Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements. These
forward-looking statements are based on our management's beliefs, assumptions
and expectations and on information currently available to our management.
Generally, you can identify forward-looking statements by terms such as "may,"
"will," "should," "could," "would," "expects," "plans," "anticipates,"
"believes," "estimates," "projects," "predicts," "potential" and similar
expressions intended to identify forward-looking statements, which generally are
not historical in nature. All statements that address operating or financial
performance, events or developments that we expect or anticipate will occur in
the future are forward-looking statements, including without limitation our
expectations with respect to product sales, future financings, or the commercial
success of our products. We may not actually achieve the plans, projections or
expectations disclosed in forward-looking statements, and actual results,
developments or events could differ materially from those disclosed in the
forward-looking statements. Our management believes that these forward-looking
statements are reasonable as and when made. However, you should not place undue
reliance on forward-looking statements because they speak only as of the date
when made. We do not assume any obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise, except as may be required by federal securities laws and
the rules of the Securities and Exchange Commission (the "SEC"). We may not
actually achieve the plans, projections or expectations disclosed in our
forward-looking statements, and actual results, developments or events could
differ materially from those disclosed in the forward-looking statements.
Forward-looking statements are subject to a number of risks and uncertainties,
including without limitation those described from time to time in our future
reports filed with the SEC.
The following discussion and analysis of our financial condition and results of
operations should be read together with our unaudited interim condensed
consolidated financial statements and related notes appearing elsewhere in this
Quarterly Report on Form 10-Q.
Basanite and its wholly owned subsidiaries are herein referred to as the
"Company", "we", "our", or "us".
Overview
This overview provides a high-level discussion of our operating results and some
of the trends that affect our business. We believe that an understanding of
these trends is important to understand our financial results for the nine
months ended September 30, 2020 and 2019, respectively. This summary is not
intended to be exhaustive, nor is it intended to be a substitute for the
detailed discussion and analysis provided elsewhere in this report, and our
audited consolidated financial statements and accompanying notes included in the
Annual Report on Form 10-K for the period ended December 31, 2019 filed with the
SEC on April 6, 2020.
The Company's wholly owned subsidiary, Basanite Industries, LLC ("BI")
manufactures BasaFlex™, a basalt fiber reinforced polymer ("BFRP") rebar. BFRP
rebar is a stronger, lighter, sustainable, non-conductive and non-corrosive
alternative for traditional steel rebar and wire mesh. BI leases a fully
permitted and Underwriters Laboratories ("UL") approved 36,900 square foot
facility located in Pompano Beach, Florida, equipped with five customized
Pultrusion machines. Each machine has two linear production lines (a total
capacity of 10 manufacturing lines). BI's operations team is currently in the
processes of optimizing and scaling the manufacturing plant to produce 11,000 to
17,000 linear feet of BFRP rebar per line, per day, depending on the product
mix. BI's own fully equipped Test Lab is utilized to evaluate, validate and
verify each product's performance attributes.
The manufacture of concrete reinforcement products made from continuous basalt
fiber create substantial benefits for the construction industry, including but
not limited to, the following:
·
BasaFlex™ never rusts - steel reinforcement products rust, causing time and
repair costs down the road;
·
BasaFlex™ is sustainable; with a longer lifecycle - production of our products
results in exceptionally low carbon footprint when compared with steel. The lack
of corrosion allows the "lifespan" of concrete products to be significantly
longer; and
·
BasaFlex™ has a lower final, in place cost - the physical nature of our products
relative to steel (4X lighter, easily transportable, "coil-able", safer and
easier to use) reduces the all-in cost of reinforcement when all factors are
considered.
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We believe that macroeconomic factors are pressuring the construction industry
to consider the use of alternative reinforcement materials for the following
reasons: the increasing need for global infrastructure repair; recent design
trends towards increasing the lifespan of projects and materials; and increasing
consideration of the long-term costs and environmental impacts of material
selections. We believe we are well positioned to benefit from this renewed
focus, although it is difficult to determine at this point what the impacts of
the COVID-19 pandemic to the construction industry.
