Notes to
Condensed Consolidated Financial Statements
MARCH 31, 2017
(Unaudited)
NOTE 1
– ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of operations
Zero Gravity Solutions, Inc. (the “
Company”) is focused on industrializing and commercializing scientific breakthroughs in the area of patentable stem cell technologies through developing advances in plant, animal and human biology based on intellectual property designed for and derived from multiple experiments on the International Space Station ("ISS"). The Company’s mission is to improve life on earth by applying intellectual property and technology designed for and derived from six NASA enabled flights through utilization of the unique long-term microgravity environment platform of the ISS. The Company’s initial projects are directed to providing solutions to critical world food crop challenges.
The Company owns proprietary technology for its first commercial product, BAM-FX
TM
that can boost the nutritional value and enhance the immune system of food crops without the use of Genetic Modification. The Company’s focus is the commercialization of BAM-FX
TM
in both domestic and international markets. The Company’s headquarters are located in Boca Raton
, Florida.
The Company operates through two wholly owned subsidiaries: BAM Agricultural Solutions, Inc. and Zero Gravity Life Sciences, Inc., both Florida corporations formed by the Company in 2014.
Going Concern and Management
’s plans
The Company has a lim
ited operating history, recurring losses from operations and a working capital deficiency at March 31, 2017
. At March 31, 2017, the Company had approximate cash balances of $682,000, a working capital deficiency of $(182
,000), total stockholders’ equity of $239,000 and an accumulated deficit of $(19,149,000). To date, the Company has in large part relied on equity financing to fund its operations. The Company expects to continue to incur losses from operations for the near-term and these losses could be significant as product development, regulatory, contract research and technical marketing personnel related expenses are incurred. The Company estimates that the costs associated with the execution of its 2017 business plan may exceed $450,000 per month, with limited or no revenue in certain months, or for an extended period of time. Management has evaluated its ability to continue as a going concern for the next twelve months from the issuance of these March 31, 2017 consolidated financial statements, and has determined that there is substantial doubt as to its ability to continue as a going concern. The Company has executed product distribution agreements with domestic and international commercial agricultural distributors and generated initial product orders. Additional technical and marketing effort must be devoted to those distributors to insure the product is properly utilized and validated by end users. Financial resources are required to carry receivable balances due from the distributors and assist with end user validation and acceptance. To fund these capital needs, the Company has and continues to raise capital through a private placement offering in connection with its investment banker and through its internal efforts. Subsequent to March 31, 2017, the Company has raised approximately $1,121,000.
If the Company does not obtain additional capital, the Company would potentially be required to reduce the scope of its business development activities or cease operations. The Company continues to explore obtaining additional capital financing and the Company is closely monitoring its cash balances, cash needs and expense levels.
Management
’s strategic plans include the following:
- continuing to advance commercialization of the Company
’s principal product, BAM-FX
TM
in both domestic and international markets;
- pursuing additional capital raising opportunities;
- continuing to explore and execute prospective partnering or distribution opportunities; and
- identifying unique mark
et and product application opportunities that represent potential positive cash flow.
Basis of Presentation
Certain information or footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United
States of America have been omitted, pursuant to the rules and regulations of the Securities and Exchange Commission for interim financial reporting. Accordingly, they do not include all the information and footnotes necessary for complete financial statements. It is management's opinion, however, that all material adjustments (consisting of normal recurring adjustments and an adjustment to prior period results (Note 2)) have been made which are necessary for a fair financial statement presentation. The interim results for the period ended March 31, 2017, are not necessarily indicative of results for the full fiscal year. These unaudited financial statements should be read in conjunction with the audited financial statements and the notes thereto for the year ended December 31, 2016
.
ZERO
GRAVITY SOLUTIONS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
MARCH 31, 2017
(Unaudited)
Principles of Consolidation
The accompanying unaudited interim condensed consolidated financial statements include the accounts
of Zero Gravity Solutions, Inc. and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
Inventory
Inventory is valued on a lower of first in, first out (FIFO) cost or net realizable value. Inventory
consisted of:
|
|
March
31,
|
|
|
December
31,
|
|
|
|
2017
|
|
|
2016
|
|
Raw materials
|
|
$
|
12,741
|
|
|
$
|
9,081
|
|
Finished product
|
|
|
47,067
|
|
|
|
5,082
|
|
Consignment inventory
|
|
|
20,987
|
|
|
|
19,238
|
|
Total Inventory
|
|
$
|
80,795
|
|
|
$
|
33,401
|
|
Concentration of Credit Risk
The Company at March 31, 2017
maintained its cash balance with two major national financial institutions. The bank balance at March 31, 2017 exceeded the FDIC limits by $105,234. The Company believes that its credit risk exposure is limited. The Company has never suffered a loss due to such excess balances.
