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 aan agricultural biotechnology company focused on commercializing technology derived from and designed for spaceflight with significant applications on Earth. These technologies are focused on improving world agriculture by providing valuable solutions to challenges facing humanity including threats to world agriculture and the ability to feed the world’s rapidly growing population.

The Company owns proprietary technology for its initial 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™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.

Going ConcernThe ongoing COVID-19 global and Management’s Plans 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.

At September 30, 2018,During the first quarter of 2020, the Company had an approximate cash balancefurloughed all employees other than the three executive officers due to the COVID-19 impact on its operations. Beginning in the second quarter of $382,000, a working capital deficiency2020 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 approximately $(420,000), a loss from operationsthe pandemic or the potential impact on the business of approximately $(4,116,000), and negative cash flows from operating activitiesdisruptions or delays in shipments of approximately $(3,398,000). product.

To date, the Company has reliedexperienced 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 equity financingacceptable 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 entered into relatedbeen condensed or omitted from these statements pursuant to such accounting principles and, non-related party promissoryaccordingly, 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 fund its operations. 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’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:

Additionally, at June 30, 2019, the Company had:

The Company has also issued stock-based compensationcash on hand of $1,782,954 at June 30, 2019. Without significant cash collections from sale of product, given the Company’s current monthly cash used in exchangeoperations, the Company has sufficient cash to operate for services. approximately six months without an additional capital raise or change to its business 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. Management

The Company has evaluatedincurred significant losses since its inception and has not demonstrated an ability to continue asgenerate sufficient revenues from the sales of its goods and services to achieve profitable operations. There can be no assurance that profitable operations will ever be achieved, or if achieved, could be sustained on a going concerncontinuing basis. In making this assessment we performed a comprehensive analysis of our current circumstances including: our financial position, our cash flow and cash usage forecasts for the next twelve months from the issuance of these Septemberperiod ending June 30, 2018 unaudited condensed consolidated financial statements,2019, and has determined that there is substantial doubt as to its ability to continue as a going concern. 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 SeptemberJune 30, 2018,2019, specifically, the issuance notes payable and convertible debt of $3,995,927 during the six months ended June 30, 2019; however, there areis no assurancesassurance that such successful efforts will continue for upduring the twelve months subsequent to a year afterthe date these unaudited condensedinterim consolidated financial statements are issued. The unaudited condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result should the Company be unable to continue as a going concern.

The Company has executed product distribution agreements with domestic and international commercial agricultural distributors and generated initial product orders. Additional technical and marketing effortefforts must be devoted to those distributors to insureensure the product is properly utilized and validated by end users. To fund these capital needs, the Company has and continues to raise capital through a private placement offerings, conductedoffering in connection with its investment banker and through it's ownits internal efforts, or through the efforts of an investment bank, as well as raising funds through issuances of debt, to related and non-related parties. 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. 

These factors create substantial doubt about the Company’s ability to 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 is 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 which contemplates the realization of assets and satisfaction of liabilities and commitments in the ordinary course of business.

Management’s strategic plans include the following:

September 30, 2018Note 2 -

(Unaudited)Summary of Significant Accounting Policies

Interim Financial StatementsPrinciples of Consolidation and Non-Controlling Interest

The interim unaudited condensed consolidated financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). In the opinion of the Company’s management, all adjustments (consisting of normal recurring adjustments and reclassifications and non-recurring adjustments) necessary to present fairly our results of operations for the three and nine months ended September 30, 2018 and 2017, our cash flows for the nine months ended September 30, 2018 and 2017, and our financial position as of September 30, 2018 have been made. The results of operations for such interim periods are not necessarily indicative of the operating results to be expected for the full year.

Certain information and disclosures normally included in the notes to the annual auditedThese consolidated financial statements have been condensed or omitted from these interimprepared in accordance with U.S. GAAP and include the accounts of the Company and its wholly-owned and majority owned subsidiaries. All intercompany transactions and balances have been eliminated.

