for an additional ninety day period. The Series C Notes bear interest at a ten percent (10%) annual rate, payable quarterly in arrears, with the first interest payment due January 15, 2020 and subsequent interest payments due on the fifteenth (15th) day after the end of each calendar quarter thereafter. Interest will be paid in shares of the Company’s common stock at $2.00 per share. The Series C Notes mature 2 years from the closing date. The Series C Notes are convertible into the Company’s common stock at $2.00 per share.
Commencing on the one (1) year anniversary of the issuance of the Series C Notes and ending eleven (11) months thereafter (i.e. one month prior to the Maturity Date), the Company may at any time upon thirty (30) days prior written notice repurchase any or all outstanding Series C Notes without penalty or premium, provided that the holder may convert the Series C Note prior to the end of the 30 day written notice by the Company of its intent to repurchase the Series C Notes, Notice Period.
The Series C Notes are secured by all assets of the Company and its subsidiaries and are subordinate to the security interest granted to holders of the Series A Notes and Series B Notes previously issued by the Company. The Series C Notes are subject to certain covenants and other provisions customary for a transaction of this nature. The Company received $300,000 in proceeds pursuant to the issuance of these Series C Notes and incurred no broker fees.
During the first quarter of 2020, the Company furloughed all employees with the exception of three executive officers. During the second quarter of 2020, the Company began to remove from furlough certain employees that are key to the Company’s operations. The Company incurred payroll liabilities to employees during the first quarter of 2020, of which approximately $190,000 currently remains unpaid.
On May 12, 2020, the Company executed a Payroll Protection Program Term Note, herein referred to as the PPP Note, and received proceeds of $278,800. The PPP Note was issued pursuant to the Coronavirus Aid, Relief, and Economic Securities Act’s, the CARE’s Act, Paycheck Protection Program. All or a portion of the PPP Note is eligible to be forgiven if all eligible employee retention criteria are met and the funds are used for eligible purposes. The Company has not determined an amount eligible for forgiveness. The PPP Note bears interest at 1% based on a 360 day calendar year and is due two years from date of issuance with repayment scheduled monthly beginning in the seventh month following the date of issuance.
Subsequent to June 30, 2019, the Company commenced an additional exchange offering of its 10% Series A Convertible Secured Promissory Notes whereby the Noteholders could elect to exchange their existing Series A Notes plus accrued and unpaid interest at the date of exchange for 12% Series B Convertible Secured Promissory Notes by agreeing to an additional investment equal to the amount of Series A Notes exchanged. The Series B Notes have a three-year term and include a conversion option whereby the Noteholder has the option to convert unpaid principal and interest into the Company’s common stock at $1.00 per share. The Company received gross proceeds of $1,240,430 during the period June – August 2020 and paid broker fees of $41,617.
On August 5, 2020, the Company received $18,200 pursuant to a thirty year unsecured promissory note through the U.S. Small Business Administration’s Disaster Assistance Program. The note bears interest of 3.75% per annum with repayment beginning in the twelfth month following the date of the note.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of OperationS
Overview
Zero Gravity Solutions, Inc., a Nevada corporation (the “Company” or “ZGSI”), is aan agricultural-based biotechnology company focused on commercializing technology derived from, and designed for, long term spaceflight and planetary colonization with significant applications to agriculture on Earth. These technologies can improveearth. The Company’s technology is focused on improving world agriculture by providing valuable solutions to challenges facing humanity, including climate change stress and soil degradation threats to world agricultureagricultural production and the abilityincreasing inability to feed the world’s rapidly growing population. The Company’s business model includes twois focused on its primary business segments: 1) BAM-FX™technology, BAM-FX®, which is a cost effective, ionic nutrient delivery platform and stimulant for plants that can deliverpromotes the delivery of minerals and micronutrients systemically at the cellular level of a plant; and 2) Directed Selection™, which relates to the production and alteration of new varieties of novel stem cells with unique and beneficial characteristics in the prolonged zero/micro gravity environment of the ISS. These novel stem cells, if developed, could be patented for commercial sale to third parties in the agricultural and human regenerative medical markets.systemically. ZGSI is headquartered in Boca Raton, Florida.
Our business activities are separated between two primary wholly owned subsidiaries.conducted by our wholly-owned subsidiary, BAM Agricultural Solutions, Inc. (“BAM”), and our 98% owned subsidiary, Specialty Agricultural Solutions, Inc. (“SASI”). BAM Inc.”)oversees productBAM-FX®’s commercial introduction and business development through in-fieldproduct trials and validation tests with crop growers and channel partners, product analysis through academic institutions and NASA,distributors that have established business networks in agricultural markets, manufacturing, and sale ofsales and agronomy supportsupport. In addition, BAM manages the introduction of Gardener’s Choice®, a ready to use product for our BAM-FX™ product.the home and garden retail markets. Gardener’s Choice® has been registered for sale in all domestic states. SASI, which was incorporated in 2018, supports introducing a commercial product for sale to legal cannabis and hemp grow operations. Another subsidiary of the Company, Zero Gravity Life Sciences Inc. (“ZGLS”) is responsible, was originally formed for any space research projects, and life science applications of our technology. We believe that the separation of these functionstechnology and the corresponding allocation of management by expertise will enable us to improve our performance and provide focusconducting research on our different business activities.future BAM product lines. ZGLS is currently inactive.
The Company is focused on near-term revenue generation through the introductionsale of the Company’s first commercial product, BAM-FX™, toBAM-FX® in domestic and international agricultural markets. BAM-FX™, an ionic micro-nutrient delivery platform,BAM-FX® is licensed in and registered for sale as a fertilizer application with thirty-two (32)in all fifty (50) domestic states and has been approved for import and commercial sales in Chile, Paraguay, Colombia, Brazil, and Paraguay. Commercial sales operations commenced in Chile during the first quarter of 2017 and commenced in Paraguay during the third quarter of 2017.
During the third quarter of 2017, the Company continued its 2016 product marketing approach of developing channel partners, or distributors, for product distribution and leveraging their existing sales and marketing networks. In addition to working with channel partners’ growers, we continue to expand our introduction of BAM-FX™ to first-time growers through field validation domestically, whereby specific expected crop results were identified at the inception of the validation process and upon achieving the expected result, a grower would agree to purchase the product. These validation trials are part of our business development effort and are expected to create BAM-FX™ brand name recognition while potentially providing pull through business for current and prospective channel partners and company direct customers, thereby generating future revenue streams. In excess of 150 field validations are in process as of September 30, 2017.
During 2016, we executed an exclusive distribution agreement with a distributor in Paraguay. The distribution agreement is a three-year agreement with a minimum initial first-year order requirement of 74,000 gallons of BAM-FX™. Product delivery pursuant to the agreement was delayed until the second quarter 2017. In the second quarter of 2017, our distributor in Paraguay obtained product import approval from Servicio Nacional de Calidad y Sanidad Vegetal y de Semillas ("SENAVE"), the government agency overseeing agricultural imports. BAM-FX™ tests were successfully completed by the Paraguay Agricultural and Technological Center (CETAPAR) in January 2017. We began product shipment during the second quarter of 2017 and anticipate recognizing revenue from this distributorby the end of 2017. We have not recognized the revenue through September 30, 2017 as the Company has not yet determined that collectability is reasonable assured. We expect to provide ongoing business development and technical product support jointly with our Chilean branch to our channel partner in Paraguay during the remainder of 2017.