Basanite Industries submitted its first round of BasaFlex™ (Basalt Fiber
Reinforced Polymer) rebar products to the Structures and Materials Department of
the University of Miami (UM), Miami, Florida, an industry accredited independent
testing laboratory, to obtain a Certified Test Report which allows Basanite to
participate in approved fiber-reinforced polymer (FRP) applications, such as
precast, architectural, flatwork and other non-structural engineered
applications. On May 29th, 2020, a Certified Test Report was submitted to
Basanite for engineering use. Basanite Industries has submitted a second round
of BasaFlex™ rebars for additional testing, that will further certify and
qualify BasaFlex™ for Federal and state government applications, to the
University of Sherbrooke, Quebec, Canada. Basanite expects the results to be
superior to the first round of testing.
The Company announced November 12, 2020 that it had reached full operational
status. Further, in response to strong market demand, the Company plans to
accelerate its growth plans, starting with a major expansion of its Pompano
Beach manufacturing facility in 2021.
In the middle of August of 2020, Basanite began scaling manufacturing operations
and commenced the manufacture of its initial stock of inventory of BasaFlex™,
its proprietary basalt FRP. Also during this timeframe, the Company filled key
positions within its production facility and reached its primary goal of full
capacity single shift operations. Basanite has begun selling across its
complete product line and is currently working on securing larger orders for
next year. The Company has also been preparing multiple test articles for
customers who are now conducting testing for specific applications. Based on
market demand, Basanite is now working towards beginning two shift operations
early in the new year.
Management has also been recruiting key positions in the Company, focused
initially on product development; driving sales growth; and expanding the
Company's market presence. Our hiring focused on key areas of excellence,
including quality assurance; operations and other technical resources;
engineering; and sales and marketing. Basanite has completed its initial hiring
plan of recruiting and hiring the following key personnel for leadership
positions, with over 140 years of industry experience in the industry combined:
Vesna Stanic, PhD
Director of Quality Assurance
Brian Metrocavage
Director of Technical Sales
Bob Robbins
Director of Business Development
Jesus Escalona
Structural / Civil Engineer
Eduardo Acosta
Structural / Civil Engineer
Jorge Angulo
Director of Operations
Earlier in 2020, Basanite contracted with an independent software company to
develop BasaPro™, a design software specifically for use with BasaFlex™. This
development effort has been completed and the operational software is being
installed at Basanite this month. The software will allow both Basanite's
engineers and Basanite's customers to normalize the use of BasaFlex™ in place of
steel rebar in all types of concrete applications. It allows for both the
conversion to BasaFlex™ from steel in existing concrete designs, or for original
designs using BasaFlex™, and is based upon the application of ACI 440 and ACI
318 standards. The software is capable of showing all calculations and
pictorial design work in conjunction with applicable building codes. This means
Basanite can now communicate with the design community in their own language.
Basanite has been receiving multiple inquiries from a range of customers for its
products, including very high levels of market interest for BasaFlex™. A large
portion of these inquiries are for very large potential orders for new
construction. However, these orders would be problematic to undertake at our
current capacity and there is no guaranty that these orders will actually be
made. However, Basanite plans to expand its production capabilities at the
Pompano Beach facility, with the initial goal of reaching 5 times its current
capabilities by Q3 of 2021, and ultimately 7 times its current capacity by 2022.
As part of this expansion plan, Basanite is developing customized manufacturing
equipment, specifically designed for the manufacture of BasaFlex™ using
Basanite's patent pending process. A version of this equipment will offer
double the capacity of our current equipment (per machine), and each machine
will run significantly faster. A prototype is expected to be available for
testing in Pompano Beach during Q1 of 2021. Based on a successful trial,
Basanite is planning a plant expansion involving 10 of these new machines, with
a goal of being fully operational in Q3 of 2021.
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Results of Operations
Revenue - The Company had $2,408 and $4,626 of revenues as a result of sales of
finished goods sold for the three and nine months ended September 30, 2020
compared to $994 and $3,892, respectively for the same period in the prior year.
Revenues have been minimal as a result of the Company's shift in focus to the
scaling of production and inventory during both periods.