ZERO GRAVITY SOLUTIONS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
MARCH 31, 2017
(Unaudited)
Fair Value of Financial Instruments
The Company accounts for financial instruments under Financial Accounting Standards Board (FASB) Accounting Standards Codificat
ion Topic (ASC) 820,
Fair Value Measurements
. This statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. To increase consistency and comparability in fair value measurements, ASC 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three levels as follows:
|
Level 1
— quoted prices (unadjusted) in active markets for identical assets or liabilities;
|
|
|
|
Level 2
— observable inputs other than Level 1, quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, and model-derived prices whose inputs are observable or whose significant value drivers are observable; and
|
|
|
|
Level 3
— assets and liabilities whose significant value drivers are unobservable.
|
Observable inputs are based on market data obtained from independent sources, while unobservable inputs are based on the Company
’s market assumptions. Unobservable inputs require significant management judgment or estimation. In some cases, the inputs used to measure an asset or liability may fall into different levels of the fair value hierarchy. In those instances, the fair value measurement is required to be classified using the lowest level of input that is significant to the fair value measurement. Such determination requires significant management judgment.
As the Company's common stock is not traded in an active market, the Company estimates the fair valu
e of its common stock (used in its Black Scholes option pricing model) pursuant to ASC 820. This estimation process maximizes the use of observable inputs, including the quoted price of the Company's common stock in an inactive market, the price of the Company's common stock determined in connection with transactions in the Company's common stock, and an income approach to valuation (a discounted cash flow technique that takes into account the future cash flows) (Note 2).
The carrying amounts of the Compa
ny’s accounts receivable and accounts payable approximate fair value due to the relatively short period to maturity for these instruments. The carrying value of the Company’s notes payable approximates fair value due to their short period to maturity and their stated interest rates, combined with historic interest rate levels.
Revenue Recognition and Accounts Receivable
Revenue is recognized when the following four basic criteria have been met: (i) persuasive evidence of an arrangement exists; (ii) del
ivery has occurred and risk of loss has passed; (iii) the seller's price to the buyer is fixed or determinable; and (iv) collectability is reasonably assured.
The Company determined that no
reserve for estimated product returns and allowances was necessary during the three-month periods ended March 31, 2017 and 2016. Determination of the reserve for estimated product returns and allowances is based on management's analyses and judgments regarding certain conditions. Should future changes in conditions prove management's conclusions and judgments on previous analyses to be incorrect, revenue recognized for any reporting period could be materially affected.
ZERO GRAVITY SOLUTIONS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial
Statements
MARCH 31, 2017
(Unaudited)
At March 31, 2017
, two customers accounted for 97.6% of total accounts receivable, each representing 54.3%, and 43.3%, respectively. During the three months ended March 31, 2017, three customers accounted for 100% of net sales, each representing 33.3%. At December 31, 2016, five customers accounted for 99.4% of accounts receivable. Each of these five customers represented 40.3%, 24.1%, 13.0%, 11.7%, and 10.3%, respectively. During the three months ended March 31, 2016, two customers accounted for 100% of net sales, each representing 61.6% and 38.4%, respectively.
The Company extends credit to customers generally without requiring collateral. The Company monitors its exposure for
credit losses and maintains allowances for anticipated losses. The Company records an allowance for doubtful accounts when it is probable that the accounts receivable balance will not be collected. When estimating the allowance, the Company takes into consideration such factors as its day-to-day knowledge of the financial position of specific clients, and the industry and size of its clients. The Company has an allowance for doubtful accounts of $107,397 and $83,697 as of March 31, 2017 and December 31, 2016
, respectively
.
Stock Based Compensation
The Company recognizes the cost of employee services received in exchange for an award of equity instruments in the financial statements and is measured based on the grant date fair value of the award. Stock b
ased compensation expense is recognized over the period during which an employee is required to provide service in exchange for the award (generally the vesting period). The Company estimates the fair value of each stock award at the grant date by using the Black-Scholes option pricing model.