China. The Company is also pursuing import approval through proper governmental officials and agencies to begin commercial sales in Indonesia, Brazil, Colombia, China, Philippines Haiti and India. The Company expects Pursuant to conduct its international operations through in-country established businesses with which a distribution agreement has been executed. Currently, distribution agreements are in place for Paraguay, South Africa and Philippines. The Company directly supports operating expenses including personnel related expenses for market development, sales and distribution in Chilelicense and business development effortsagreement with Agro Space Tech SA de CV de RV, the Company is providing technical assistance to obtain approval in Paraguay.Mexico. Country specific commercial operations are only undertaken with a qualified local business partner having existing in-country business relationships. Our business relationships are formed either through a license or a distribution agreement.
Our targetedThe Company began domestic channel partnersproduct trials on multiple crops in laboratory and academic settings as well as in field applications on grower/end-user crops during 2014 and expanded field applications with those and additional trial participants in subsequent years. These basic trials showed yield, nutritional value and biomass improvements for crops treated. The Company also noted an early indication of a curative response to fungal, bacterial, and viral plant diseases. We continue to use trials to increase our understanding of the mode of action, application rates and protocols for our product and validate product efficacy. These trials are critical in general, large agriculturalboth market and product distributors with whichdevelopment efforts. During the past five years, the Company has executed or expects to execute a distribution agreement. Four domestic distribution agreements with agricultural product distributors in Pennsylvania, Ohio and California have been executed, including an agreement with Pinnacle Agriculture Distribution, Inc. ("Pinnacle"). The agreement with Pinnacle includes three distribution outlets in California. Pinnacle is a multifaceted agricultural retail distribution business with operations including agricultural chemicals, fertilizer bulk handling and precision agricultural services. Pinnacle services growers across the United States. The other three channel partners service regional growers in Ohio and Pennsylvania.
During the third quarter of 2017, the Company continued to move its grower's returnincreasingly focused on investment sales and marketing approach beyond yield benefits to include benefits associated with yield uniformity, consistent timing of crop maturation, plant stability for efficient harvesting and geopolitical reasons, primarily internationally focused. The results from a number of our 2017 validation trials are expected to justify the return on investment calculations.
During 2016, the Company directed its research to obtain technicalobtaining third-party product validation, through studies with academic institutions and NASA-Ames Research Center, pursuant toin accordance with the Company’sCompany’s Reimbursable Space Act Agreement RSAA. Preliminarywith the National Aeronautics and Space Administration Ames Research Center.
The agricultural industry is known to adopt new technology slowly. The Company believes that slow adoption and sales results is due to the Company’s inability to sufficiently differentiate its product from NASA ARC biomass studies throughother products making similar claims. Additionally, in a number of row crops, the firstproduct, combined with application costs, has not resulted in sufficient grower return, especially in those crops whose ex-farm pricing is low. Therefore, the Company targeted high value crops including grape, avocado, citrus, berry, and hemp and for specific validation trials during 2019. Based upon BAM-FX®’s performance in these trials, the Company expects to focus business development efforts in these high value crops during 2020 and 2021.
During 2017, we began to develop a ready to use, home and garden product, Gardener’s Choice®, for retail markets. Independent third parties successfully tested Gardener’s Choice® for plant performance and consumer safety during 2018. During the fourth quarter of 2017, the Company showcased the product concept at a home and garden trade show indicationsand generated interest from prospective purchasers. During 2018, through an independent sales team, the Company introduced Gardener’s Choice® directly to Ace Hardware retailers at their annual trade show and expanded product introduction to a number of other big box retailers during 2019. We have received positive feedback from retailers. However, we secured limited purchase commitments during the first and second quarters of 2019, the time of the year during which retailers purchase and display product for the outdoor home and garden season.
The Company had limited resources to allocate to business development and promotion of Gardener’s Choice® during the fourth quarter 2018 through May of 2019. We believe that BAM-FX™Gardener’s Choice® sales were nominal through the second quarter of 2019 due to it being a new product, a lack of regional focus and the Company’s resource constraints to provide the product support, training and promotion campaigns required by retailers to generate store product sales during the spring home and garden season. We were not able differentiate the benefits of Gardener’s Choice® to the consumer at the retail level from other well-known competitive products and therefore, we did not generate product reorders.
During the second quarter 2019, the Company hired a Vice President of Business Development and added two independent commissioned sales representatives to promote and sell BAM-FX® to growers in the Midwest and southern states. The Company’s objectives were to build brand name recognition while demonstrating BAM-FX® crop benefits and develop grower relationships into purchase commitments. The program consisted of three steps: (i) apply BAM-FX® on select acreage; (ii) quantify results at harvest; and (iii) based on performance, request reimbursement for the product used with a commitment to purchase during the next planting cycle. Growers in Colorado, Kansas, Illinois, and Texas participated.
Anecdotal results of in-field trails, which became available in the later part of the third and into the fourth quarter of 2019, were mixed or inconclusive. The program started late and therefore, we missed early crop applications, increased photosynthetic efficiency withinwhich we believe would have been more beneficial for the plant leaf structure wherein light energy is converted into biomasscrop during the growing season. Abnormal wet weather conditions and increased plant nitrogen use efficiencyflooding in Illinois led to the U.S. Department of Agriculture designating 102 counties as primary disaster areas on August 14, 2019. A number of Illinois growers declined or discontinued trials due to poor weather conditions and continued prior farming practices with which increasesthey were comfortable. The Company saw positive results in a Colorado corn trial. However, hail damaged both control and trial plots mid-season and therefore, yield results were compromised. The Company analyzed the plant’s biomass production per unitgrowers’ soil as part of nitrogen,the program and found nutrient deficiencies, specifically in Texas, that the growers decided not to address, thereby reducingnegatively impacting yields on both control and trial crops. Due to the amountexpense of nitrogen needed for biomass production. These findings are significantly beneficialmonitoring the growers’ progress, the Company did not have the personnel or financial resources to our product commercialization efforts. We expectmonitor and provide guidance to the growers during the growing season. Although the Company received interest from a number of growers to continue fundingtrials in the RSAA during 2017; however, due to lack of financial resources, ongoing research has been deferred beyondnext growing cycle, the third quarter of 2017 until adequate funding is available.Company generated nominal program sales.
To support its commercialization and revenue generation efforts,sales, the Company employs or contracts certified crop advisors and agronomists for the technical requirements of product introduction bothand applications domestically and internationally.
The Company continues to develop technical relationships to validate the science incorporated in Chile.BAM-FX® and identify additional commercial markets and licensing opportunities for the product. The agronomymajority of this work was performed during 2019 by Iowa State University on the efficacy of a granular product and technical agricultural personnel develop channel partner relationships, improvenew product formulations, Colusa County Farms on tomato and Nurture Earth Research and Development Pvt. Ltd. in India to identify scientific bio-markers showing product efficacy and application timing. We received results of third party tests during the first quarter of 2020.
Results of trials on our technical supportdry formulation showed a combination of yield improvement and the plant’s ability to growerscope with diseases. Two trials were conducted in India, both in pomegranate. The first trial was conducted in February and channel partners,March of 2019 on fifteen trees in an orchard of 550 trees infected with bacterial blight. Bacterial blight can reduce yields up to 90%. There is no known cure for bacterial blight. After two foliar applications of our dry formulation diluted in water, the treated trees began to shed damaged foliage, grow new leaves, and drive scientific academicproduce undamaged fruit. The trees showed signs of recovery and NASAfruit damage was controlled. The second trial, also conducted in India, compared yields against a control group. 3,500 trees were treated with foliar applications in April and May 2019 against a control group of 500 trees. Treated trees compared to non-treated trees produced a 27% increase in yield at harvest.
