ZERO GRAVITY SOLUTIONS, INC. Overview
Zero Gravity Solutions, Inc. , aNevada corporation (the "Company" or "ZGSI"), is an 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. 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 agricultural production and the increasing inability to feed the world's rapidly growing population. The Company's business model is focused on its primary technology, BAM-FX®, which is a cost effective, delivery platform and stimulant for plants that promotes the delivery of minerals and micronutrients systemically. ZGSI is headquartered inBoca Raton, Florida . Our business activities are conducted by our wholly owned subsidiary,BAM Agricultural Solutions, Inc. ("BAM"), and our 98% owned subsidiary,Specialty Agricultural Solutions, Inc. ("SASI"). BAM oversees BAM-FX®'s commercial introduction and business development through product trials and validation with crop growers and distributors that have established business networks in agricultural markets, manufacturing, sales and agronomy support. In addition, BAM manages the introduction of Gardener's Choice®, a ready to use product for 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"), was originally formed for space research projects, life science applications of our technology and conducting research on future BAM product lines. ZGLS is currently inactive. The Company is focused on revenue generation through the sale of BAM-FX® in domestic and international agricultural markets. BAM-FX® is licensed in and registered for sale as a fertilizer application in all fifty (50) domestic states and has been approved for import and commercial sales inChile ,Paraguay ,Colombia ,Brazil , andChina . The Company is also pursuing import approval through proper governmental officials and agencies to begin commercial sales inPhilippines andIndia . Pursuant to a license and business development agreement withAgro Space Tech SA de CV de RV, the Company is providing technical assistance to obtain approval inMexico andPeru . 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. The Company began domestic product 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 both market and product development efforts. During the past five years, the Company increasingly focused on obtaining third-party validation, through studies with academic institutions and in accordance with the Company's Reimbursable Space Act Agreement with theNational 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 are due to the Company's inability to sufficiently differentiate its product from other products making similar claims. Additionally, in a number of row crops, the product, 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 for specific validation trials during 2019. Based upon BAM-FX®'s performance, the Company expects to focus business development efforts in those crops showing the best return on investment during 2021. During 2017, we developed 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 and 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 2019. 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 Gardener's Choice® sales were nominal through the third 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 to 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. 42
--------------------------------------------------------------------------------
Table of Contents
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 inColorado ,Kansas, Illinois , andTexas 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, which we believe would have been more beneficial for the crop during the growing season. Abnormal wet weather conditions and flooding inIllinois led to theU.S. Department of Agriculture designating 102 counties as primary disaster areas onAugust 14, 2019 . A number ofIllinois growers declined or discontinued trials due to poor weather conditions and continued prior farming practices with which they were comfortable. The Company saw positive results in aColorado corn trial. However, hail damaged both control and trial plots mid-season and therefore, yield results were compromised. The Company analyzed the growers' soil as part of the program and found nutrient deficiencies, specifically inTexas , that the growers decided not to address, thereby negatively impacting yields on both control and trial crops. Due to the expense of monitoring the growers' progress, the Company did not have the personnel or financial resources to monitor and provide guidance to the growers on site during the growing season. Although the Company received interest from a number of growers to continue trials in the next growing cycle, the Company generated nominal sales from this program.
To support commercialization and sales, the Company employs or contracts certified crop advisors and agronomists for the technical requirements of product introduction and applications domestically and internationally.