ZERO GRAVITY SOLUTIONS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
MARCH 31, 2017
(Unaudited)
Costs equal to these fair values are recognized ratably over the requisite
service period based on the number of awards that are expected to vest, or in the period of grant for awards that vest immediately and have no future service condition. The expense resulting from share-based payments is recorded in general and administrative expense. We have elected to account for the forfeiture of awards as they occur.
The Company also grants share-based compensation
awards to non-employees for service provided to the Company. The Company measures and recognizes the fair value of such transactions based on the fair value of consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable.
Loss per Common Share
Loss per share is calculated by dividing the Company
’s net loss applicable to common shareholders by the weighted average number of common shares during the period. Diluted loss per share is calculated by dividing the Company’s net loss available to common shareholders by the diluted weighted average number of shares outstanding during the year. The diluted weighted average number of shares outstanding is the basic weighted number of shares adjusted for any potentially dilutive debt or equity. The effect of the inclusion of the dilutive shares would have resulted in a decrease in loss per share. Accordingly, the weighted average shares outstanding have not been adjusted for dilutive shares. Outstanding warrants and stock options are not considered in the calculation as the impact of the potential common shares (totaling approximately 12,618,000 shares for the three months ended March 31, 2017 and 10,945,000 shares for the three-months ended March 31, 2016), would be to decrease the net loss per share.
Income Ta
xes
The Company accounts for income taxes under the asset and liability method, in which deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of e
xisting assets and liabilities and their respective tax basis and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period that includes the enactment date. A valuation allowance is required to the extent any deferred tax assets may not be realizable. The difference in the expected income tax benefit and no benefit recorded for the three months ended March 31, 2017 and 2016 is due to an increase in the valuation allowance.
ZERO GRAVITY SOLUTIONS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
MARCH 31, 2017
(Unaudited)
Recently Issued Accounting Pronouncements
In May 2014, the
FASB issued Accounting Standards Update (“ASU”) No. 2014-09,
Revenue from Contracts with Customers
, which supersedes the revenue recognition guidance in Revenue Recognition (Topic 605), and requires entities to recognize revenue in a way that depicts the transfer of potential goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. This new standard, as amended, is now effective for annual reporting periods beginning after December 15, 2017, and interim reporting periods within that reporting period. The standard permits the use of either retrospective or cumulative effect transition methods, with early adoption permitted. Based upon Managements' current assessment of the standard, the Company does not anticipate any material impact upon the adoption of this standard.
In July 2015, the FASB issued ASU No. 2015-11,
Simplifying the Measurement of Inventory
. ASU 2015-11 requires that inventory within the scope of the guidance be measured at the lower of cost and net realizable value. Inventory measured using last-in, first-out (LIFO) and retail inventory method (RIM) are excluded from this new guidance. This ASU replaces the concept of market with the single measurement of net realizable value and is intended to create efficiencies for preparers and more closely align U.S. GAAP with IFRS. This ASU is effective for public business entities in fiscal years and interim periods within those years, beginning after December 15, 2016. The implementation of this standard did not have a material impact on the Company’s consolidated financial statements. The Company's disclosures reflect the adoption of this new standard.
In November 2015, the FASB issued ASU. No. 2015-17,
Balance Sheet Classification of Deferred Taxes
. ASU No. 2015-17 simplifies the presentation of deferred taxes on the balance sheet by requiring classification of all deferred tax items as noncurrent including valuation allowances by jurisdiction. The ASU is effective for public entities for annual and interim periods beginning after December 15, 2016, and interim periods within those annual reporting periods. The Company adopted this standard in the first quarter of 2017. The implementation of this standard did not have a material impact on the Company’s consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-02,
Leases
. The main difference between the provisions of ASU No. 2016-02 and previous U.S. GAAP is the recognition of right-of-use assets and lease liabilities by lessees for those leases classified as operating leases under previous U.S. GAAP. ASU No. 2016- 02 retains a distinction between finance leases and operating leases, and the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee have not significantly changed from previous U.S. GAAP. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize right-of-use assets and lease liabilities. The accounting applied by a lessor is largely unchanged from that applied under previous U.S. GAAP. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. This ASU is effective for public business entities in fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted as of the beginning of any interim or annual reporting period. The Company has not yet determined the effect of the standard on its ongoing reporting.