During April and May 2019, the Company treated, with a foliar application, fifteen olive trees in California that were infected with Xylella fastidiosa. Xylella is a plant pathogen. Infected trees become less productive and decline progressively. Tree leaf and tissue samples were collected prior to and subsequent to the foliar application and submitted to an independent third party laboratory for analysis. The laboratory report showed no Xylella was present in the tissue samples taken from the treated trees.
Based on the data from these trials and previous positive results, including pigeon pea germination trials, the Company filed a provisional patent application with the United States Patent and Trademark Office (“USPTO”) on August 28, 2019, titled Plant Priming Compositions and Methods of Use Thereof, U.S. Patent Application Number 62/893,028. The provisional patent application establishes a starting point in the intellectual property protection process with the USPTO. The Company subsequently submitted its full patent application and was notified by the USPTO on August 28, 2020 that the patent application was received.
The Company’s product studies. development plan for the remainder of 2019 included refining our analysis of plant bio-markers to identify those bio-markers that show that our product has induced priming and testing the efficacy of a granular form of BAM-FX®.
Priming is a natural defense response of a plant to a stress caused by insects or pathogens. Our trials have shown our product elicits a priming response, enabling a plant to prepare itself against insect or pathogen stresses. We believe the identification of these bio-markers will provide us a precise tool for optimal product application timing and dosage.
The Company manufactures BAM-FX™its product in its productiona manufacturing facility in Okeechobee, Florida. Manufacturing is conducted on an as-needed batch process. The Company continually performs regulatory and process efficiency reviews of manufacturing operations. In February 2017, the Company hired aOur manufacturing plant manager is an experienced biochemical engineer,engineer. We have made limited quantities of granular product using a batch process for research purposes and expectsplan to make ongoing processidentify equipment and quality assurancemanufacturing requirements for commercial scale operations when testing and control improvementsregistration requirements for the granular product are complete. Given adequate resources, we believe testing and equipment modifications to existing equipment to enhance efficiencies. The Company expects to engineer, design and add a continuous flow processing manufacturing facility inregistration could be completed during the Western United States to service expected demand from customers in that region and the Asia Pacific area. Engineering, design and construction are expected to begin during fiscal 2018 contingent upon product demand.
During 2015, our chief scientist began developing new formulationssecond quarter of BAM-FX™ to address nutritional needs of plants that are additive to our product’s current zinc and copper formulation. The new formulations address known plant deficiencies of boron, manganese, magnesium and iron and can be manufactured to include all or numerous combinations of these elements. The new formulations have been tested by an independent laboratory verifying the existence of, and ability to, combine those elements. We expect to further develop these formulations in a laboratory setting, perform efficacy trials on new formulations, and scale production during 2018, with the intent of adding several new specialized products to our current product offering during fiscal 2018.2021.
Although we have started and realized nominal product sales, we anticipate that in the near term, ongoing expenses, including product marketing,development, manufacturing process improvement, developing and maintaining domestic and international distributor relationships and the addition of in-field salescorporate administration and technical personnel,product support, will be funded primarily by proceeds from sales of our securities.
During May 2015, we began a second-round private placement offering from which, during the first quartersecurities and issuance of 2016, we received an additional $1,278,500 in gross proceeds.
During 2016, the Company commenced a new private offering of up to $10,000,000 of the Company’s securities. The offering consists of 3,333,333 common shares for $3.00 per common share. Proceeds from the offering were $1,977,999 with offering costs of $138,800 for the period ended September 30, 2017.debt.
We have generated nominal revenuessales from our operations thus farfar. We believe with the financial ability to promote and expect thatmarket, in addition to easing COVID-19 commerce restrictions, product sales will increase significantly in 2018could begin during the first quarter of 2021 primarily through our domesticfrom direct sales to end users and international channel partners.distributor purchases.
We cannot, however, guarantee we will be successful in generating significant revenue for the remainder of 2017 or the beginning of 2018sales or in the execution of our business strategy. Our business is subject to risks inherent in the establishment of a new business enterprise, including the financial risks associated with the limited capital resources currently available to us for the implementation of our business strategies. To become profitable and competitive, we must raise additional capital to execute our 2018 business plan and realize revenues expected.
The ongoing COVID-19 global and national health emergency has caused significant disruption in the international and United States economies and financial markets. In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic. The spread of COVID-19 has caused illness, quarantines, cancellation of events and travel, business and school shutdowns, reduction in business activity and financial transactions, labor shortages, supply chain interruptions and overall economic and financial market instability. The COVID-19 pandemic has the potential to significantly impact the Company’s supply chain, distribution centers, or logistics and other service providers. During the first quarter of 2020, the Company furloughed all employees other than three executive officers due to the COVID-19 impact on its operation capability. Beginning in the second quarter of 2020, the Company began to remove certain employees from furlough that are key to ongoing operations. The Company is not able to estimate the duration of the pandemic and potential impact on the business if disruptions or delays in shipments of product occur. To date, the Company has experienced product shipment delays due to import restrictions imposed by countries in which the Company had customer purchase commitments. In addition, a severe prolonged economic downturn could result in a variety of risks to the business, including weakened demand for product and a decreased ability to raise additional capital when needed on acceptable terms, if at all. As the situation continues to evolve, the Company will continue to closely monitor market conditions and respond accordingly.
Critical Accounting Policies and Estimates
Our discussion and analysis of our unaudited consolidated financial condition and unaudited consolidated results of operations are based on our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these unaudited condensed consolidated financial statements requires us to make estimates and assumptions that affect the amounts reported in our condensed consolidated financial statements and accompanying notes. Note 2: Summary of Significant Accounting Policies in our unaudited condensed consolidated financial statements contains a description of the accounting policies used in the preparation of our unaudited condensed consolidated financial statements as well as the consideration of recently issued accounting standards and the estimated impact these standards will have on our unaudited condensed consolidated financial statements. We evaluate our estimates on an ongoing basis. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. Actual amounts could differ significantly from these estimates under different assumptions and conditions.
We define a critical accounting policy or estimate as one that is both important to our consolidated financial condition and consolidated results of operations and requires us to make difficult, subjective, or complex judgments or estimates about matters that are uncertain. We believe that the following are the critical accounting policies and estimates used in the preparation of our unaudited condensed Consolidated Financial Statements. In addition, there are other items within our unaudited condensed Consolidated Financial Statements that require estimates but are not deemed critical as defined in this paragraph.
Accounting for Derivatives
The Company evaluates its convertible instruments, options, warrants or other contracts to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for under ASC Topic 815, “Derivatives and Hedging.” The result of this accounting treatment is that the fair value of the derivative is marked-to-market each balance sheet date and recorded as a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded in the statement of operations as other income (expense). Upon conversion of a note where the embedded conversion option has been bifurcated and accounted for as a derivative liability, the Company records the shares at fair value, relieves all related notes, derivatives, and debt discounts, and recognizes a net gain or loss on extinguishment. Equity instruments that are initially classified as equity that become subject to reclassification under ASC Topic 815 are reclassified to liabilities at the fair value of the instrument on the reclassification date.
The company has adopted FASB ASU 2017-11, which simplifies the accounting for certain equity-linked financial instruments and embedded features with down round features that reduce the exercise price when the pricing of a future round of financing is lower. This allows the company to treat such instruments or their embedded features as equity instead of considering them as a derivative. If such a feature is triggered the value is measured pre-trigger and post-trigger. The difference in these two measurements is treated as a dividend, reducing income. The value recognized as a dividend is not subsequently remeasured, but in instances where the feature is triggered multiple times each instance is recognized.
Revenue Recognition
In accordance with ASC 606 we consider persuasive evidence of an arrangement to be a signed agreement, a binding contract with the customer or other similar documentation reflecting the terms and conditions under which products are sold. 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. This recognition generally occurs when the product is shipped to or received by the customer.