The Company continues to develop technical relationships to validate the science incorporated in BAM-FX® and identify additional commercial markets and licensing opportunities for the product. The majority of this work was performed during 2019 byIowa State University on the efficacy of a granular product and new product formulations,Colusa County Farms on tomato andNurture Earth Research and Development Pvt. Ltd. inIndia 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 dry formulation showed a combination of yield improvement and the plant's ability to cope with diseases. Two trials were conducted inIndia , both in pomegranate. The first trial was conducted in February and 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 produce undamaged fruit. The trees showed signs of recovery and fruit damage was controlled. The second trial, also conducted inIndia , compared yields against a control group. 3,500 trees were treated with foliar applications in April andMay 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 andMay 2019 , the Company treated, with a foliar application, fifteen olive trees inCalifornia 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") onAugust 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 onAugust 28, 2020 that the patent application was received. The Company's product 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 biomarkers will provide us a precise tool for optimal product application timing and dosage. The Company manufactures its product in a manufacturing facility inOkeechobee, Florida . Manufacturing is conducted on an as-needed batch process. The Company continually performs regulatory and process efficiency reviews of manufacturing operations. Our manufacturing plant manager is an experienced biochemical engineer. We have made limited quantities of granular product using a batch process for research purposes and plan to identify equipment and manufacturing requirements for commercial scale operations when testing and registration requirements for the granular product are complete. Given adequate resources, we believe testing and registration could be completed during the fourth quarter of 2021. 43
--------------------------------------------------------------------------------
Table of Contents
Although we have started and realized nominal product sales, we anticipate that in the near term, ongoing expenses, including product development, manufacturing process improvement, corporate administration and technical product support, will be funded primarily by proceeds from sales of our securities and debt. We have generated nominal sales from our operations thus far. We believe with the financial ability to promote and market, in addition to easing COVID-19 commerce restrictions, product sales could begin during the third quarter of 2021 primarily from direct sales to end users and international distributor purchases. We cannot, however, guarantee we will be successful in generating significant sales 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 business plan and realize revenues expected. The ongoing COVID-19 global and national health emergency has caused significant disruption in the international andUnited States economies and financial markets. InMarch 2020 , theWorld 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. This situation is particularly acute inIndia as the country has recently experience an increase in COVID-19 cases and the government has imposed further restrictions to movement within the country. Less restrictive thanIndia , conditions in bothMexico andPhilippines have limited our distributors' ability to conduct full-scale business development initiatives, thereby causing delays in product orders to and purchases from us. In addition, prolonged travel restrictions within foreign countries could result in a variety of risks to the business, including weakened demand for product. The Company continues to closely monitor market conditions and respond accordingly. 44
--------------------------------------------------------------------------------
Table of Contents
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 inthe United States . The preparation of these unaudited consolidated financial statements requires us to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes. Note 2: Summary of Significant Accounting Policies in our unaudited consolidated financial statements contains a description of the accounting policies used in the preparation of our unaudited consolidated financial statements as well as the consideration of recently issued accounting standards and the estimated impact these standards will have on our unaudited 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 Consolidated Financial Statements. In addition, there are other items within our unaudited 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 re-measured, 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 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. 45
--------------------------------------------------------------------------------
Table of Contents
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).
46--------------------------------------------------------------------------------
Table of Contents
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 fromU.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 actualforfeiture 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.
47--------------------------------------------------------------------------------
Table of Contents
Results of Operations - For the Three Months Ended
September September
For the three months ended 30, 30,
2019 2018 $ Change % Change
Sales $ 15,815 $ 11,635 $ 4,180 35.9 %
Cost of Sales 1,239 2,476 (1,237 ) (50.0 )%
Gross Profit 14,576 9,159 5,417 59.1 %
Operating Expenses 1,209,030 1,019,766 189,264 18.6 %
Loss from Operations (1,194,454 ) (1,010,607 ) (183,847 ) 18.2 %
Other Income / (Expense) (923,246 ) (253,846 ) (669,400 ) 263.7 %
Net Loss including non-controlling interest (2,117,700 ) (1,264,453 ) (853,247 ) 67.5 % Non-controlling interest
608 - 608 - %
Net Loss available to common stockholders
67.4 %
Net Loss per Share - Basic and Diluted
Sales for the three months endedSeptember 30, 2019 was$15,815 an increase of$4,180 or 35.9% over$11,635 for the three months endedSeptember 30, 2018 . Sales are generated from sales to distributors of agricultural products and directly to growers. During the three months endedSeptember 30, 2019 , the Company began to offer BAM-FX and Gardener's Choice on-line.