ZERO GRAVITY SOLUTIONS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
MARCH 31, 2017
(Unaudited)
In March 2016, the FASB issued ASU 2016-09,
Compensation -”Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
, which simplifies several aspects of the accounting for share-based payment transactions. Under ASU 2016-09, excess tax benefits and tax deficiencies are recognized as income tax expense or benefit in the income statement. ASU 2016-09 also provides entities with the option to elect an accounting policy to continue to estimate forfeitures of stock-based awards over the service period (current GAAP) or account for forfeitures when they occur. Under ASU 2016-09, previously unrecognized excess tax benefits should be recognized using a modified retrospective transition. In addition, amendments requiring recognition of excess tax benefits and tax deficiencies in the income statement, as well as changes in the computation of weighted-average diluted shares outstanding, should be applied prospectively. ASU 2016-09 is effective beginning in the first quarter of 2017. The Company adopted ASU 2016-09, and elected to account for the forfeiture of awards as they occur, during the first quarter of 2017, with no material impact.
NOTE 2
– EMPLOYEE STOCK-BASED COMPENSATION ADJUSTMENT TO PRIOR PERIOD RESULTS
In preparing the Company's December 31, 2016 consolidated financial statements,
the Company determined that an error was made in the calculation of stock-based compensation expense under ASC 718 for certain awards granted after January 1, 2016. The error related to management's estimate of the fair value of the Company's common stock used in its Black-Scholes option pricing model. The Company had recorded non-cash compensation expense based upon the then current private placement price of $1.25 per share. The $1.25 price that was used during 2016 did not fully consider other observable inputs and valuation techniques to determine a supportable price per share; therefore, management re-evaluated such inputs and determined that the fair value per common share should have been a range of $0.63 - $0.68 for those awards throughout the first quarter of 2016. The error resulted in an approximate overstatement of stock-based compensation expense of $776,000 in the first quarter of 2016. The Company assessed the materiality of this misstatement in the 2016 interim period financial statements in accordance with the SEC's Staff Accounting Bulletin (SAB) No. 99, Materiality, codified in ASC No. 250, Presentation of Financial Statements, and concluded that the misstatement was not material to any interim period. In accordance with SAB 108, the Company has adjusted the quarter ended March 31, 2016 financial statements. There was no impact to total stockholders' equity or cash flows.
|
|
Three Months Ended March 31, 2016
|
|
|
|
As Originally Reported
|
|
|
Adjustment
|
|
|
As Corrected
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
$
|
2,705,000
|
|
$
|
(776,000
|
)
|
$
|
1,929,000
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
$
|
(2,808,000
|
)
|
$
|
776,000
|
|
$
|
(2,032,000
|
)
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
$
|
(2,876,000
|
)
|
$
|
776,000
|
|
$
|
(2,100,000
|
)
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted earnings (loss) per share
|
$
|
(0.07
|
)
|
$
|
0.02
|
|
$
|
(0.05
|
)
|
|
|
|
|
|
|
|
|
|
|
NOTE
3
– PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows:
|
|
March 31,
2017
|
|
|
December 31,
2016
|
|
Computer Equipment
|
|
$
|
15,332
|
|
|
$
|
15,332
|
|
Equipment and Furniture
|
|
|
123,517
|
|
|
|
123,517
|
|
Leasehold Improvements
|
|
|
7,593
|
|
|
|
7,593
|
|
|
|
|
146,442
|
|
|
|
146,442
|
|
Accumulated Depreciation
|
|
|
(33,492
|
)
|
|
|
(27,385
|
)
|
Property and Equipment - Net
|
|
$
|
112,950
|
|
|
$
|
119,057
|
|
Depreciation expense for the
three-month periods ended March 31, 2017 and 2016 was $6,107
and $2,566, respectively.