Going Concern
We adopted FASB ASU No. 2014-15, Presentation of Financial Statements- Going Concern, during the first quarter of 2016. This standard defines management’s responsibility to evaluate conditions or events as related to uncertainties that raise substantial doubt about our ability to continue as a going concern and to provide related footnote disclosures, as applicable. Management’s estimates and assumptions, used in the evaluation of our ability to meet our obligations as they become due within one year after the date our financial statements are issued, are based on the facts and circumstances at such date and are subject to a material and high level of subjectivity and uncertainty due to the matters themselves being uncertain and subject to modification. The effect of any individual or aggregate changes in the estimates and assumptions, or the facts and circumstances, could be material to the financial statements. We have concluded that there is substantial doubt about our ability to continue as a going concern. The accompanying condensed consolidated financial statements have been prepared assuming we will continue as a going concern, but do not include any adjustments that might result if we were unable to do so.
Employee Stock-Based Compensation and Share-Based payment to non-employees
We measure employee and non-employee compensation expense for all stock-based awards at fair value on the date of grant and recognize compensation expense over the service period for awards expected to vest.
We use the Black-Scholes option-pricing model to determine the fair value for stock option awards and recognize compensation expense on a straight-line basis over the awards’ vesting periods for employees and over the service period for non-employees. Determining the fair value of stock-based awards at the grant date requires judgment. The determination of the grant date fair value of options using an option-pricing model is affected by our estimated common stock fair value as well as assumptions regarding a number of other complex and subjective variables. If any of the assumptions used in the Black-Scholes model changes significantly, stock-based compensation for future awards may differ materially compared with the awards granted previously. In valuing our options, we make assumptions about risk-free interest rates, dividend yields, volatility, and weighted-average expected lives, including estimated forfeiture rates, of the options.
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 (discounted cash flow).
| The Black-Scholes option-pricing model requires the use of highly subjective and complex assumptions, including the expected term and the price volatility of the underlying stock, which determine the fair value of stock-based awards. These assumptions include: |
● | Risk-free rate. Risk-free interest rates are derived from U.S. Treasury securities as of the option grant date. |
● | Expected dividend yields. Expected dividend yields are based on our historical dividend payments, which have been zero to date. |
● | Volatility. Because we have a limited trading history as a public company, we estimate volatility of our share price based on a combination of the published historical volatilities of comparable publicly traded companies in our vertical markets and the historical volatility of our common stock. |
● | Expected term. We estimate the weighted-average expected life of the options as 5 years. |
● | Forfeiture rate. Forfeiture rates are estimated using historical actual forfeiture trends as well as our judgment of future forfeitures. These rates are evaluated at least annually and any change in compensation expense is recognized in the period of the change. The estimation of stock awards that will ultimately vest requires judgment and, to the extent actual results or updated estimates differ from our current estimates, such amounts will be recorded as a cumulative adjustment in the period in which the estimates are revised. We consider many factors when estimating expected forfeitures, including the types of awards and employee class. Actual results, and future changes in estimates, may differ substantially from management's current estimates. |
Results of Operations
For the three-months ended | September 30, | September 30, | $ | % | ||||||||||||
2017 | 2016 | Change | Change | |||||||||||||
Revenue | $ | 4,000 | $ | 16,000 | $ | (12,000 | ) | 75.0 | % | |||||||
Cost of revenue | - | 2,000 | 2,000 | (100.0 | )% | |||||||||||
Gross profit | 4,000 | 14,000 | (10,000 | ) | 71.4 | % | ||||||||||
Operating expenses | 1,534,000 | 1,717,000 | 183,000 | 10.7 | % | |||||||||||
Loss from operations | (1,530,000 | ) | (1,703,000 | ) | 173,000 | 20.7 | % | |||||||||
Other income / (expense) | (21,000 | ) | (21,000 | ) | - | - | % | |||||||||
Net loss | $ | (1,551,000 | ) | $ | (1,724,000 | ) | $ | 173,000 | 10.0 | % | ||||||
Net loss per share - basic and diluted | $ | (0.04 | ) | $ | (0.04 | ) | $ | - | - | % | ||||||
For the nine months ended | September 30, | September 30, | $ | % | ||||||||||||
2017 | 2016 | Change | Change | |||||||||||||
Revenue | $ | 66,000 | $ | 37,000 | $ | 29,000 | 78.3 | % | ||||||||
Cost of revenue | 12,000 | 6,000 | (6,000 | ) | (100.0 | )% | ||||||||||
Gross profit | 54,000 | 31,000 | 23,000 | 74.1 | % | |||||||||||
Operating expenses | 5,763,000 | 5,384,000 | (379,000 | ) | (7.0 | )% | ||||||||||
Loss from operations | (5,709,000 | ) | (5,353,000 | ) | (356,000 | ) | (6.7 | )% | ||||||||
Other income / (expense) | (48,000 | ) | (157,000 | ) | 109,000 | 69.4 | % | |||||||||
Net loss | $ | (5,758,000 | ) | $ | (5,510 ,000 | ) | $ | (248,000 | ) | (4.5 | )% | |||||
Net loss per share - basic and diluted | $ | (0.15 | ) | $ | (0.14 | ) | $ | (0.01 | ) | 7.1 | % | |||||
For the three months ended | June 30, | June 30, | ||||||||||||||
2019 | 2018 | $ Change | % Change | |||||||||||||
Sales | $ | 4,923 | $ | 29,600 | $ | (24,668 | ) | (83.3 | )% | |||||||
Cost of Sales | 6,327 | 4,727 | 1,600 | 33.8 | % | |||||||||||
Gross Profit (Loss) | (1,404 | ) | 24,873 | (26,277 | ) | (105.6 | )% | |||||||||
Operating Expenses | 1,051,775 | 1,177,535 | (125,760 | ) | (10.7 | )% | ||||||||||
Loss from Operations | (1,053,179 | ) | (1,152,662 | ) | (99,483 | ) | (8.6 | )% | ||||||||
Other Expense, net | (1,567,049 | ) | (121,723 | ) | 1,445,326 | 1,187.4 | % | |||||||||
Non-controlling interest | 283 | -- | 283 | -- | % | |||||||||||
Net Loss | $ | (2,619,945 | ) | $ | (1,274,385 | ) | $ | (1,345,560 | ) | 105.6 | % | |||||
Net loss per share - basic and diluted | $ | (0.07 | ) | $ | (0.03 | ) | $ | (0.04 | ) | 133.3 | % | |||||
RevenueSales for the three-monthsthree months ended SeptemberJune 30, 20172019 was $4,000,$4,923, a decrease of $12,000$24,668 or 75.0%83.3% over $16,000$29,600 for the three-months ended September 30, 2016. Revenue for the ninethree months ended SeptemberJune 30, 20172018. The decrease in Sales was $66,000, an imcrease of $29,000 or 78.3% over $37,000 forprimarily due to a $22,500 sale to a startup agricultural product distributor during the ninethree months ended SeptemberJune 30, 2016. Revenue is2018, which did not reoccur during the three months ended June 30, 2019 due to changes in their business. Sales are generated both from sales to our channel partners, or distributors of agricultural products and directly to growers who have completed trials in multiple crop-growing seasons and realizedwith positive crop attributes from applying BAM-FX™BAM-FX® to their crops. A majority of our efforts duringDuring the ninethree months ended SeptemberJune 30, 2017 supported channel partners’ through promotion, education, and technical support in2019, $3,600 of Sales includes the sale of ready to use and application of ourretail product, by commercial end users or for additional validation trials. We expectGardener’s Choice®, introduced to realize ongoing revenue from sales to channel partners as we provide sales and technical product support to replenish their inventory.a national brand hardware store’s franchisees.
