Note 1 - Organization and Summary of Significant Accounting Policies

12 Months Ended

Dec. 31, 2018

Organization, Consolidation and Presentation of Financial Statements Disclosure and Significant Accounting Policies [Text Block]

NOTE

– ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of operations

Zero Gravity Solutions, Inc. (the “Company”) is a biotechnology company focused on commercializing technology derived from and designed for spaceflight with significant applications on Earth. These technologies are focused on improving world agriculture by providing valuable solutions to challenges facing humanity including threats to world agriculture and the ability to feed the world’s rapidly growing population.

The Company owns proprietary technology for its initial commercial product, BAM-FX

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

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 and ZGLS, both Florida corporations formed by the Company in

2014.

2018,

the Company created a

third

subsidiary SASI, which began operations in

2019.

The Company owns

98%

of this subsidiary.

Going Concern and Management’s Plans

These consolidated financial statements are prepared on a going concern basis which contemplates the realization of assets and settlements of liabilities and commitments in the normal course of business.

The Company has a working capital deficiency as of

December 31, 2018,

and a net loss and negative cash flows from operating activities for the year then ended. At

December 31, 2018,

the Company had an approximate cash balance of

$44,000,

a working capital deficiency of approximately $(

2,691,000

), a net loss of approximately $(

5,440,000

), and negative cash flows from operating activities of approximately $(

4,145,000

) for the year then ended. To date, the Company has relied on equity financing and has entered into related and non-related party promissory notes to fund its operations. The Company has also issued stock-based compensation in exchange for services. Although the Company intends to raise additional capital, the Company expects to continue to incur losses from operations and have negative cash flows from operating activities for the near-term and these losses could be significant as product development, regulatory, contract research, and technical marketing personnel related expenses are incurred. Management has evaluated its ability to continue as a going concern for the next

twelve

months from the issuance of these

December 31, 2018

consolidated financial statements, and has determined that there is substantial doubt as to its ability to continue as a going concern. The Company has satisfied its obligations using cash from successful capital raising efforts through

December 31, 2018,

however there are

assurances that such successful efforts will continue for up to a year after these financial statements are issued. The consolidated financial statements do

not

include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that

may

result should the Company be unable to continue as a going concern. The Company has executed product distribution agreements with domestic and international commercial agricultural distributors and generated initial product orders. Additional technical and marketing efforts must be devoted to those distributors to insure the product is properly utilized and validated by end users. To fund these capital needs, the Company has and continues to raise capital through a private placement offering in connection with its investment banker and through its internal efforts, as well as through issuances of debt. Subsequent to

December 31, 2018,

the Company has raised approximately

$3,824,000

(Note

). 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

in both domestic and international markets;

● Pursuing additional capital raising opportunities;

● Continuing to explore and execute prospective partnering or distribution opportunities; and

● Identifying unique market opportunities that represent potential positive cash flow.

Use of Estimates

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Significant estimates include allowance for doubtful accounts and other receivables, inventory reserves and classifications, amortization period and recoverability of intangible assets, valuation of beneficial conversion features in convertible debt, valuation of loss contingencies, valuation of derivative liabilities, valuation of stock-based compensation and the valuation allowance on deferred tax assets. Actual results could differ from those estimates.

Cash and Cash Equivalents

For the purposes of the statement of cash flows, the Company considers all highly liquid investments purchased with an original maturity of

three

months or less to be cash equivalents. The Company had

cash equivalents at

December 31, 2018

and

2017.

Segment Reporting

The Company views its operations and manages its business as

one

reportable segment. As a result the consolidated financial statements presented within, relate to our principal operating segment. Customers in the United States account for

81.0%

of our revenues, while

19.0%

was derived from customers in South America. We do

not

have any property or equipment outside of the United States.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of ZGSI and its wholly-owned subsidiaries. The company own

98%

of SASI which began operations in

2019.

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 and net realizable value. At

December 31,

inventory consisted of:

	December 31,		December 31,
	2018		2017
Raw materials	$	17,610	$	23,562
Finished product		85,532		45,081
Total Inventory	$	103,142	$	68,643

During the year ended

December 31, 2018

the Company recorded an impairment of inventory of

$32,084.

This was included in Costs of Sales.

Property and Equipment

Property and equipment is stated at cost, less accumulated depreciation. Expenditures for maintenance and repairs are charged to expense as incurred.