Cost of Goods Sold
During the three and nine months ended September 30, 2020, the Company had cost
of sales of $919 and $3,065 compared to $31,295 and $85,953, respectively for
the same period in the prior year. Cost of goods sold consisted of the
following:
For the three months ended For the six months ended
September 30, September 30,
2020 2019 2020 2019
Product cost $ 919 $ - $ 3,065 $ -
Equipment rental and 9,822 21,841
maintenance - -
Supplies - 12,629 - 39,969
Shipping cost - 291 - 5,401
Contract labor - 5,852 - 15,903
Uniforms - 2,701 - 2,839
Merchant fees - - - -
Total cost of goods
sold $ 919 $ 31,295 $ 3,065 $ 85,953
For the three and nine months ended September 30, 2020, the Company had a gross
margin from operations in the amount of $1,489 and $1,561 compared to a negative
gross margin from operations in the amount of $30,301 and $82,061, respectively
for the same period in the prior year. The Company has small margins as they
sold existing inventory while preparing for the scaling the manufacture of
BasaFlex™. In the same period in the prior year, the Company lost money on a
gross margin basis due to inefficiencies in the start-up process and extremely
narrow margins on the initial sales of like products. In the future, as the
Company's product gains acceptance, it is expected for margins to increase.
Operating Expenses
Professional fees - During the three months ended September 30, 2020 and 2019
professional fees were $127,294 compared to $68,927 for the same period in the
prior year. The Company had paid similar amounts for accounting services but has
increases fees as it relates to legal fees with the ongoing litigation and new
supplier and consulting agreements as it tries to secure relationships in the
industry.
During the nine months ended September 30, 2020 and 2019, professional fees were
$290,168 compared to $283,200 for the same period in the prior year. The
increased cost was due to higher legal expense in the current period resulting
from legal fees as noted above.
Payroll and payroll taxes - During the three and nine months ended September 30,
2020, payroll and payroll taxes were $107,284 and $507,170 compared to $287,355
and $604,664 in the prior year. The decrease was due to the termination of the
prior CEO in the first quarter of 2020 and the resignation of the CFO in the
second quarter of 2020 compared to both being employed during the same period in
the prior year.
Consulting - During the three months ended September 30, 2020, consulting fees
were $71,260 and $375 for the same period in the prior year. The increase is due
to consulting agreements for senior management.
During the nine months ended September 30, 2020, consulting fees were $170,198
compared to $216,465 for the same period in the prior year. The decrease was due
to the Company having amounts paid under several consulting agreements to senior
management.
General and administrative - During the three months ended September 30, 2020,
general and administrative expenses were $402,217 compared to $470,955 for the
same period in the prior year. The decrease is largely due to the stock-based
compensation expense in the prior year of $252,510 offset by the increase in
overall general and administrative costs, including but not limited to,
supplies, computers, furniture and other overhead costs.
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During the nine months ended September 30, 2020, general and administrative
expenses were $903,279 compared to $1,960,484 for the same period in the prior
year. The decrease is largely due to the stock-based compensation expense in the
prior year of $1,371,847 off set by the increase in overall general and
administrative costs.
Other Income
Disposition of fixed asset - During the three and nine months ended September
30, 2020 and 2019, the Company had a gain of $40,838 for both periods compared
to a $0 and $700 in the prior year. The increase in gain is due to the sale of
an asset during the quarter.
Miscellaneous income - During the three and nine months ended September 30,
2020, miscellaneous income was $0 and $70,817 as a result of a gain on the
settlement of a lawsuit of compared to $257 and $1,531 for the same period in
the prior year. The increase is due to the net settlement of $125,000 less the
contingency fee and expenses paid to the attorney for the HLM Storefront
litigation.
Gain on settlement of payable - During the three and nine months ended September
30, 2020, the Company had a gain of $292,112 for both periods as compared to
$64,050 and $201,547 for the same period in the prior year. The gain in the
current periods is due to the forgiveness by prior management of accrued wages
and related expenses whereas in the prior year, the gain is largely due to the
writing off of several payables that had exceeded their statute of limitations
for collection.