For the three months ended
48--------------------------------------------------------------------------------
Table of Contents
Operating Expenses increased by$189,264 to$1,209,030 for the three months endedSeptember 30, 2019 compared to$1,019,766 for the three months endedSeptember 30, 2018 , or 18.6%. The increase in Operating Expenses was primarily due to an increase in legal fees of$65,139 related to an intellectual property settlement agreement with our former Chief Science Officer and services related to our debt restructuring and documentation, an increase in accounting fees for temporary help of$55,712 , an increase in business travel and trade show expense of$40,090 , an increase in non-cash equity compensation and cash compensation paid to consultants and advisors primarily related to business development and sales of$86,617 and$26,637 , respectively, and an increase in web site expense of$27,159 . The increase in Operating Expenses was partially offset by a decrease in salaries and related employee benefits and payroll tax expense of$69,719 resulting from headcount reductions. Other Expense for the three months endedSeptember 30, 2019 increased by$669,400 to$923,246 from$253,846 for the period endedSeptember 30, 2018 . The increase in Other Expense was primarily due to an increase in accretion of debt discount of$629,247 due to the Company's debt restructuring whereby certain debt and accrued interest as ofApril 30, 2019 was exchanged for Series A Notes and for certain participating Series A Note Holders, the issuance of Series B Notes for additional capital. In addition, Other Expense increase due to an increase in interest expense of$146,350 due to an increase in the Company's debt with higher interest rate terms and a change in the fair value of an embedded conversion option of$51,000 contained in an outstanding convertible note. These increases in Other Expense were offset by a gain of$156,000 , realized upon repayment of a convertible note, which eliminated an embedded conversion option derivative liability, during the three months endedSeptember 30, 2019 . The fair value of the embedded derivative liability associated with the note was$156,000 . Net Loss available to common stockholdersfor the three months endedSeptember 30, 2019 increased by$852,639 , or 67.4%, to$2,117,092 from Net Loss available to common stockholders of$1,264,453 for the three months endedSeptember 30, 2018 . The increase in Net Loss is primarily due to an increase in Operating Expenses of$189,264 and an increase in Other Expense of$669,400 .
Results of Operations - For the Nine Months Ended
September September
For the Nine Months ended 30, 30,
2019 2018 $ Change % Change
Sales $ 65,233 $ 44,705 $ 20,528 45.9 %
Cost of Sales 34,879 7,754 27,125 349.8 %
Gross Profit 30,354 36,951 (6,597 ) (17.9 )%
Operating Expenses 3,148,588 3,691,813 (543,225 ) (14.7 )%
Loss from Operations (3,118,234 ) (3,654,862 ) 536,628 (14.7 )%
Other Income / (Expense) (2,850,782 ) (460,653 ) (2,390,129 ) 518.9 %
Net Loss including non-controlling interest $ (5,969,016 ) $ (4,115,515 ) $ (1,853,501 ) 45.3 %
Non-controlling interest (1,163 ) - (1,163 ) - %
Net Loss available to common stockholders
Net Loss per Share - Basic and Diluted
Sales for the nine months endedSeptember 30, 2019 was$65,233 , an increase of$20,528 or 45.9% over$44,705 for the nine months endedSeptember 30, 2018 . The increase in Sales was due to a sale of product for specialty crop markets during the nine months endedSeptember 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 nine months endedSeptember 30, 2018 , which did not reoccur during the nine months endedSeptember 30, 2019 due to changes in their business. Sales are generated from sales to our network of distributors and directly to growers. During the nine months endedSeptember 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 and nominal initial on-line sales of BAM-FX and Gardener's Choice. For the nine months endedSeptember 30, 2019 , Cost of Sales was$34,879 , an increase of$27,125 or 349.8% over$7,754 for the nine months endedSeptember 30, 2018 . The increase in Cost of Sales was directly related to our increase in Sales for the nine months endedSeptember 30, 2019 over 2018 and a write off of inventory of$10,942 during the nine months endedSeptember 30, 2019 . During 2019, the Company reduced the acid content of its product and discontinued the sale of previously manufactured product remaining in inventory. 49
--------------------------------------------------------------------------------
Table of Contents