For the three-months three months ended SeptemberJune 30, 2017, cost2019, Cost of revenueSales was $0 a decrease$6,327, an increase of $2,000$1,600 or 100%33.8% over $2,000$4,727 for the three months ended September 31, 2016. For the nine months ended SeptemberJune 30, 2017, cost of revenue was $12,000, an increase of $6,000 over $6,000 reported during the same period in 2016 or 100.0%.2018. The increase in costCost of revenue isSales was directly related to our changes in revenue fora write off of inventory of $4,003 during the three and nine months ended SeptemberJune 30, 2017 over 2016.2019. During 2019, the Company reduced the acid content of its product and discontinued the sale of previously manufactured product remaining in inventory.
Operating expenses decreased by $183,000 to $1,534,000Expenses for the three-monthsthree months ended SeptemberJune 30, 2017 compared to $1,717,0002019 was $1,051,775, a decrease of $125,760 or 10.7% over $1,177,535 for the three-monthsthree months ended SeptemberJune 30, 2016, or 10.7%.2018. The decrease in operating expense isOperating Expenses was primarily due to a decrease in salaries and related employee benefits and payroll tax expense of $228,051 resulting from headcount reductions, a decrease in non-cash equity compensation paid to consultants, board members and employees of $96,000; a decrease in R&D expenses of $127,000; a decrease in shipping expenses of $10,000;$123,771 and a decrease in legalconsulting expense of $109,000 for services related to the Company’s intellectual property and general corporate matters;$12,033. These decreases were offset primarily by an increase in sales, marketing and technical employeelegal fees of $99,909 related and consultant expense for commercial product introduction, ongoing product validation trials and collection of and analysis of trial results of $55,000;to an intellectual property settlement agreement with our former Chief Science Officer, an increase in auditresearch and development expense of $64,000;$47,181, an increase in bad debtaccounting fees for temporary help of $32,052, an increase in advertising and promotion of $17,794, an increase in product marketing shipping expense of $16,000$12,775 and an increase in insurance expenseweb site expense.
Other Expense, net for the three months ended June 30, 2019 was $1,567,049, an increase of $33,000$1,445,326 or 1,187.4% over $121,723 for the three months ended June 30, 2018. The increase in Other Expense was primarily due to an increase in directorsaccretion of debt discount of $1,287,548 from $49,320 for the three months ended June 30, 2018 to $1,336,868 for the three months ended June 30, 2019. Accretion of debt discount was due to the Company’s debt restructuring whereby certain debt and officersaccrued interest as of April 30, 2019 was exchanged for Series A Notes and for certain participating Series A Noteholders, the issuance of Series B Notes for additional capital. Accretion of debt discount attributed to the retired debt was $840,320. In addition, interest expense increased by $172,778 due to an increase in the Company’s debt with higher interest rate terms.
Net Loss for the three months ended June 30, 2019 was $2,619,945, an increase of $1,345,560 or 105.6% over $1,274,385 for the three months ended June 20, 2018. The increase in Net Loss was primarily due to an increase in Other Expense for the three months ended June 30, 2019 of $1,445,326 offset by a decrease in Operating Expenses for the three months ended June 30, 2019 of $125,760.
Results of Operations
For the six months ended | June 30, | June 30, | ||||||||||||||
2019 | 2018 | $ Change | % Change | |||||||||||||
Sales | $ | 49,418 | $ | 33,070 | $ | 16,348 | 49.4 | % | ||||||||
Cost of Sales | 33,640 | 5,277 | 28,363 | 537.5 | % | |||||||||||
Gross Profit | 15,778 | 27,793 | (12,015 | ) | (43.2 | )% | ||||||||||
Operating Expenses | 1,939,558 | 2,672,048 | (732,490 | ) | (27.4 | )% | ||||||||||
Loss from Operations | (1,923,780 | ) | (2,644,255 | ) | 720,475 | (27.2 | )% | |||||||||
Other Income / (Expense) | (1,927,536 | ) | (206,807 | ) | 1,720,729 | 832.0 | % | |||||||||
Non-controlling interest | (555 | ) | -- | (555 | ) | -- | % | |||||||||
Net Loss | $ | (3,850,761 | ) | $ | (2,851,062 | ) | $ | (999,699 | ) | 35.1 | % | |||||
Net loss per share - basic and diluted | $ | (0.10 | ) | $ | (0.07 | ) | $ | (0.03 | ) | 42.9 | % | |||||
Sales for the six months ended June 30, 2019 was $49,418, an increase of $16,348 or 49.4% over $33,070 for the six months ended June 30, 2018. The increase in Sales was due to a sale of product liability expense.for specialty crop markets during the six months ended June 30, 2019 of $44,495 which was offset by a decrease of $22,500 from a sale to a startup agricultural product distributor during the six months ended June 30, 2018, which did not reoccur during the six months ended June 30, 2019 due to changes in their business. Sales are generated from sales to distributors of agricultural products and to growers who have completed trials in multiple crop-growing seasons with positive crop attributes from applying BAM-FX® to their crops. During the six months ended June 30, 2019, $3,600 of sales includes first time sales of ready to use retail product, Gardener’s Choice®, introduced to a national brand hardware store’s franchisees.
For the six months ended June 30, 2019, Cost of Sales was $33,640, an increase of $28,363 or 537.5% over $5,277 for the six months ended June 30, 2020. The increase in Cost of Sales was directly related to our increase in Sales for the six months ended June 30, 2019 over 2018 and a write off of inventory of $10,286 during the six months ended June 30, 2019. During 2019, the Company reduced the acid content of its product and discontinued the sale of previously manufactured product remaining in inventory.
Operating expenses increased by $379,000 to $5,763,000Expenses for the ninesix months ended SeptemberJune 30, 2017 compared to $5,384,0002019 was $1,939,558, a decrease of $732,490 or 27.4% over $2,672,048 for the ninesix months ended SeptemberJune 30, 2016, or 7.0%.2018. The increasedecrease in operating expense isOperating Expenses was primarily due to a decrease in salaries and related employee benefits and payroll tax expense of $424,840 due to a reduction in headcount, a decrease of $250,107 in non-recurring impairment expense, a decrease of $148,959 in non-cash equity compensation of $994,000;paid to consultants, board members and employees, a decrease in R&D expensesnon-recurring impairment of $243,000;royalty advances of $129,580, a decrease in shipping expensesresearch and development expense of $51,000; a decrease in office expense, supplies and equipment of $33,000;$36,489 and a decrease in legalconsulting expense of $227,000 for services related to the Company’s intellectual property and general corporate matters,$21,095. These decreases were primarily offset by an increase in sales, marketing and technical employeelegal fees related and consultant expense for commercial product introduction, ongoing product validation trials and collectionto an intellectual property settlement with our former Chief Science Office of and analysis of trial results of $703,000;$61,868, an increase in bad debttemporary help expense of $40,000;$57,849, an increase in rentadvertising and promotion expense of $19,000;$49,641, an increase in audit expensefees of $146,000;$23,878, an increase in insuranceproduct shipping expense for business development purposes of $20,580 and an increase in commission expense of $95,000$13,171.
Other Expense for the six months ended June 30, 2019 was $1,927,536, an increase of $1,720,729 or 832% over $206,807 for the six months ended June 30, 2018. The increase in Other Expense was primarily due to an increase in directors and officers and product liability expense; and an increase in non-cash inducement expense of $927,000 due to warrant conversions.
