Note 2 - Summary of Significant Accounting Policies

9 Months Ended

Sep. 30, 2019

Significant Accounting Policies [Text Block]

Note

- Summary of Significant Accounting Policies

Principles of Consolidation and Non-Controlling Interest

These consolidated financial statements have been prepared in accordance with U.S. GAAP and include the accounts of the Company and its wholly-owned and majority owned subsidiaries. All intercompany transactions and balances have been eliminated.

The non-controlling interest in SASI (

) is reported as Non-controlling interest in Total Stockholders' Deficit of our Consolidated Financial Statements.

Business Segments and Concentrations

The Company uses the “management approach” to identify its reportable segments. The management approach requires companies to report segment financial information consistent with information used by management for making operating decisions and assessing performance as the basis for identifying the Company's reportable segments. The Company manages its business as

one

reportable segment and the unaudited consolidated financial statements are presented as

one

operating business segment.

Customers in the United States accounted for

100%

of our revenues. We do

not

have any property or equipment outside of the United States.

Use of Estimates

Preparing financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reported period. Actual results could differ from those estimates, and those estimates

may

be material.

Significant estimates during the

nine

months ended

September 30, 2019

include allowance for doubtful accounts and other receivables, inventory reserves and classifications, 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.

Fair Value of Financial Instruments

The Company accounts for financial instruments under Financial Accounting Standards Board (“FASB”) ASC

820,

Fair Value Measurements

. ASC

820

provides a framework for measuring fair value and requires disclosures regarding fair value measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, based on the Company's principal or, in absence of a principal, most advantageous market for the specific asset or liability.

The Company uses a

three

-tier fair value hierarchy to classify and disclose all assets and liabilities measured at fair value on a recurring basis, as well as assets and liabilities measured at fair value on a non-recurring basis, in periods subsequent to their initial measurement. The hierarchy requires the Company to use observable inputs when available, and to minimize the use of unobservable inputs, when determining fair value.

The

three

tiers are defined as follows:

•

Level

—Observable inputs that reflect quoted market prices (unadjusted) for identical assets or liabilities in active markets;

•

Level

2—Observable

inputs other than quoted prices in active markets that are observable either directly or indirectly in the marketplace for identical or similar assets and liabilities; and

•

Level

3—Unobservable

inputs that are supported by little or

market data, which require the Company to develop its own assumptions.

The determination of fair value and the assessment of a measurement's placement within the hierarchy requires judgment. Level

valuations often involve a higher degree of judgment and complexity. Level

valuations

may

require the use of various cost, market, or income valuation methodologies applied to unobservable management estimates and assumptions. Management's assumptions could vary depending on the asset or liability valued and the valuation method used. Such assumptions could include estimates of prices, earnings, costs, actions of market participants, market factors, or the weighting of various valuation methods. The Company

may

also engage external advisors to assist us in determining fair value, as appropriate.

Although the Company believes that the recorded fair value of our financial instruments is appropriate, these fair values

may

not

be indicative of net realizable value or reflective of future fair values. See Note

(D) for level

reconciliation of derivative liabilities.

The Company's financial instruments, including cash, net accounts receivable, accounts payable and accrued expenses, are carried at historical cost. At

September 30, 2019

and

December 31, 2018,

the carrying amounts of these instruments approximated their fair values because of the short-term nature of these instruments.

ASC

825

“

Financial Instruments

”, allows entities to voluntarily choose to measure certain financial assets and liabilities at fair value (“fair value option”). The fair value option

may

be elected on an instrument-by-instrument basis and is irrevocable unless a new election date occurs. If the fair value option is elected for an instrument, unrealized gains and losses for that instrument should be reported in earnings at each subsequent reporting date. The Company did

not

elect to apply the fair value option to any outstanding financial instruments.

Cash and Cash Equivalents

For purposes of the consolidated statements of cash flows, the Company considers all highly liquid instruments with a maturity of

three

months or less at the purchase date and money market accounts to be cash equivalents. At

September 30, 2019

and

December 31, 2018,

the Company had cash equivalents of

and

$0,

respectively.

Accounts Receivable

Credit is extended to customers based on an evaluation of their financial condition and other factors. The Company does

not

require collateral. Management periodically assesses the Company's accounts receivable and, if necessary, establishes an allowance for estimated uncollectible amounts. Accounts determined to be uncollectible are charged to operations when that determination is made. Interest is

not

accrued on overdue accounts receivable.

Allowance for doubtful accounts was

$13,802

and

September 30, 2019

and

December 31, 2018,

respectively. Bad debt expense was

$14,144

and

$4,060

for the

nine

months ended

September 30, 2019

and

2018,

respectively.

September 30, 2019,

two

customers accounted for

38.0%

of total gross accounts receivable. Each of these customers represented

25.3%

and

12.7%,

respectively. At

December 31, 2018,

two

customers accounted for

100%

of total accounts receivable. Each of these customers represented

78.1%

and

21.9%,

respectively.