ZERO GRAVITY SOLUTIONS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
MARCH 31, 2017
(Unaudited)
NOTE
4
– RELATED PARTY TRANSACTIONS
Notes Payable
In July 2015, a Director advanced the Company $500,000 under a note payable for working capital purposes. The unsecured note payable bears interest at 8.5% per annum, is payable quarterly,
and was originally due in July 2016. In connection with the note, the Company issued five-year warrants to purchase 350,000 shares of the Company’s common stock at an exercise price of $3
per share. The relative fair value of the debt and warrants was recorded resulting in a debt discount of $227,258 upon execution of the agreement. For the three-months ended March 31, 2016, accretion of the debt discount was $65,988. The accretion of debt discount is presented in other expenses on the statements of operations. In July 2016, the maturity date of the note was extended to July 2017, and a conversion feature was added. The conversion feature allows the holder to convert the debt into common shares at his option at a conversion price of $1.25 per share (400,000 shares). The addition of the conversion feature represented a substantial modification to the debt instrument but the modification was determined to not be material. During the period ended March 31, 2017, $10,389 was recorded as interest expense and is included in accounts payables.
In July 2017, the maturity date of the note was extended to July 2018.
Royalty Agreement
In 2013, the Company entered into a royalty agreement, which was amended in 2015, with a key employee and principal stockholder of the Company and a current Director of the Company. The
agreement has a term of 25 years, requires payments of royalties equal to 5% of gross sales of products derived from certain patents held or licensed by the Company, including the BAM-FX™ product, and a minimum monthly payment of $2,500 to be offset against future royalty obligations of the Company. In addition, certain other costs the Company made that were necessary for the maintenance and protection of the Company’s rights in the underlying patents were applied against future royalty obligations of the Company.
Sales subject to the royalty agreement were $255 and $5,700 for the
three-month periods ended March 31, 2017 and 2016. As of March 31, 2017, and December 31, 2016, $299,030 and $277,038 of prepaid royalties, respectively, are available to be offset against future royalty obligations.
Exercise of Warrants
On March 1, 2017, the Company entered into an agreement with a member of its Board of Directors whereby 350,000 previously issued warrants were exercised in exchange for the issuance of 350,000 shares of the Company's common stock and a cash payment to th
e Company of $525,000. In connection with the transaction, the Company issued a new five-year warrant to purchase up to 350,000 shares of the Company's common stock at an exercise price of $4.50 per share.
On March 16, 2017, the Company also entered into
an agreement with a second member of its Board of Directors whereby 400,000 previously issued warrants were exercised in exchange for the issuance of 400,000 shares of the Company's common stock and a cash payment to the Company of $600,000. In connection with the transaction, the Company issued a new five-year warrant to purchase up to 400,000 share of the Company's common stock at an exercise price of $4.50 per share.
Inducement charges of $926,885 relating to these transactions were expensed in March 2017 (Note 7).
Payable to Former Director
An obligation of $75,000 is payable to a former Director for past consulting services. This obligation is unsecured and non-interest bearing and is included in accounts payable at March 31, 2017 and December 31, 2016, respectively.
NOTE
5
– COMMITMENTS
Lease Commitments
The Company leases its offices and building space under short term leases. These
leases are renewable either monthly or annually. The Company also has a two-year lease for its warehouse in Okeechobee, which began September 1, 2016 and will expire August 31, 2018. The future minimum lease payments are $14,748 for 2017 and $9,832 for 2018. Lease expense was $6,942 and $3,561 for the periods ended March 31, 2017 and 2016, respectively.
Research Commitment
In January 2016, the Company entered into a Reimbursable Space Act Agreement (the “
SAA”) with the National Aeronautics and Space Administration Ames Research Center (“NASA ARC”). Pursuant to the SAA, NASA ARC will evaluate the Company’s nutrient delivery system for commercial agriculture and NASA applications and the potential development of new agricultural technologies and products. The Company shall provide funding and reimbursement for the costs incurred by NASA ARC under the SAA, but shall own any resulting intellectual property created pursuant to the SAA. The Company paid NASA ARC a total of $373,750, which served as reimbursement for NASA ARC’s estimated expenses to carry out its first-year responsibilities pursuant to the SAA. The SAA remains in effect until the earlier of completion of all obligations contemplated in the SAA or five years from the date of agreement. For the three months ended March 31, 2017 and 2016, $29,610 and $62,292 respectively were expensed under the agreement.
ZERO GRAVITY SOLUTIONS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
MARCH 31, 2017
(Unaudited)
NOTE
6
– NOTE PAYABLE
The Company has an
outstanding note payable for financing corporate insurance premiums. The note carries a rate of interest of 6.5% and is due in September 2017
.