Other expense for the nine-month period ended September 30, 2017 decreased by $109,000 to $48,000 from $157,000 for the nine months ended September 30, 2016. The decrease in other expense is primarily due to a decrease in interest expense and accretion of debt discount of $1,461,241 from $72,962 for the six months ended June 30, 2018 to $1,534,203 for the six months ended June 30, 2019. Accretion of debt discount was due to the Company’s debt restructuring whereby certain debt and accrued interest as of April 30, 2019 was exchanged for Series A Notes and for certain participating Series A Noteholders, the issuance of Series B Notes for additional capital. Accretion of debt discount attributed to the retired debt was $840,320. In addition, interest expense increased by $246,831 due to an increase in connectionthe Company’s debt with the 8.5% Promissory Note executed on July 16, 2015, with a related party.higher interest rate terms.
Net lossLoss for the three-monthssix months ended SeptemberJune 30, 2017 decreased by $173,000 to $1,551,000 from net loss2019 was $3,850,761, an increase of $1,724,000$999,699 or 35.1% over $2,851,062 for the three-months ended September 30, 2016. The decrease in net loss is primarily due to a decrease in gross profit of $10,000; a decrease in operating expenses of $183,000. Net loss for the ninesix months ended SeptemberJune 30, 2017 increased by $248,000 to $5,738,000 from net loss of $5,510,000 for the nine months ended September 30, 2016.2018. The increase in net loss isNet Loss was primarily due to an increase in operating expensesOther Income/(Expense) of $379,000$1,720,729 offset by an increase in gross profit of $23,000 and a decrease in other expensesOperating Expenses for the six months ended June 30, 2019 of $109,000.$732,490.
Use of Cash
Net Cash Used in Operating Activities
Net cash used in operating activities for the period ended September 30, 2017 increased by $107,000 to $3,481,000 from $3,374,000 for ninesix months ended SeptemberJune 30, 2016.2019 was approximately $1,989,000, an increase of approximately $157,000, or 8.5%, from approximately $1,832,000 for the six months ended June 30, 2018. The increase in net cash used in operating activities iswas primarily due to an increase in net loss of $248,000;approximately $1,000,000, an increase in accounts receivableinventory of $70,000; and a net increase in accounts payable and accrued expenses of $228,000, included in changes in operating assets and liabilities offset byapproximately $158,000, a decrease in prepaid and other current assets of $116,000approximately $57,000 due to non-cash equity based compensation expense of which approximately $99,000 was issued with the expense deferred to future periods, a decrease in impairment loss of approximately $193,000, a decrease in advances on future royalties to related parties reserve of approximately $130,000 and a decrease in non-cash equity based compensation expense of approximately $221,000. The increase in net cash used in operating activities for the six months ended June 30, 2019 was primarily offset by an increase in non-cash equity compensation, amortization of debt discountdiscounts related to various notes and warrant inducement expenseconvertible notes of $5,000.approximately $1,461,000.
Net Cash Used in Investing Activities
Net Cash Provided by Financing Activities Net cash provided by Liquidity and Capital Resources The Company expects to incur significant expenses and operating losses for the foreseeable future. Specifically, we estimate that the costs associated with the execution of our business. The Company is active in its fundraising, and subsequent to We filed a registration statement on Form 10 with the Net cash used in investing activities for the nine months ended September 30, 2017financingfinancing activities increased by $1,958,000 to $3,395,000 for the ninesix months ended SeptemberJune 30, 2017 from $1,438,0002019 was approximately $3,728,000, an increase of approximately $916,000, or 32.6%, over approximately $2,812,000 for the ninesix months ended SeptemberJune 30, 2016.2018. The increase in net cash provided by financing activities iswas due primarily to an increase in the proceeds from the exerciseissuance of warrants fromSeries B Notes, 12% convertible notes payable to related parties of $1,185,000,approximately $2,300,000, an increase in proceeds from issuance of Series B Notes, 12% convertible notes payable of approximately $763,000, a decrease in repayments of notes payable to related party of approximately $300,000 and an increase in proceeds from convertible notes payable of approximately $95,000. The increase in cash provided by financing activities for the six months ended June 30, 2019 was offset by a decrease in notes payable – related party of approximately $1,411,000, a decrease in proceeds from sale of common stock of approximately $911,000, a decrease in proceeds from notes payable of $600,000, a decrease in offering costs of $13,000$150,000 and an increase in proceeds from the salerepayments of common stock of $260,000 offset by an increase in payment of offering costs for related party exercise of warrants of $34,000 and an increase in payments on notes payable of $67,000.$50,000. 20172019 and 2020 business planplans may exceed $425,000$300,000 per month for the remainder of the fiscal year and into fiscal 2018month. This expense rate is primarily due to maintainingto: an increase in costs of additional technical personnel, personnel-related costs and consultantcosts; promotional expenses to develop markets for domestic and international markets for the salesales of our product, BAM-FX™. The Company continuesBAM-FX®, our retail product, Gardener’s Choice®, and our cannabis market product introduction; improvements to analyze its operating expensesour manufacturing facility and has begun to reduce those expenses in the thirdprocesses; research and fourth quartersproduct development related expense for expansion of 2017.our product line, patent application filing costs, and development of commercial priming and granular products; and interest expense. The Company has evaluated its ability to continue as a going concern for the next twelve months from the issue date of the SeptemberJune 30, 20172019 consolidated financial statements. There is substantial doubt about the Company's ability to continue as a going concern as we do not currently have the funding necessary to support the projected operating costs we expect we will needto be needed to operate the business through 2018.SeptemberJune 30, 2017,2019, the Company received gross proceeds of $300,000 fromhas raised approximately $1,837,000.sale of shares of common stock pursuantSEC that became effective in February 2015, which requires us to operate as a fully reporting public company. We expect to continue to incur additional personnel and professional costs associated with operating as a fully reporting public company. Accordingly, we have acknowledged the need to obtain additional funding to operate the Company and have continued to raise funds through a private offering begun during fiscal 2016. In October 2017, the Company issued an unsecured promissory note to a member of the Company’s Board of Directors in the principal face amount of $500,000.
In July 2015, a Director advanced the Company $500,000 under a note payable for working capital purposes. The unsecured note payable bears interest at 8.5% per annum, is payable quarterly, and was originally due in July 2016. In July 2016, the maturity date
Adequate additional financing may not be realized from our private offering or otherwise may not be available to us on acceptable terms, or at all. If we are unable to raise capital when needed or on attractive terms, we would be forced to delay, reduce or eliminate our research and development programs or any future commercialization efforts. We will need to generate significant revenues to achieve profitability, and we may never do so.
Cash on Hand
As of SeptemberJune 30, 2017,2019, the Company had a cash balance of $130,000approximately $1,783,000 compared to a cash balance of $232,000 atapproximately $44,000 as of December 31, 2016.2018.
Total assets were $782,000approximately $2,375,000 and $1,075,000$552,000 at SeptemberJune 30, 20172019 and December 31, 2016,2018, respectively. Working capital (deficit) was $(952,000)$833,000 and $(594,000)$(2,691,000) at SeptemberJune 30, 20172019 and December 31, 2016,2018, respectively. The decreaseincrease in working capital (deficit) of $358,000$3,525,000 during the period was primarily due to cash used in operating activities of $3,481,000approximately $1,989,000 offset by cash provided by the salefinancing activities of common stock, loan proceedsapproximately $3,728,000 and exerciserestructuring of warrants, net of offering expenses of $3,590,000; a increase in payments ofcurrent notes payable of $67,000in which the notes were converted to Series A and an decrease in cash paid to acquire assets and intellectual property.Series B secured, convertible long term notes payable. Total stockholders’ equitydeficit decreased by $864,000approximately $4,450,000 to a deficit of ($1,053,000)$(646,000) at SeptemberJune 30, 20172019 from a deficit of ($189,000)$(5,096,000) at December 31, 2016.2018.