The non-controlling interest in 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 condensed consolidated financial statements. Accordingly, these interim unaudited condensed consolidated financial statements should be readare presented as one operating business segment. 

Customers in conjunction with the audited consolidated financial statements and notes thereto included inUnited States accounted for 100% of our Annual Report on Form 10-K forrevenues. We do not have any property or equipment outside of the year ended December 31, 2017 as filed with the SEC on August 13, 2018. The December 31, 2017 balance sheet is derived from those statements.United States.

Use of Estimates

The preparation of the unaudited condensed consolidatedPreparing financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”)U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts inof assets and liabilities and the unaudited condensed consolidateddisclosure of contingent assets and liabilities at the date of the financial statements.statements and revenues and expenses during the reported period. Actual results could differ from those estimates. estimates, and those estimates may be material.

Significant estimates induring the accompanying unaudited condensed consolidated financial statementssix months ended June 30, 2019 include the allowance for doubtful accounts and other receivables, inventory reserves and classifications, amortization period and recoverability of intangible assets, valuation of beneficial conversion features in convertible debt, valuation of loss contingencies, valuation of derivative liabilities, valuation of stock-based compensation and the valuation allowance on deferred tax assets.

Segment Reporting

Fair Value of Financial Instruments

The Company views its operationsaccounts for financial instruments under Financial Accounting Standards Board (“FASB”) ASC 820, Fair Value Measurements. ASC 820 provides a framework for measuring fair value and manages its businessrequires disclosures regarding fair value measurements. Fair value is defined as one reportable segment. Asthe price that would be received to sell an asset or paid to transfer a resultliability in an orderly transaction between market participants at the unaudited condensed consolidated financial statements presented within, relate to ourmeasurement date, based on the Company’s principal operating segment.  Customersor, in absence of a principal, most advantageous market for the United States accounted for 100% of our revenues. Except for $23,202 in inventory shipped to Paraguay for a sale where the revenue has not been recognized, we do not have any other propertyspecific asset or equipment outside of the United States.

Principles of Consolidationliability.

The accompanying unaudited condensed consolidatedCompany 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:

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 statements includeinstruments 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 accountscarrying amounts of Zero Gravity Solutions, Inc.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 its wholly-owned subsidiaries. All significant intercompany balancesliabilities at fair value (“fair value option”). The fair value option may be elected on an instrument-by-instrument basis and transactions have been eliminatedis 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 consolidation.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 the purposes of the statementconsolidated statements of cash flows, the Company considers all highly liquid investments purchasedinstruments with an originala maturity of three months or less at the purchase date and money market accounts to be cash equivalents. The Company had no cash equivalents at SeptemberAt June 30, 20182019 and December 31, 2017.2018, 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:

ZERO GRAVITY SOLUTIONS, INC. AND SUBSIDIARIESOf the total inventory balance, the Company had $26,326 classified as a current asset, a portion of which 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.

Notes to Condensed Consolidated Financial Statements

September 30, 2018

(Unaudited)

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 repairsequipment are charged to expense as incurred.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.

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

Impairment of Long LivedLong-lived Assets

The Company accounts forManagement 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.” This guidance requires thatEvents and circumstances considered by the Company in determining whether the carrying value of identifiable intangible assets and other long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  Recoverabilityrecoverable include, but are not limited to: significant changes in performance relative to expected operating results; significant changes in the use of assetsthe 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 heldgenerated from the use and usedultimate disposition of these assets.

If impairment is measured byindicated based on a comparison of the assets’ carrying amount of an asset to futurevalues and the undiscounted net cash flows, expected to be generated by the asset.  If such assets are considered to be impaired, the impairment to be recognized is measured byas the amount by which the carrying amount of the assets exceeds the fair value of the assets.  Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.

Concentration of Credit RiskAccounting for Derivatives

The Company believesevaluates 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 its credit risk exposure is limited. The Company has never suffered a loss due to excess balances.