Depreciation is computed on a straight-line basis over estimated useful lives of

three

(

) to

ten

(

) years. Property and equipment is reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset

may

not

be recoverable. There were

impairment charges taken during the years ended

December 31, 2018

and

2017.

Impairment of Long Lived Assets

The Company accounts for long-lived assets in accordance with the provisions of ASC

360

“Impairment or Disposal of Long-Lived Assets.” This guidance requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset

may

not

be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.

Intellectual Property

The Company reviewed its intellectual property for impairment and determined that it had

recoverable value.

$10,210

was recorded as impairment cost in

2018.

Concentration of Credit Risk

The Company believes that its credit risk exposure is limited. The Company has never suffered a loss due to funds in excess of FDIC limits and had

funds held in excess of FDIC limits at

December 31, 2018.

Fair Value of Financial Instruments

The Company accounts for financial instruments under Financial Accounting Standards Board (FASB) Accounting Standards Codification Topic (ASC)

820,

Fair Value Measurements

. This statement 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 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 (a discounted cash flow technique that considers the future cash flows).

The carrying amounts of the Company’s accounts receivable and accounts payable approximate fair value due to the relatively short period to maturity for these instruments. The carrying value of the Company’s notes payable approximates fair value due to their short period to maturity and their stated interest rates, combined with historic interest rate levels.

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.

Advertising

The Company conducts advertising for the promotion of its products and services. In accordance with ASC

720

35,

“Advertising Costs,” advertising costs are charged to operations when incurred. Such amounts aggregated

$65,717

2018

and

$16,034

2017.

Legal Expenses

All legal costs are charged to expense as incurred.

Convertible Notes With Fixed Rate Conversion Options

The Company

may

enter into convertible notes, some of which

may

contain fixed rate conversion features, whereby the outstanding principal and accrued interest

may

be converted, by the holder, into common shares at a fixed discount to the price of the common stock at the time of conversion. The Company measures the fair value of the notes at the time of issuance, which is the result of the share price discount at the time of conversion and records the premium to interest expense on the note issuance date.

Debt Issue Cost

Debt issuance cost paid to lenders, or

third

parties are recorded as debt discounts and amortized over the life of the underlying debt instrument.

Revenue Recognition and Accounts Receivable:

Effective

January 1, 2018 (

date of adoption), we recognize revenues from the sale of agricultural biotechnology products to distributors and customers pursuant to the provisions of ASC

606,

“Revenue From Contracts With Customers”.

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. The core principle of this Topic is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. Revenue is recognized in accordance with the core principle by applying the following

five

steps:

) identify the contracts with a customer;

) identify the performance obligations in the contract;

) determine the transaction price;

) allocate the transaction price to the performance obligations; and

) recognize revenue when (or as) we satisfy a performance obligation.

Revenues for agricultural chemical products are recognized when title to the products is transferred which

may

be upon shipment to the customer or receipt by the customer of the product. This satisfies the performance obligation on which we earn the transaction price. There was

cumulative effect of adopting ASC

606.

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

The Company determined that

reserve for estimated product returns and allowances was necessary during the years ended

December 31, 2018

and

2017.

Determination of the reserve for estimated product returns and allowances is based on management's analyses and judgments regarding certain conditions. Should future changes in conditions prove management's conclusions and judgments on previous analyses to be incorrect, revenue recognized for any reporting period could be materially affected.

December 31, 2018,

two

customers accounted for

100%

of total accounts receivable. Each of these customers represented

78.1%,

and

21.9%

respectively. During the year ended

December 31, 2018,

two

customers accounted for

68.6%

of net sales

49.4%

and

19.2%

respectively.

December 31, 2017,

three

customers accounted for

100%

of total accounts receivable. Each of these

three

customers represented

46.5%,

34.9%

and

18.6%

respectively. During the year ended

December 31, 2017,

one

customer accounted for

22.8%

of net sales.

The Company extends credit to customers generally without requiring collateral. The Company monitors its exposure for credit losses and maintains allowances for anticipated losses. The Company records an allowance for doubtful accounts when it is probable that the accounts receivable balance will

not

be collected. When estimating the allowance, the Company takes into consideration such factors as its day-to-day knowledge of the financial position of specific clients, and the industry and size of its clients. The allowance for doubtful accounts as of

December 31, 2018

and

2017

was

and

$32,663,

respectively.

Cost of sales

Cost of sales is comprised of material costs, invoiced shipping costs and royalty expense.