Gain (loss) on extinguishment of debt - During the three and nine months ended
September 30, 2020, the Company had a loss of $63,914 and $62,934 from the
extinguishment of debt compared to $0 and a gain of $2,886 for the same periods
in the prior year. The increase in losses is due to the settlement of various
long-standing debts for restricted common shares.
Other Expenses
Impairment of fixed asset - During the three and nine months ended September 30,
2020 and 2019, the Company had no gain or loss for both periods compared to a $0
and loss of $1,478 in the prior year.
Interest expense - During the three and nine months ended September 30, 2020 and
2019, interest expense was $550,094 and $801,925 compared to $25,569 and
$72,711, respectively, for the same period in the prior year. The increase is
mainly due to the amortization of the debt discounts recorded for the
convertible debt.
Liquidity and Capital Resources
Since inception, the Company has incurred net operating losses and used cash in
operations. As of September 30, 2020, the Company had an accumulated deficit of
$27,774,402. The Company has incurred general and administrative expenses
associated with its product development and compliance while concurrently
preparing the facility and further developing the manufacturing business. We
expect operating losses to continue in the short term and require additional
financing for continued support of our BFRP manufacturing business until the
Company can generate sufficient revenues and positive cash flow. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern.
We have historically satisfied our working capital requirements through the sale
of restricted common stock and the issuance of warrants and promissory notes.
We will continue our efforts until we have can obtain positive cash flow to
cover our expenses.
At September 30, 2020, the Company had cash of $575,912 compared to $129,152 at
December 31, 2019.
Notwithstanding the proceeds from the sale of our common stock this year,
current working capital is not sufficient to maintain our current operations,
and there is no assurance that sales efforts will be successful enough in the
near term to achieve the level of revenue sufficient to provide positive cash
flow. To the extent such revenues and corresponding cash flows do not
materialize, we will continue working towards securing more working capital with
a preference towards debt which may be convertible to equity. We cannot provide
any assurances that required capital will be obtained or that the terms of such
required capital may be acceptable to us. If we are unable to obtain adequate
financing, we may reduce our operating activities until sufficient funding is
secured or revenues are generated to support operating activities.
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Cash Flows
Net cash used in operating activities amounted to $1,612,928 and $1,760,258 for
the nine months ended September 30, 2020 and 2019, respectively.
During the nine months ended September 30, 2020, we used $115,956 net cash for
investing activities compared to $494,532 used in the same period in the prior
fiscal year for the modifications and UL listing of the production machinery and
the final payments for the enhancements made to our production facility as
compared to the deposits made on machinery and equipment.
During the nine months ended September 30, 2020, we had $2,175,644 net cash
provided by financing activities compared to $2,397,418 in the prior year.
Issuance of common shares for $684,167, borrowing of $1,886,727 from the
issuance of convertible and short-term notes payable, including from related
parties; less $348,000 of partial and full repayment of convertible notes; and
less $47,250 of partial repayment of notes payable provided the net cash during
the nine months ended September 30, 2020. We also issued common shares for
$2,262,748, borrowing of $284,300 from the issuance of convertible and
short-term notes payable, including from related parties; less $35,000 of
partial repayment of a convertible note; less $54,704 of full repayment of a
related party convertible note; less $50,000 of full repayment of a demand note
payable less $9,926 of partial repayment of a note payable provided the net cash
during the nine months ended September 30, 2019.
We do not believe that our cash on hand as of September 30, 2020 will be
sufficient to fund our current working capital requirements to the point where
we are generating positive cash flow. We have recently entered into several
convertible promissory notes to help fund operations and will require additional
working capital in the short term. We continue working towards securing more
working capital with a preference towards debt which may be convertible to
equity. However, there is no assurance that we will be successful in our efforts
or, if we are, that the terms will be beneficial to our shareholders.
Risk Factors
Investing in our common stock involves a high degree of risk. You should
carefully consider the risk factors included in the Company's annual report on
Form 10-K for the year ended December 31, 2019 filed with the SEC on April 6,
2020, before deciding whether to invest in the Company. Additional risks and
uncertainties not presently known to us, or that we currently deem immaterial,
may also impair our business operations or our financial condition.
ITEM 3.
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