Operating Expenses decreased by$543,225 to$3,148,588 for the nine months endedSeptember 30, 2019 compared to$3,691,813 for the nine months endedSeptember 30, 2018 , or 14.7%. The decrease in Operating Expenses was primarily due to a decrease in salaries and related employee benefits and payroll tax expense of$625,088 due to a reduction in headcount, a decrease of$205,107 in non-recurring impairment expense, a decrease in non-recurring impairment of royalty advances of$129,580 , a decrease of$82,962 in non-cash equity compensation paid to consultants and advisors and a decrease in research and development expense of$37,790 . These decreases were primarily offset by an increase in legal fees related to an intellectual property settlement with our former Chief Science Office and services related to our debt restructuring and documentation of$128,319 , an increase in consulting and advisor cash expenses of$140,403 , an increase in accounting fees for temporary help of$113,561 , an increase in advertising and promotion expense of$96,549 , an increase in web site expense of$40,128 , an increase in audit fees of$31,309 , and an increase in product shipping expense for business development purposes of$24,298 . Other Expense for the nine months endedSeptember 30, 2019 increased by$2,390,129 to$2,850,782 from$460,653 for the period endedSeptember 30, 2018 . The increase in Other Expense was primarily due to an increase in accretion of debt discount of$2,090,484 due to the Company's debt restructuring whereby certain debt and accrued interest as ofApril 30, 2019 was exchanged for Series A Notes and for certain participating Series A Note Holders, the issuance of Series B Notes for additional capital. Accretion of debt discount attributed to the retired debt was$840,320 . In addition, Other Expense increase due to an increase in interest expense of$393,180 resulting from an increase in the Company's debt with higher interest rate terms and a change in the fair value of an embedded conversion option of$64,000 contained in an outstanding convertible note. These increases in Other Expense were offset by a gain of$156,000 , realized upon repayment of a convertible note, which eliminated an embedded conversion option derivative liability, during the nine months endedSeptember 30, 2019 . The fair value of the embedded derivative liability associated with the note was$156,000 . Net Loss available to common stockholders for the nine months endedSeptember 30, 2019 increased by$1,852,338 to$5,967,853 from Net Loss available to common stockholders of$4,115,515 for the nine months endedSeptember 30, 2018 . The increase in net loss is primarily due to an increase in Other Expense of$2,390,129 partially offset by a decrease in Operating Expenses of$544,879 for the period endedSeptember 30, 2019 . Use of Cash
Net cash used in operating activities for the nine months endedSeptember 30, 2019 was approximately$2,957,000 , a decrease of approximately$441,000 , or 13.0%, from approximately$3,398,000 for the nine months endedSeptember 30, 2018 . The decrease in net cash used in operating activities was primarily due to an increase in non-cash amortization of debt discount and loss on debt extinguishment of$2,090,000 , an increase in accounts payable and accrued expenses of$568,000 , an increase in accrued interest due related parties of$244,000 , a decrease in prepaid and other of$57,000 and a change in fair value a derivative liability of$64,000 . The decrease in net cash used in operating activities was offset by an increase in net loss of approximately$1,854,000 , a decrease in non-cash impairment expense of$203,000 , an increase in inventory of approximately$207,000 , a decrease in advances on future royalties to related parties reserve of approximately$130,000 , an increase in non-cash gain on debt extinguishment of$156,000 and a decrease in deferred revenue of$43,000 .
Net cash used in investing activities decreased by
Net Cash Provided by Financing Activities
Net cash provided by financing activities for the nine months endedSeptember 30, 2019 was approximately$3,422,000 , a decrease of approximately$350,000 , or 9.3%, from approximately$3,772,000 for the nine months endedSeptember 30, 2018 . The decrease in net cash provided by financing activities was due primarily to an increase in proceeds from issuance of Series B Notes, 12% convertible notes payable to related parties of 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$200,000 , a decrease in repayments of notes payable of approximately$116,000 and an increase in proceeds from convertible notes payable of approximately$89,000 . The increase in cash provided by financing activities for the nine months endedSeptember 30, 2019 was offset by a decrease in proceeds from notes payable - related party of approximately$1,911,000 , a decrease in proceeds from sale of common stock of approximately$911,000 , a decrease in proceeds from notes payable of$700,000 , an increase in repayments of notes payable of$182,000 and an increase in repayment of a convertible note of approximately$136,000 .