Cash on hand as of November 25, 2020, was approximately $5,000.
Outlook
Required Capital OverGoing Forward
Due to the Next Year
Sincefact that our product, BAM-FX™BAM-FX®, is new in the competitive agricultural markets, it is difficult to accurately predict revenues and cash flow at this time. For us to successfully introduce our home and garden retail product, Gardener’s Choice®, we will need to commit ongoing financial resources before realizing revenues and cash flow. We required additional funding to cover 2019 expenses and we will need additional funding to cover 2017 expenses. Subsequent to September 30, 2017 through November 17, 2017, we issued 100,000 shares of common stock pursuant to our private offering for $300,000 in gross proceeds.2020.
On March 1, 2017,or about May 11, 2019, the Company entered into an agreementExchange and Release Agreement (each, an “Exchange Agreement”), with a membercertain holders of itsthe Company’s Promissory Notes (each, an “Old Note”), including certain members of the Board of Directors whereby 350,000 previously issued warrants were exercisedand/or their respective affiliates, pursuant to which, among other things, the holders thereof agreed to exchange all or part of the amounts owed under their Old Notes for new 10% Series A Secured Convertible Promissory Notes (each, a “Series A Note”). The face value of a Series A Note is equal to the principal face amount of an Old Note plus all interest due or accrued under the Old Note through March 31, 2019.
Furthermore, pursuant to each Exchange Agreement, in connection with any such exchange, forthe holder of an Old Note may, in their sole discretion, also exchange any warrant that such note holder received in connection with the issuance of 350,000the Old Notes for a new warrant to purchase shares of the Company's common stock (an “Exchange Warrant”).
Such transactions contemplated by the Exchange Agreements are referred to herein as the “Refinancing”. The Company conducted the Refinancing in reliance upon the exemptions provided in the Securities Act, including Regulation D, Rule 506(b).
Furthermore, each Exchange Agreement provides that the holder of an Old Note may, in their sole discretion, also subscribe for a 12% Series B Secured Convertible Promissory Note (a “Series B Note”) and a cash paymentbe allowed to pay up to one-half of the subscription price of the Series B Note with amounts owed under the Old Note.
In accordance with the terms of the Exchange Agreements and in reliance upon the exemptions provided in the Securities Act, including Regulation D, Rule 506(b), the Company initiated a new private offering of $525,000. Inits securities to certain prospective accredited investors and holders of Old Notes, and entered into Subscription Agreements (each, a “Subscription Agreement”) with certain of such noteholders, including certain members of the Board of Directors and/or their respective affiliates, pursuant to which, among other things, such noteholders subscribed to purchase Series B Notes and warrants to purchase shares of common stock (each, a “Purchase Warrant”).
The transactions contemplated by the Subscription Agreements are referred to herein as the “Offering”. Aggregate gross proceeds in connections with the Offering were approximately $3,062,000, and proceeds net of commission were approximately $2,962,000. Commissions were paid in connection with the transaction,Offering equal to 3% of the principal thereof, totaling approximately $100,000 in the aggregate. The Company intends to use the proceeds from the Offering to fund working capital requirements.
The Series A Notes and Series B Notes shall collectively be referred to herein as the “Offering Notes”. The Exchange Warrants and Purchase Warrants shall collectively be referred to herein as the “Offering Warrants”. The Offering Notes were made on substantially the same terms, except as noted. The Offering Warrants were made on substantially the same terms, except as noted.
The Series A Notes bear interest at the rate of ten percent (10%) per annum and the Series B Notes bear interest at the rate of twelve percent (12%) per annum, in each case, with such interest being payable by the Company issuedin cash to the holders thereof beginning nine (9) months and fifteen (15) days from the issuance date of such Offering Note with interest payments due on the fifteenth (15th) day of each month thereafter. The Offering Notes shall be repaid in full by the Company, plus all unpaid interest thereon, by thirty-six (36) months from the date of issuance upon the tender of such Offering Note (the “Maturity Date”). Prepayment of all unpaid principal and interest on each such Offering Note may be made by the Company prior to the Maturity Date at any time without penalty or premium upon forty-five (45) days’ prior written notice to the holder of such Offering Note (a “Prepayment Notice”); provided, however, that a new five-year warrantholder of a Series B Note may not receive a Prepayment Notice prior to purchase upthe repayment of the principal and interest owing under any Old Note or Series A Note. The Offering Notes are secured by the assets of the Company and its subsidiaries, with the priority of the Series A Notes being subordinated to 350,000that of the Series B Notes. Furthermore, in additional to terms customarily included in such instruments, each holder of an Offering Note is entitled to convert the unpaid principal and interest due and owing under such Offering Note into common stock at any time prior to the earlier of (a) October 1, 2021 or (b) thirty (30) days following a Prepayment Notice. The conversion price under a Series A Note is two dollars ($2.00) per share and the conversion price under a Series B Note is one dollar ($1.00) per share.
Each (i) Exchange Warrant may be exercised by the holder thereof within three (3) years of issuance into shares of the Company's common stock at an exercise price of $4.50equal to one dollar ($1.00) 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 wereshare and (ii) Purchase Warrant may be exercised at any time after issuance and through ninety (90) days after payment in exchange for the issuance of 400,000 sharesfull of the Company's common stockOffering Note at an exercise price equal to (A) one dollar ($1.00) per share if the Purchase Warrant is exercised on or before April 1, 2020, and a cash payment(B) fifty cents ($0.50) per share if the Purchase Warrant was exercised after April 1, 2020, in each case, by providing to the Company a notice of $600,000.exercise, payment and surrender of such Offering Warrant. In connection withaddition, the transaction,Offering Warrants are subject to adjustment upon the occurrence of specified events including, but not limited to, a payment of certain stock dividends, a subdivision or combination of the Company’s outstanding shares of common stock, a reclassification of the common stock, a consolidation or merger of the Company, a sale or transfer of all or substantially all of the assets of the Company, or any compulsory share exchange affecting the Company. The Company issued a new five-year warrantfully vested, non-forfeitable warrants to purchase up to 400,0009,499,600 common shares of the Company's common stock at an exercise price of $4.50$1.00 per share as part of the Offering.
Subsequent to June 30, 2019, the Company issued fully vested, non-forfeitable warrants to purchase 120,000 common shares at an exercise price of $3.00 per common share to an employee for services.
Subsequent to June 30, 2019, the Company issued fully vested, non-forfeitable warrants to purchase 358,500 shares of common stock to consultants for services.
Subsequent to June 30, 2019, certain consultants and former employees exercised warrants in a cashless exercise resulting in the issuance of 146,248 shares of the Company’s common stock.
Subsequent to June 30, 2019, the Company issued 262,500 shares of common stock to advisors and consultants for services.
Subsequent to June 30, 2019, the Company issued 190,000 employee stock options pursuant to its 2015 Equity Incentive Plan.
Subsequent to June 30, 2019, the Company paid $100,000 of related party notes payable and $230,500 of convertible notes payable.
During October 2019, the Company commenced an offering of up to $5,000,000 of 10% Convertible Secured Promissory Notes (the “Notes”) with an initial closing date of December 31, 2019, which was extended for an additional ninety day period. The Notes bear interest at a ten percent (10%) annual rate, payable quarterly in arrears, with the first interest payment due January 15, 2020 and subsequent interest payments due on the fifteenth (15th) day after the end of each calendar quarter thereafter. Interest will be paid in shares of the Company’s common stock at $2.00 per share. The Notes mature 2 years from the closing date. The Notes are convertible into the Company’s common stock at $2.00 per share.