Warrants

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

Stock based compensation

The Company recognizes the cost of employee services received in exchange for an award of equity instruments in the consolidated financial statements which is measured based on the grant date fair value of the award. Stock based compensation expense is recognized over the period during which an employee is required to provide service in exchange for the award (generally the vesting period). The Company estimates the fair value of each stock award at the grant date by using the Black-Scholes option pricing model.

Costs equal to these fair values are recognized ratably over the requisite service period based on the number of awards that are expected to vest, or in the period of grant for awards that vest immediately and have

future service condition. The expense resulting from employee and share-based payments is recorded in general and administrative expense in

2018

and

2017.

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

Loss per Share

Loss per share is calculated by dividing the Company’s net loss by the weighted average number of common shares outstanding during the period. Diluted earnings loss per share is calculated by dividing the Company’s net income (loss) by the diluted weighted average number of shares outstanding during the year. The diluted weighted average number of shares outstanding is the basic weighted number of shares adjusted for any potentially dilutive debt or equity instruments. The effect of the inclusion of the dilutive shares would have resulted in a decrease in loss per share. Accordingly, the weighted average shares outstanding have

not

been adjusted for dilutive shares. Outstanding warrants, stock options and convertible debt are

not

considered in the calculation as the impact of the potential common shares (totaling

16,952,975

shares and

10,713,175

shares for the years ended

December 31, 2018

and

2017,

respectively), would be to decrease net loss per share.

Research and Development

Research and development costs are charged to expenses as incurred and were

$151,846

and

$179,351

for the years ended

December 31, 2018

and

2017

respectively.

Warranty Expense

The Company's distribution agreements provide for a warranty on products sold. As sales under such distribution agreements have been nominal through

2018

and

2017,

there has been

warranty expense in

2018

2017.

A provision for estimated future warranty costs is to be recorded as cost of sales when products are shipped, and warranty costs are to be based on historical trends in warranty charges as a percentage of gross product shipments. A resulting accrual is to be reviewed regularly, and periodically adjusted to reflect changes in warranty cost estimates.

Income Taxes

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 existing assets and liabilities and their respective tax basis and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable 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 Company does

not

have an accrual for uncertain tax positions as of

December 31, 2018

and

2017.

The Company files corporate income tax returns with the Internal Revenue Service and the states where the Company determines it is required to do so. The Company’s policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. At

December 31, 2018,

the Company did

not

have any accrued interest or penalties associated with any unrecognized tax benefits, nor was any interest expense recognized during the years ended

December 31, 2018

2017.

As of

December 31, 2018

tax years

2015

2018

remain open for IRS audit.

Investments

We have an equity investment in a privately held entity. We account for investments either under the equity method or cost method of accounting depending on our ownership interest and the level of our influence in each joint venture. Investments accounted for under the equity method are recorded based upon the amount of our investment and adjusted each period for our share of the investee's income or loss. Cost method investments are recorded at cost less any impairments. All investments are reviewed for changes in circumstance or the occurrence of events that suggest an other than temporary event where our investment

may

not

be recoverable. All investments were carried at a

zero

value as of

December 31, 2018 (

See Note

Reclassifications

Certain amounts totaling

$34,750

in the

December 31, 2017

balance sheet have been reclassified from accounts payable, related party to accrued interest, related party to conform to the

December 31, 2018

presentation. This reclassification had

effect on current liabilities in either period presented.

Recently Issued Accounting Pronouncements

March 2016,

the FASB issued ASU

No.

2016

02,

Leases

. The main difference between the provisions of ASU

No.

2016

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

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

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 implementation did

not

have a material impact on the consolidated financial statements.

June 2018,

the Financial Accounting Standards Board (“FASB”) issued ASU

No.

2018

07,

“Compensation - Stock Compensation (Topic

718

): Improvements to Nonemployee Share-Based Payment Accounting.” ASU

2018

expands the scope of Topic

718

to include share-based payment transactions for acquiring goods and services from nonemployees. The guidance also specifies that Topic

718

applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. This guidance is effective for fiscal years beginning after

December 15, 2018,

including interim periods within those fiscal years. Early adoption is permitted, but

earlier than an entity’s adoption date of Topic

606.

This guidance is applicable to the Company’s fiscal year beginning

January

2019.

The implementation did

not

have a material effect on its consolidated financial statements.

Zero Gravity Solutions, Inc. 10-K