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 2019, 2020 and 2021 business plans may exceed$300,000 per month. This expense rate is primarily due to: an increase in costs of additional technical personnel and personnel-related costs; promotional expenses to develop markets for domestic and international sales of our product, BAM-FX®, our retail product, Gardener's Choice®, and our cannabis market product introduction; improvements to our manufacturing facility and processes; research and product development related expense for expansion of our product line, patent application filing costs, 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 theSeptember 30, 2019 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 to be needed to operate the business. The Company is active in its fundraising, and subsequent toSeptember 30, 2019 , the Company has raised approximately$2,819,000 . We filed a registration statement on Form 10 with theSEC that became effective inFebruary 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 as a fully reporting public company and have continued to raise funds through private offerings, issuance of debt and inducement of outstanding warrants. 50
--------------------------------------------------------------------------------
Table of Contents
Adequate additional financing may not be realized from our equity or debt offerings 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
Total assets were approximately$1,077,000 and$552,000 atSeptember 30, 2019 andDecember 31, 2018 , respectively. Working capital (deficit) was approximately$(501,000) and$(2,691,000) atSeptember 30, 2019 andDecember 31, 2018 , respectively. The decrease in working capital (deficit) of$2,191,000 during the period was primarily due to cash used in operating activities of approximately$2,957,000 offset by cash provided by financing activities of approximately$3,422,000 and restructuring of current notes payable in which the notes were exchanged for Series A and Series B secured, convertible long term notes payable of approximately$1,750,000 . Total stockholders' deficit decreased by approximately$2,488,000 to$(2,608,000) atSeptember 30, 2019 from$(5,096,000) atDecember 31, 2018 . Outlook
Required Capital Going Forward
Due to the fact that our product, 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 in 2020 and 2021. On or aboutMay 11, 2019 , the Company entered into an Exchange and Release Agreement (each, an "Exchange Agreement"), with certain holders of the Company's Promissory Notes (each, an "Old Note"), including certain members of the Board of Directors and/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 throughMarch 31, 2019 . Furthermore, pursuant to each Exchange Agreement, in connection with any such exchange, the 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 the Old Notes for a new warrant to purchase shares of 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 be 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 its 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 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. 51
--------------------------------------------------------------------------------
Table of Contents
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 in 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 holder of a Series B Note may not receive a Prepayment Notice prior to the 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 that 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 istwo dollars ($2.00 ) per share and the conversion price under a Series B Note isone 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 common stock at an exercise price equal toone dollar ($1.00 ) per share and (ii) Purchase Warrant may be exercised at any time after issuance and through ninety (90) days after payment in full of the Offering Note at an exercise price equal to (A)one dollar ($1.00 ) per share if the Purchase Warrant is exercised on or beforeApril 1, 2020 , and (B)fifty cents ($0.50 ) per share if the Purchase Warrant was exercised afterApril 1, 2020 , in each case, by providing to the Company a notice of exercise, payment and surrender of such Offering Warrant. In addition, the 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 fully vested, non-forfeitable warrants to purchase 9,499,600 common shares at an exercise price of$1.00 per share as part of the Offering. Subsequent toSeptember 30, 2019 , the Company issued three fully vested, non-forfeitable five year warrants to purchase, in the aggregate, up to 45,000 common shares at an exercise price of$3.00 per common share to an employee for services.
Subsequent to
Subsequent to
Subsequent to
Subsequent toSeptember 30, 2019 , the Company issued fully vested, non-forfeitable two year warrants to purchase, in the aggregate, up to 470,000 shares of common stock at an exercise price of$1.00 in connection with a debt offering.
Subsequent to
Subsequent to
Subsequent to
Subsequent to
Subsequent to
52--------------------------------------------------------------------------------
Table of Contents
Subsequent to
DuringOctober 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 ofDecember 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 dueJanuary 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. 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 may 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. OnMay 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, andEconomic Securities Act's , (theCARE'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 toSeptember 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
DuringNovember 2020 , the Company commenced an offering of up to$5,000,000 of 11% Convertible Secured Promissory Notes (the "Notes"). The Notes bear interest at a eleven percent (11%) annual rate, payable quarterly in arrears. Interest will be paid in shares of the Company's common stock in the range of$1.00 to$1.50 per share. The Notes mature 2 years from the closing date. The Notes are convertible into the Company's common stock in the range of$1.00 to$1.50 per share. 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 may 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$505,000 in gross proceeds pursuant to the issuance of Notes and incurred broker fees of$32,200 . OnFebruary 16, 2021 , the Company executed a Second Draw Paycheck Protection Term Note and received proceeds of$276,201 , the terms of which are the same as the PPP Note. 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.
Without consideration of any revenue or additional fundraising, at the Company's current rate of expenditure, we expect that our current capital will not be sufficient to cover our future operating costs for twelve months.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
53--------------------------------------------------------------------------------
Table of Contents
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 2.
© Edgar Online, source