Inventory

Inventory is valued on a lower of

first

in,

first

out (FIFO) cost or net realizable value.

Inventory consisted of:

Classification	September 30, 2019		December 31, 2018
Raw materials	$	38,778	$	17,610
Finished products		268,497		85,532
Total Inventory	$	307,275	$	103,142

September 30, 2019,

of the total inventory balance of

$307,275,

the Company had

$46,772

classified as a current asset, a portion of which was subsequently shipped to customers and a portion ready for shipment, however, due to Covid-

restrictions, remains on hold. The remaining inventory is classified as a non-current asset on the accompanying consolidated balance sheet. This inventory is considered slow moving but is

not

obsolete, and

impairment is required.

During the

three

and

nine

months ended

September 30, 2019,

the Company recognized an impairment charge of

and

$10,286,

respectively, which is included in cost of sales. There were

impairment charges taken during the

three

and

nine

months ended

September 30, 2018.

Property and Equipment

Property and equipment is stated at cost less accumulated depreciation. Depreciation is provided on the straight-line basis over the estimated useful lives of the assets ranging from

three

ten

years.

Expenditures for repair and maintenance which do

not

materially extend the useful lives of property and equipment are charged to operations. When property or equipment is sold or otherwise disposed of, the cost and related accumulated depreciation are removed from the respective accounts with the resulting gain or loss reflected in operations.

Management reviews the carrying value of its property and equipment whenever events or changes in circumstances indicate that the carrying amount of the asset

may

not

be recoverable.

Impairment of Long-lived Assets

Management evaluates the recoverability of the Company's identifiable intangible assets and other long-lived assets when events or circumstances indicate a potential impairment exists, in accordance with the provisions of ASC

360

“Impairment or Disposal of Long-Lived Assets.” Events and circumstances considered by the Company in determining whether the carrying value of identifiable intangible assets and other long-lived assets

may

not

be recoverable include, but are

not

limited to: significant changes in performance relative to expected operating results; significant changes in the use of the assets; significant negative industry or economic trends; and changes in the Company's business strategy. In determining if impairment exists, the Company estimates the undiscounted cash flows to be generated from the use and ultimate disposition of these assets.

If impairment is indicated based on a comparison of the assets' carrying values and the undiscounted cash flows, the impairment to be recognized is measured as the amount by which the carrying amount of the assets exceeds the fair value of the assets.

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 remeasured, but in instances where the feature is triggered multiple times each instance is recognized.

Convertible Notes

with

Fixed Rate Conversion Options

The Company

may

enter into convertible notes, some of which

may

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

may

be converted, by the holder, into common 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.

Beneficial Conversion Features

For instruments that are

not

considered liabilities under ASC

480

or ASC

815,

the Company applies ASC

470

to convertible securities with beneficial conversion features that must be settled in stock. ASC

470

requires that the beneficial conversion feature be valued at the commitment date as the difference between the effective conversion price and the fair market value of the common stock (whereby the conversion price is lower than the fair market value) into which the security is convertible, multiplied by the number of shares into which the security is convertible limited to the amount of the loan. This amount is recorded as a debt discount and amortized to interest expense in the Consolidated Statements of Operations.

Debt Issue Cost

Debt issuance cost paid to lenders, or

third

parties is recorded as debt discount and amortized to interest expense in the Consolidated Statements of Operations, over the life of the underlying debt instrument.

Revenue Recognition and Concentrations

Effective

January 1, 2018,

the Company adopted ASC

606,

“Revenue from Contracts with Customers” to recognize revenues from the sale of agricultural biotechnology products to distributors and customers. There was

cumulative effect of adopting ASC

606.

Pursuant to ASC

606,

we recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration or payment the Company expects to be entitled to receive in exchange for those goods or services. Our revenue is recognized 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.

We apply judgment in determining the customer's ability and intention to pay, which is based on a variety of factors including the customer's historical payment experience or, in the case of a new customer, published credit or financial information pertaining to the customer. If a contract includes multiple promised goods or services, we apply judgment to determine whether the promised goods or services are capable of being distinct and are distinct within the context of the contract. If these criteria are

not

met, the promised goods or services are accounted for as a combined performance obligation. We determine the transaction price based on the consideration which we will be entitled to receive in exchange for transferring goods or services to our customer. We recognize revenue at the time that the related performance obligation is satisfied by transferring the promised goods or services to our customer.

Revenue for agricultural biotechnology products is recognized when title to the product is transferred which

may

be upon shipment to or receipt by the customer of the product.

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.

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.

The Company determined that

reserve for estimated product returns and allowances was necessary during the

three

and

nine

months ended

September 30, 2019

and

2018.

During the

three

and

nine

months ended

September 30, 2019,

one

customer accounted for

and

66.1%

of net sales, respectively. During the

three

months ended

September 30, 2018,

one

customer accounted for

75.2%

of net sales. During the

nine

months ended

September 30, 2018,

two

customers accounted for

69.9%

of net sales each representing,

50.3%

and

19.6%,

respectively.