Fair Value of Financial Instruments

The Company accounts for financial instruments under Financial Accounting Standards Board (FASB) Accounting Standards Codification Topic (ASC) 820, Fair Value Measurements.  This statement definesthe fair value establishesof the derivative is marked-to-market each balance sheet date and recorded as a framework for measuringliability. In the event that the fair value in generally accepted accounting principles, and expands disclosures about fair value measurements.  To increase consistency and comparabilityis recorded as a liability, the change in fair value measurements, ASC 820 establishes a fair value hierarchy that prioritizesis recorded in the inputs to valuation techniques used to measure fair value into three levelsstatement of operations as follows:other income (expense).

ZERO GRAVITY SOLUTIONS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2018

(Unaudited)

Observable inputs are based on market data obtained from independent sources, while unobservable inputs are based onUpon conversion of a note where the Company’s market assumptions.  Unobservable inputs require significant management judgment or estimation.  In some cases,embedded conversion option has been bifurcated and accounted for as a derivative liability, the inputs used to measure an asset or liability may fall into different levels ofCompany records the shares at fair value, hierarchy.  In those instances, the fair value measurement is requiredrelieves 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 be classified using the lowest level of input that is significantreclassification under ASC Topic 815 are reclassified to the fair value measurement.  Such determination requires significant management judgment. 

As the Company's common stock is not traded in an active market, the Company estimatesliabilities at the fair value of itsthe 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.

Convertible Notes with Fixed Rate Conversion Options

The Company may 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 stock (used in its Black Scholes option pricing model) pursuantshares at a fixed discount 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 inat the Company's common stock, and an income approach to valuation (a discounted cash flow technique that considerstime of conversion. The Company measures the future cash flows).

The carrying amounts of the Company’s accounts receivable and accounts payable approximate fair value due to the relatively short period to maturity for these instruments. The carrying value of the Company’s notes payable approximatesat the time of issuance, which is the result of the share price discount at the time of conversion and records the premium to interest expense on the note issuance date.

Beneficial Conversion Features

For instruments that are not considered liabilities under ASC 480 or ASC 815, the Company 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 the fair market value dueof the common stock (whereby the conversion price is lower than the fair market 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 recognitionRecognition and accounts receivableConcentrations

Effective January 1, 2018, (Date of adoption), wethe Company adopted ASC 606, “Revenue from Contracts with Customers” to recognize revenues from the sale of agricultural biotechnology products to distributors and customers pursuantcustomers. There was no cumulative effect of adopting ASC 606.

Pursuant to the provisions of ASC 606, “Revenue From Contracts With Customers”.

Wewe recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration (that is, payment) to whichor payment the companyCompany expects to be entitled to receive in exchange for those goods or services. The core principle of this TopicOur revenue is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. Revenue is recognized in accordance with the core principle 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.

RevenuesWe 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 chemicalbiotechnology products areis recognized when title to the productsproduct is transferred which may be upon shipment to the customer or receipt by the customer of the product. This satisfies the performance obligation on which we earn the transaction price. There was no cumulative effect of adopting ASC 606.

Amounts billed to customers for shipping and handling fees are included in net sales, and costs incurred by the company for the delivery of invoiced goods are classified as cost of goods sold in our Statements of Operations.

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

At SeptemberThe Company determined that no reserve for estimated product returns and allowances was necessary during the three and six months ended June 30, 2018,2019 and 2018.

During the three customersand six months ended June 30, 2019, one customer accounted for 100%0% and 87% of total accounts receivable, each representing 59.6%, 22.5%, and 17.9%,net sales, respectively. During the three and six months ended SeptemberJune 30, 2018, one customer accounted for 75.2%68% of net sales. During the nine months ended September 30, 2018 two customers accounted for 69.9% of net sales each representing, 50.3% and 19.6%, respectively. During the three months ended September 30, 2017, two customers accounted for 94.0% of net sales, each representing 79.1%, and 14.9%, respectively. During the nine months ended September 30, 2017 three customers accounted for 69.5% of net sales, each of these customers represented 33.6%, 22.9% and 13.0%, respectively. 

