FORWARD-LOOKING STATEMENTS

Statements in this report may be "forward-looking statements." Forward-looking statements include, but are not limited to, statements that express our intentions, beliefs, expectations, strategies, predictions or any other statements relating to our future activities or other future events or conditions. These statements are based on current expectations, estimates and projections about our business based, in part, on assumptions made by management. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may, and are likely to, differ materially from what is expressed or forecasted in the forward-looking statements due to numerous factors, including those described above and those risks discussed from time to time in this report, including the risks described under "Risk Factors" and any risks described in any other filings we make with the SEC. Any forward-looking statements speak only as of the date on which they are made, and we do not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date of this report.

Management’s discussion and analysis of financial condition and results of operations are based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these unaudited condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an on-going basis, we evaluate these estimates, including those related to useful lives of property and equipment, the allowance for doubtful accounts and stock based compensation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. There can be no assurance that actual results will not differ from those estimates.

PART I. FINANCIAL INFORMATION

Item 1. CONDENSED Consolidated Financial Statements

ZERO GRAVITY SOLUTIONS, INC. AND SUBSIDIARIES

Condensed Consolidated Balance SheetSheets

See accompanying notes to unaudited condensed consolidated financial statements

ZERO GRAVITY SOLUTIONS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(Unaudited)

See accompanying notes to unaudited condensed consolidated financial statements

ZERO GRAVITY SOLUTIONS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited)

See accompanying notes to unaudited condensed consolidated financial statements

ZERO GRAVITY SOLUTIONS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, September 30, 2018

(Unaudited)

ZERO GRAVITY SOLUTIONS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2018

(Unaudited)

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. 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.

Impairment of Long Lived Assets

The Company accounts for long-lived assets in accordance with the provisions of ASC 360-10-35-15 “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.

Concentration of Credit Risk

The Company believes that its credit risk exposure is limited. The Company has never suffered a loss due to excess balances.

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:

ZERO GRAVITY SOLUTIONS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31,September 30, 2018

(Unaudited)

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. 

Revenue recognition and accounts receivable

WeEffective 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 Recognition”From Contracts With Customers”.

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. 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: 1) identify the contracts with a customer; 2) identify the performance obligations in the contract; 3) determine the transaction price; 4) allocate the transaction price to the performance obligations; and 5) recognize revenue when (or as) we satisfy a performance obligation.

When amountsRevenues 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 no cumulative effect of adopting ASC 606. Amounts billed to customers for shipping and handling fees they are included in net sales, and the related 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 no reserve for estimated product returns and allowances was necessary during the threenine months ended March 31,September 30, 2018 and 2017.2017. 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. 

At March 31,September 30, 2018, twothree customers accounted for 100% of total accounts receivable, each representing 59.6%, 22.5%, and 17.9%, 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. During the three months ended September 30, 2017, two customers accounted for 94.0% of net sales, each representing 79.1%, and 14.9%, respectively. During the nine months ended September 30, 2017 three customers accounted for 69.5% of net sales, each of these customers represented 33.6%, 22.9% and 13.0%, respectively. 

At December 31, 2017, three customers accounted for 100% of total accounts receivable. Each of these three customers represented 85.8%46.5%, 34.9% and 14.2%, respectively. During the period ended March 31, 2018, two customers accounted for 100% of net sales 75% and 25% respectively. 0% of sales for the quarter were to customers outside of the U.S.

At 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 period ended March 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 March 31,September 30, 2018 and December 31, 2017 was $0$0 and $32,663,$32,663, respectively.

ZERO GRAVITY SOLUTIONS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31,September 30, 2018

(Unaudited)

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 discount in the unaudited condensed consolidated financial statements which is recorded at 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 unaudited condensed 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 no 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 13,550,332,(15,993,998, shares and 14,044,84212,981,000 shares for the periodsnine months ended March 31,September 30, 2018 and December 31, 2017, respectively), would be to decrease net loss per share.

Research and Development

Research and development costs are charged to expense as incurred.

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 no warranty expense in 2018 or 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.

ZERO GRAVITY SOLUTIONS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31,September 30, 2018

(Unaudited)

The Company does not have an accrual for uncertain tax positions as of March 31,September 30, 2018 and December 31, 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 March 31,September 30, 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 periodsthree or nine months ended March 31,September 30, 2018 or 2017.