In August 2017,
Commencing on the one (1) year anniversary of the issuance of the Notes and ending eleven (11) months thereafter (i.e. one month prior to the maturity date), the Company enteredmay at any time upon thirty (30) days prior written notice repurchase any or all outstanding Notes without penalty or premium; provided, that the holder may convert the Note prior to the end of the Notice Period, as defined in the Note.
The Notes are secured by all assets of the Company and its subsidiaries, and are subordinate to the security interest granted to holders of the Series A Notes and Series B Notes previously issued by the Company. The Notes are subject to certain covenants and other provisions customary for a transaction of this nature. The Company received $300,000 in proceeds pursuant to the issuance of Notes and incurred no broker fees.
On May 12, 2020, the Company executed a Payroll Protection Program Term Note, herein referred to as the “PPP Note”, and received proceeds of $278,800. The PPP Note was issued pursuant to the Coronavirus Aid, Relief, and Economic Securities Act’s,(the CARE’s Act’s) Paycheck Protection Program. All or a portion of the PPP Note is eligible to be forgiven if all eligible employee retention criteria are met and the funds are used for eligible purposes. The Company has not determined an amount eligible for forgiveness. The PPP Note bears interest at 1% based on a 360 day calendar year and is due two years from date of issuance with repayment scheduled monthly beginning in the seventh month following the date of issuance.
Subsequent to June 30, 2019, the Company commenced an exchange offering of its 10% Series A Convertible Secured Promissory Notes whereby the noteholders could elect to exchange their existing Series A Notes plus accrued and unpaid interest at the date of exchange for 12% Series B Convertible Secured Promissory Notes by agreeing to an additional investment equal to the amount of Series A Notes exchanged. The Series B Notes have a three-year term and include a conversion option whereby the noteholder has the option to convert unpaid principal and interest into the Company’s common stock at $1.00 per share. The Company received gross proceeds of $1,240,430 and paid broker fees of $41,617.
On August 5, 2020, the Company received $18,200 pursuant to a two-year thirty year unsecured promissory note bearingthrough the U.S. Small Business Administration’s Disaster Assistance Program. The note bears interest of 10% and received $100,000.
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In September 2017,3.75% per annum with repayment beginning in the Company entered into a two-year promissory note bearing interesttwelfth month following the date of 10% and received $500,000.
In October 2017, the Company entered into a two-year promissory note bearing interest of 10% and received $500,000.note.
Without consideration of any revenue or additional fundraising, at the Company’sCompany’s current rate of expenditure, we expect that our current capital will not be sufficient to cover our future operating costs through the fourth quarter of 2017; however, the Company is actively working on fundraising activities in order to continue operations through 2017 and into 2018.
The sales cycle for new products, including our product BAM-FX™, in agriculture markets is a minimum of two to three growing seasons. We have completed, domestically, two growing seasons and with certain growers, three growing seasons of validation trials and testing as a commercial product and believe that positive trial results on growers’ crops have contributed to product awareness and initial revenue. We expect our international market sales cycle will follow a similar timeframe. However, as important as the positive trial results are, third-party validation of the product’s performance and scientific proof of the product’s performance predictability and consistency, which provides the basis to compute grower’s return on investment, are equally important to our channel partners in their purchasing decisions. The scientific studies commencing in 2016 with NASA under our RSAA concluded during the second quarter of 2017. Observations from these studies include positive physiological plant function from BAM-FX applications. Continuing NASA's work during the second year of the RSAA could provide a scientific understanding of these observations. We expect to continue funding the RSAA during 2017; however, due to lack of financial resources, that research has been deferred until adequate funding is available.twelve months.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Critical Accounting Policies and Estimates
For a discussion of our accounting policies and related items, please see the Notes to the unaudited consolidated Financial Statements, included in Note 1.2.
Item 3. Quantitative & Qualitative Disclosures about Market RiskSRisks
As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide the information required by this item.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
DuringAs of the third quarterend of 2017,the period covered by this report (the “Evaluation Date”), the Company carried out an evaluation, under the supervision and with the participation of our management, including our Principal Executive Officer and Principal AccountingFinancial Officer (our Chief Executive Officer and Chief Financial Officer, respectively), of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).Act. Based upon this evaluation, our Chief Executive Officer concluded that, as of the Evaluation Date, our disclosure controls and procedures were not effective to provide reasonable assurance that (i) information required to be disclosed in the reports that are filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified by the SEC’s rules and forms and (ii) our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is accumulated and communicated to our management including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. For discussion of material weaknesses refer to the December 31, 2016, Form 10-K item 9A, the material weaknesses have not been fully remediated.
Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that the Company’sCompany’s disclosure controls and procedures will detect or uncover every situation involving the failure of persons within the Company to disclose material information otherwise required to be set forth in the Company’s periodic reports.
Changes in Internal ControlsControl Over Financial Reporting
There have beenwere no additional changes toin internal controls over financial reporting (as defined in RuleRules 13a-15(f) and 15d-(f)15d-15(f) of the exchange act)Exchange Act) that occurred during the last fiscal quarter to which this report relatesthree months ended June 30, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
We are not a party to any current or pending legal proceedings.
As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide the information required by this item.
Item 2. Unregistered Sales of Equity Securities and Use of ProceedSProceeds
Each of the below transactions were exempt from the registration requirements of the Securities Act in reliance upon Section 4(a)(2) of the Securities Act or Regulation D promulgated under the Securities Act. None.
During October 2015, we commenced a new private offering of up to $10,000,000 of our securities. The $10,000,000 offering consists of 8,000,000 Units at $1.25 per Unit each unit consisting of one share of the Company’s common stock and a five-year warrant to purchase an additional share of the Company’s common stock at $2. The Company executed a side letter to investors in the original offering to retroactively adjust the terms of the Company’s May 2015 offering with the terms of the new offering. Through September 30, 2017, the Company issued 4,936,000 shares of common stock and 4,936,000 warrants to purchase an additional share of the Company’s common stock pursuant to this offering (which includes the retroactive adjustment for the May 2015 offering).
During 2016, the Company commenced a private offering of up to $10,000,000 of the Company’s securities. The offering consists of 3,333,333 shares of the Company’s common stock at $3.00. During the nine months ended September 30, 2017, the Company issued 1,243,000 shares of common stock. In connection with the offering, the Company issued fully vested, non-forfeitable warrants to purchase 27,020 common shares with an exercise price of $3.00 per common share to the Company’s placement agent. For the year ended December 31, 2016, the Company issued 221,667 shares of common stock. In connection with the offering, the Company issued fully vested, non-forfeitable warrants to purchase 11,083 common shares with an exercise price of $3.00 per common share to the Company’s placement agent.
Subsequent to September 30, 2017 through November 17, 2017, the Company issued 100,000 shares of common stock pursuant to the Company’s private offering. 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 Company’s placement agent.
On March 1, 2017, the Company entered into an agreement with a member of its Board of Directors whereby 350,000 previously issued warrants were exercised in exchange for the issuance 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.
Item 3. Defaults upon Senior Securities
None.
ItemITEM 4. Mine Safety DisclosuresMINE SAFETY DISCLOSURES
Not applicableNone.
None.
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(2) | Incorporated by reference from the Company’s Registration Statement on Form 10, filed with the SEC on December 29, 2014. |
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(4) | Incorporated by reference from the Company’s Current Report on Form 8-K, filed with the SEC on January 25, 2018. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
| ZERO GRAVITY SOLUTIONS, INC. | |
| (Registrant) | |
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Dated: November | By: | /s/ Timothy A. Peach |
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| Timothy A. Peach, Acting Chief Executive Officer |
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| (Principal |
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