At December 31, 2017, three customers accounted for 100% of total accounts receivable. Each of these three customers represented 46.5%, 34.9% and 18.6%, respectively.

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

ZERO GRAVITY SOLUTIONS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2018

(Unaudited)

Cost of salesSales

Cost of sales is comprised of materialrepresents costs invoiced shipping costsdirectly related to the production, manufacturing and royalty expense.  

Warrants

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

Stock based compensation

The Company recognizes the cost of employee services receivedCompany’s product inventory purchased from third-party manufacturers as well as royalty expense and any declines in exchange for an award of equity instruments in the unaudited condensed 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 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.

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 2018 and 2017.

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

Loss per Share

Loss per share is calculated by dividing the Company’s net loss by the weighted average number of common shares outstanding during the period. Diluted earnings loss per share is calculated by dividing the Company’s net income (loss) by the diluted weighted average number of shares outstanding during the year. The diluted weighted average number of shares outstanding is the basic weighted number of shares adjusted for any potentially dilutive debt or equity instruments. The effect of the inclusion of the dilutive shares would have resulted in a decrease in loss per share. Accordingly, the weighted average shares outstanding have not been adjusted for dilutive shares. Outstanding warrants, stock options and convertible debt are not considered in the calculation as the impact of the potential common shares (15,993,998, shares and 12,981,000 shares for the nine months ended September 30, 2018 and 2017, respectively), would be to decrease net loss per share.inventory values.

Research and Development

Research and development costs are charged to expense as incurred.

For the three and six months ended June 30, 2019, the Company recognized $63,891 and $64,962 in research and development costs in the consolidated statements of operations.

For the three and 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's distribution agreements provide for a warranty on products sold. As salesSales under such distribution agreements have been nominal throughduring the three and six months ended 2019 and 2018, and 2017, there has been no warranty expense in 2018 or 2017. respectively.

A provision for estimated future warranty costs is to be recorded as a component or cost of sales when products are shipped, and warranty costs are to be based on historical trends in warranty charges as a percentage of gross product shipments. A resulting accrual is to be reviewed regularly, and periodically adjusted to reflect changes in warranty cost estimates. There has been no related warranty expense accrued during the three and six months ended June 30, 2019 and 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

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 be recognized in the financial statements when it is requiredmore 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 positions in other expense. No interest and penalties related to uncertain income tax positions were recorded for the extent any deferred tax assets may not be realizable.three and six months ended June 30, 2019 and 2018.

ZERO GRAVITY SOLUTIONS, INC. AND SUBSIDIARIESAdvertising Costs

Notes to Condensed Consolidated Financial Statements

September 30, 2018

(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.

The Company does not have an accrual for uncertain tax positions as of September 30, 2018recognized $8,794 and December 31, 2017.  The Company files corporate income tax returns with the Internal Revenue Service$0 in marketing and the States where the Company determines it is required to do so.  The Company’s policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. At September 30, 2018, the Company did not have any accrued interest or penalties associated with any unrecognized tax benefits, nor was any interest expense recognizedadvertising costs during the three or nine months ended SeptemberJune 30, 2019 and 2018, or 2017. 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.

Investments

We have an equity investment in a privately held entity as discussed in note 4. We accountAccounting for investments either under the equity method or cost method of accounting depending on our ownership interest and the level of our influence. 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.

Reclassifications

Certain amounts in the December 31, 2017 balance sheet have been reclassified from accounts payable, related party to accrued interest, related party to conform to the September 30, 2018 presentation.  This reclassification had no effect on current liabilities in either period presented.