NOTE
7
– EQUITY
Common Stock
Private placement offerings
During the t
hree months ended March 31, 2017, the Company issued 229,500 shares of common stock pursuant to its October 2016 private offering for $3.00 per share. Proceeds from the offering were $688,500 with offering costs of $53,400. In connection with the offering, the Company issued fully vested, non-forfeitable warrants to purchase 20,008 common shares with an exercise price of $3.00 per common share to the placement agent. These warrants are included in additional paid in capital as non-cash offering costs of $23,734.
ZERO GRAVITY SOLUTIONS, INC. AND SUBSIDIARIES
Notes to
Condensed Consolidated Financial Statements
MARCH 31, 2017
(Unaudited)
Common stock issued for services
During the t
hree months ended March 31, 2017, the Company issued for services, 50,000 shares of common stock with a value of $150,000, included in general and administrative expenses.
During the
three months ended March 31, 2016, the Company issued for services, 20,000 shares of common stock with a value of $25,000. As of March 31, 2016, $24,658 was recorded as prepaid compensation.
Warrants
During the t
hree months ended March 31, 2017, the Company issued fully vested, non-forfeitable warrants to purchase 235,000 common shares at an exercise price of $3.00 per common share to employees and consultants for services. The estimated fair value of $283,039 was based upon the following management assumptions: expected dividends of 0, volatility of 148.39%, risk free interest rates of 1.90% - 2.05%, and expected life of the warrants of 5 years.
During the three months ended March 31, 201
6, the Company issued fully vested, non-forfeitable warrants to purchase 110,000 common shares at an exercise price of $2.00 per common share to employees and consultants for services. The estimated fair value of $130,833 was based upon the following management assumptions: expected dividends of 0, volatility of 184.2%, risk free interest rates of 1.31% - 1.38%, and expected life of the warrants of 5 years.
On July 16, 2015, Michael Smith, a Board member, received a 5-year cashless warrant to purchase up to 350,000 shares of common st
ock (at $3.00 per share) as additional consideration for a loan he made to the Company.
On March 1, 2017, the Company and Mr. Smith entered into an Amendment No. 1 to the prior warrant, pursuant to which (a) the exercise price was decreased to $1.50 per share for that portion of the prior warrant to be exercised by Mr. Smith on such date and
(b) the exercise of the prior warrant was to be on a cash basis. Subsequent to the execution of Amendment No.1, on March 1, 2017, Mr. Smith fully exercised the prior warrant. As a result of the prior warrant exercise, Mr. Smith received 350,000 shares of the Company's common stock in exchange for a cash payment of $525,000. As additional consideration for Mr. Smith's entry into Amendment No. 1 and exercise of the prior warrant, on March 1, 2017, the Company issued to Mr. Smith another five- year warrant (the "New Smith Warrant") to purchase up to 350,000 shares of the Company's common stock at an exercise price of $4.50 per share.
The estimated fair value of this warrant of approximately $402,000 was based on the following assumptions: expected dividends of 0, volatility of 148.39%, risk free interest rate of 1.89%, and expected life of the warrants of 5 years.
On February 19, 2016, Diamond B Capital, LLC (“
Diamond B”) received from the Company a five-year warrant to purchase up to 400,000 shares of the Company’s common stock at an exercise price of $2.00 per share (the “Prior Diamond B Warrant”). Alexander M. Boies, a member of the Company’s Board of Directors, holds membership interests representing a 12% ownership interest in Diamond B. On March 16, 2017, the Company also entered into an Amendment No. 1 to the Prior Diamond B Warrant (the “Prior Diamond B Warrant Amendment”), pursuant to which the exercise price was decreased to $1.50 per share for that portion of the Prior Diamond B Warrant to be exercised by Diamond B on such date. Subsequent to the execution of the Prior Diamond B Warrant Amendment, on March 16, 2017, Diamond B fully exercised the Prior Diamond B Warrant (the “Prior Diamond B Warrant Exercise”). As a result of the Prior Diamond B Warrant Exercise, Diamond B received 400,000 shares of the Company’s common stock in exchange for a cash payment of $600,000. As additional consideration for Diamond B's entry into the Prior Diamond B Warrant Amendment and exercise of the Prior Diamond B Warrant, on March 9, 2017, the Company issued to Diamond B another five-year warrant (the "New Diamond B Warrant") to purchase up to 400,000 shares of the Company's common stock at an exercise price of $4.50 per share.