Cost of Sales

Cost of sales represents costs directly related to the production, manufacturing and freight-in of the Company's product inventory purchased from

third

-party manufacturers as well as royalty expense and any declines in inventory values.

Research and Development

Research and development costs are charged to expense as incurred.

For the

three

and

nine

months ended

September 30, 2019,

the Company recognized

$35,873

and

$100,835

in research and development costs in the consolidated statements of operations.

For the

three

and

nine

months ended

September 30, 2018,

the Company recognized

$16,710

and

$138,625

in research and development costs in the consolidated statements of operations.

Warranty Expense

The Company's distribution agreements provide for a warranty on products sold. Sales under such distribution agreements have been nominal during the

three

and

nine

months ended

2019

and

2018,

respectively.

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

related warranty expense accrued during the

three

and

nine

months ended

September 30, 2019

and

2018,

respectively.

Income Taxes

The Company accounts for income tax using the asset and liability method prescribed by ASC

740,

“

Income Taxes

”

Under this method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax bases of assets and liabilities using enacted tax rates that will be in effect in the year in which the differences are expected to reverse. The Company records a valuation allowance to offset deferred tax assets if based on the weight of available evidence, it is more-likely-than-

not

that some portion, or all, of the deferred tax assets will

not

be realized. The effect on deferred taxes of a change in tax rates is recognized as income or loss in the period that includes the enactment date.

The Company follows the accounting guidance for uncertainty in income taxes using the provisions of ASC

740

“Income Taxes”. Using that guidance, tax positions initially need to be recognized in the financial statements when it is more likely than

not

the position will be sustained upon examination by the tax authorities. As of

September 30, 2019,

and

December 31, 2018,

the Company had

uncertain tax positions that qualify for either recognition or disclosure in the financial statements. The Company recognizes interest and penalties related to uncertain income tax positions in other expense.

interest and penalties related to uncertain income tax positions were recorded for the

three

and

nine

months ended

September 30, 2019

and

2018.

Advertising Costs

Advertising costs are expensed as incurred. Advertising costs are included as a component of general and administrative expense in the consolidated statements of operations.

The Company recognized

$19,117

and

$13,574

in marketing and advertising costs during the

three

months ended

September 30, 2019

and

2018,

respectively and

$64,022

and

$11,677

in marketing and advertising costs during the

three

and

nine

months ended

September 30, 2019

and

2018,

respectively.

Accounting for Leases

March 2016,

the FASB issued ASU

No.

2016

02,

Leases

. The main difference between the provisions of ASU

No.

2016

and previous GAAP is the recognition of right-of-use assets and lease liabilities by lessees for those leases classified as operating leases under previous 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 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 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's adoption

January 1, 2019

did

not

have a material impact on the consolidated financial statements.

The Company leases its office, building and laboratory space under separate short term leases (month-to-month) with

long term commitment. The Company has

capitalizable right of use assets or liabilities.

The Company incurred rent expense of

$179,136

and

$158,976

for the

nine

months ended

September 30, 2019

and

2018,

respectively. These amounts are included as a component of general and administrative expenses.

Stock-Based Compensation

The Company recognizes the cost of employee services received in exchange for an award of equity instruments in the consolidated financial statements which is measured based on the grant date fair value of the award. Stock based compensation expense is recognized over the period during which an employee is required to 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 using the simplified method to determine the term.

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 the

three

and

nine

months ended

September 30, 2019

and

2018.

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.

June 2018,

the 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.

Basic and Diluted Earnings (Loss) per Share

Pursuant to ASC

260

45,

basic earnings (loss) per common share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding for the periods presented. Diluted earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during the period.

Potentially dilutive common shares consist of common stock issuable for stock options and warrants (using the treasury stock method), convertible notes and common stock issuable.

The following potentially dilutive equity securities outstanding as of

September 30, 2019

and

2018

were

not

included in the computation of diluted loss per common share because the effect would have been anti-dilutive:

	September 30, 2019		September 30, 2018

Convertible notes payable (exercise price $0.50 - $2/share)		7,824,625		1,487,291
Warrants (exercisable - $0.50 - $6/share)		19,247,285		12,145,665
Stock options (vested - $1.25 - $3/share)		1,563,333		1,880,000
Total common stock equivalents		28,635,243		15,512,956

Certain convertible notes payable contain exercise prices that have a discount to market. As a result, the amount computed for common stock equivalents could change given the quoted closing trading price at each reporting period.

Investments

We have an equity investment in a 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

September 30, 2019

and

December 31, 2018 (

See Note

Recent Accounting Standards

Changes to accounting principles are established by the FASB in the form of ASU's to the FASB's Codification. We consider the applicability and impact of all ASU's on our consolidated financial position, results of operations, stockholders' deficit, cash flows, or presentation thereof.

Management has considered all recent accounting pronouncements and believes that these recent pronouncements will

not

have a material effect on the Company's consolidated financial statements.

Zero Gravity Solutions, Inc. 10-Q