Recently Issued Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASC 606, “Revenue from Contracts with Customers” which has been further clarified and amended. The core principle of the new standard is for companies to 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. The new standard also will result in enhanced disclosures about revenue, provide guidance for transactions that were not previously addressed comprehensively (for example, service revenue and contract modifications) and clarify guidance for multiple-element arrangements. Entities have the option to apply the new guidance under a retrospective approach to each prior reporting period presented or a modified retrospective approach with the cumulative effect of initially applying the new guidance recognized at the date of initial application within the Statement of Financial Position. The standard is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. The Company has finalized its assessment of ASC 606 and determined there will be no material effect on our financial position and results of operations. The timing and amount of revenue recognized based on the new standard is consistent with the revenue recognition policy under previous guidance, however, certain additional financial statement disclosures will be required beginning with 2018 reporting, including additional disaggregated view of revenue. We have adopted the new standard effective January 1, 2018, using the modified retrospective transition method.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 has not finalized the analysis to determine the effect of the standard, but believes that it willCompany’s adoption January 1, 2019 did not have a material impact on the statement of operations.

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, 20182019 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 June 2018, the Financial Accounting Standards Board (“FASB”)FASB issued ASU No. 2018-07, “Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting.” ASU No 2018-07 expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The guidance also specifies that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. This guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than an entity’s adoption date of Topic 606. This guidance is applicable to the Company’s fiscal year beginning January 1, 2019. The Company is currently evaluating the potential effects of this guidanceimplementation did not have a material effect on its consolidated financial statements.

In July 2017,

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 FASB issued Accounting Standards Update No. 2017-11 Earnings Per Share (Topic 260) Distinguishing Liabilities from Equity (Topic 480) Derivativesweighted 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 Hedging (Topic 815) (“ASU 2017-11”)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), which changesconvertible notes and common stock issuable.

The following potentially dilutive equity securities outstanding as of June 30, 2019 and 2018 were not included in the classification analysiscomputation of certain equity-linked financial instruments (or embedded features) with down round features. When determining whether certain financial instruments should be classified as liabilities or equity instruments,diluted loss per common share because the effect would have been anti-dilutive:

Two of the convertible notes payable contain exercise prices that have a down round feature no longer precludes equity classification when assessing whetherdiscount to market equal to 65% of the instrument is indexed to an entity’s own stock. ASU 2017-11 also clarifies existing disclosure requirements for equity-classified instruments.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 freestanding equity-linked financial instrument (or embedded conversion option) no longer would beprivately 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 asunder 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 derivative liability at fairzero value as a result of June 30, 2019 and December 31, 2018 (See Note 5).

Recent Accounting Standards

Changes to accounting principles are established by the existenceFASB in the form of a down round feature. For freestanding equity classified financial instruments, ASU 2017-11 requires entities that present earnings per share (EPS) in accordance with ASC Topic 260 to recognize the effect of the down round feature when it is triggered. That effect is treated as a dividend and as a reduction of income available to common shareholders in basic EPS.  Convertible instruments with embedded conversion options that have down round features are now subjectASU’s to the specialized guidance for contingent beneficial conversion features in ASC 470-20.  ForFASB’s Codification. We consider the Company, ASU 2017-11 is effective for fiscal years,applicability and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period. If an entity early adopts ASU 2017-11 in an interim period, any adjustments should be reflected asimpact of the beginning of the fiscal year that includes that interim period in either of the following ways: 1. Retrospectively to outstanding financial instruments with a down round feature by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the first fiscal year and interim period(s) in which ASU 2017-11 is effective or 2. Retrospectively to outstanding financial instruments with a down round feature for each prior reporting period presented in accordance with the guidanceall ASU’s on accounting changes in paragraphs 250-10-45-5 through 45-10. The Company has elected early adoption and the effects of this guidance are reflected in its unaudited condensedour consolidated financial statements and there was no cumulative effect adjustment.position, results of operations, stockholders’ deficit, cash flows, or presentation thereof.

On August 2018,Management has considered all recent accounting pronouncements and believes that these recent pronouncements will not have a material effect on the SEC adopted amendments to certain disclosure requirements in Securities Act Release No. 33-10532, Disclosure Update and Simplification. The amendments will become effective on November 5, 2018. Among the amendments is the requirement to present the changes in shareholders’ equity in the interimcompany’s financial statements (either in a separate statement or footnote) in quarterly reports on Form 10-Q. The Company has elected to implement this amendment beginning the first quarter of 2019.statements.