The estimated fair value of this warrant of approximately $463,000 was based on the following assumptions: expected dividends of 0, volatility of 148.39%, risk free interest rate of 1.89%, and expected life of the warrants of 5 years.
On February 27, 2017, an employee exerci
sed a five-year warrant to purchase 40,000 shares of common stock, which had an original exercise price of $2.00 per share, at an exercise price of $1.50 per share for a cash payment of $60,000. In addition, the employee was given a five-year warrant to purchase 40,000 shares of common stock with an exercise price of $4.50 per share.
The estimated fair value of this warrant of approximately $46,000 was based on the following assumptions: expected dividends of 0, volatility of 148.39%, risk free interest rate of 2.05%, and expected life of the warrants of 5 years.
The modifications to the exercise price of the warrants is considered a conversion incentive, resulting in an expense
(including the expense of the new warrants) of $926,885, recorded as general and administrative expense and additional paid in capital in the period March 31, 2017.
ZERO GRAVITY SOLUTIONS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
MARCH 31, 2017
(Unaudited)
The following is a summary of the Company
’s warrant activity for the three months ended March 31, 2017:
|
|
|
|
|
|
|
|
|
|
Weighted
Average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average
|
|
|
Contractual
Life
|
|
|
Aggregate
Intrinsic
|
|
|
|
Number
of Warrants
|
|
|
Exercise
Price
|
|
|
(in
Years)
|
|
|
Value
|
|
Outstanding
– January 1, 2017
|
|
|
9,664,733
|
|
|
$
|
1.44
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
255,008
|
|
|
|
3.00
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
790,000
|
|
|
|
4.50
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(790,000
|
)
|
|
|
(1.50
|
)
|
|
|
|
|
|
|
|
|
Cancelled/Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Outstanding
and exercisable - March 31, 2017
|
|
|
9,919,741
|
|
|
$
|
1.77
|
|
|
|
3.4
|
|
|
$
|
2,606,698
|
|
The
aggregate intrinsic value in the table above represents the total intrinsic value (the difference between the estimated stock price on March 31, 2017 and the exercise price, multiplied by the number of in-the-money warrants) that would have been received by the warrant holders, had all warrant holders been able to, and in fact had, exercised their warrants on March 31, 2017
.
Stock incentive plan options
In November 2015, the Company adopted its 2015 Equity Incentive Plan. The Plan provides stock base
d compensation to employees, directors and consultants, as more fully described in the Plan. The Company has reserved 4,000,000 shares to the Plan. During the three months ended March 31, 2017, the Company granted 60,000 options to employees and officers. The estimated fair value of $68,328 was based upon the following management assumptions: expected dividends of $0, volatility of 148.4%, risk free interest rates of 1.89%-1.93%, and expected life of the options of 5 years.
|
|
|
|
|
|
|
|
|
|
Weighted
Average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average
|
|
|
Contractual
Life
|
|
|
Aggregate
Intrinsic
|
|
|
|
Number
of
Options
|
|
|
Exercise
Price
|
|
|
(in
Years)
|
|
|
Value
|
|
Outstanding
– January 1, 2017
|
|
|
2,755,000
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
60,000
|
|
|
|
3.00
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Cancelled/Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Outstanding - March 31, 2017
|
|
|
2,815,000
|
|
|
$
|
1.29
|
|
|
|
9.0
|
|
|
$
|
192,850
|
|
Exercisable - March 31, 2017
|
|
|
2,698,479
|
|
|
$
|
1.25
|
|
|
|
8.7
|
|
|
$
|
187,425
|
|
ZERO GRAVITY SOLUTIONS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
MARCH 31, 2017
(Unaudited)
NOTE
8
– SUBSEQUENT EVENTS
Subsequent to March 31, 2017, the Company issued 373,500 shares of common stock with offering costs of $75,240 under the private offering. The Company also issued fully vested non-forfeitable warrants to p
urchase 21,945 shares of common stock to the placement agent. Gross proceeds from the issuances were $1,120,500.
Subsequent to March 31, 2017, The Company issued warrants to purchase 175,000 shares of common stock to consultants for services.
In July 2017 the $500,000 related party loan was extended to a due date of July 2018 without any other changes to the terms of the note.