Investments

We have an equity investment in a privately held entity as discussed in note 4. 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. 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.

Reclassifications

Certain amounts in the December 31, 2017 balance sheet have been reclassified from accounts payable, related party to accrued interest, related party to conform to the March 31,September 30, 2018 presentation.  This reclassification had no effect on current liabilities in either period presented.

Recently Issued Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASC 606, “Revenue from Contracts with Customers” which has been further clarified and amended. The core principle of the new standard is for companies to 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 new standard also will result in enhanced disclosures about revenue, provide guidance for transactions that were not previously addressed comprehensively (for example, service revenue and contract modifications) and clarify guidance for multiple-element arrangements. Entities have the option to apply the new guidance under a retrospective approach to each prior reporting period presented or a modified retrospective approach with the cumulative effect of initially applying the new guidance recognized at the date of initial application within the Statement of Financial Position. The standard is effective for fiscal years, and interim periods within those years, beginning after Dec.December 15, 2017. The Company has finalized its assessment of ASC 606 and determined there will be no material effect on our financial position and results of operations. The timing and amount of revenue recognized based on the new standard is consistent with the revenue recognition policy under previous guidance, however, certain additional financial statement disclosures will be required beginning with 2018 reporting, including additional disaggregated view of revenue. We have adopted the new standard effective January 1, 2018, using the modified retrospective transition method.

In March 2016, the FASB issued ASU No.2016-02, 2016-02, Leases. The main difference between the provisions of ASU No.2016-02 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- 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 finalized the analysis to determine the effect of the standard, but believes that it will not have a material impact on the statement of operations.

ZERO GRAVITY SOLUTIONS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31,September 30, 2018

(Unaudited)

In June 2018, the Financial Accounting Standards Board (“FASB”) issued ASU No.2018-07, 2018-07, “Compensation - Stock Compensation (Topic 718)718): Improvements to Nonemployee Share-Based Payment Accounting.” ASU No2018-07 2018-07 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 no earlier than an entity’s adoption date of Topic 606. This guidance is applicable to the Company’s fiscal year beginning January 1,2019. The Company is currently evaluating the potential effects of this guidance on its consolidated financial statements.

In July 2017, the FASB issued Accounting Standards Update No. 2017-11 Earnings Per Share (Topic 260) Distinguishing Liabilities from Equity (Topic 480) Derivatives and Hedging (Topic 815) (“ASU 2017-11”), which changes the classification analysis of certain equity-linked financial instruments (or embedded features) with down round features. When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. ASU 2017-11 also clarifies existing disclosure requirements for equity-classified instruments. As a result, a freestanding equity-linked financial instrument (or embedded conversion option) no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down round feature. For freestanding equity classified financial instruments, ASU 2017-11 requires entities that present earnings per share (EPS) in accordance with ASC Topic 260 to recognize the effect of the down round feature when it is triggered. That effect is treated as a dividend and as a reduction of income available to common shareholders in basic EPS.  Convertible instruments with embedded conversion options that have down round features are now subject to the specialized guidance for contingent beneficial conversion features in ASC 470-20.  For the Company, ASU 2017-11 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period. If an entity early adopts ASU 2017-11 in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period in either of the following ways: 1. Retrospectively to outstanding financial instruments with a down round feature by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the first fiscal year and interim period(s) in which ASU 2017-11 is effective or 2. Retrospectively to outstanding financial instruments with a down round feature for each prior reporting period presented in accordance with the guidance on accounting changes in paragraphs 250-10-45-5 through 45-10. The Company is currently evaluatinghas elected early adoption and the potential effects of this guidance onare reflected in its unaudited condensed consolidated financial statements.statements and there was no cumulative effect adjustment.

On August 2018, the SEC adopted amendments to certain disclosure requirements in Securities Act Release No. 33-10532, Disclosure Update and Simplification. The amendments will become effective on November 5, 2018. Among the amendments is the requirement to present the changes in shareholders’ equity in the interim financial statements (either in a separate statement or footnote) in quarterly reports on Form 10-Q. The Company has elected to implement this amendment beginning the first quarter of 2019.

Depreciation expense for the periodnine months ended March 31,September 30, 2018 and 2017 was $6,235$18,770 and $6,107,$18,414, respectively

ZERO GRAVITY SOLUTIONS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2018

(Unaudited)

In August 2017, the Company issued an unsecured promissory note to its then in-house corporate counsel in the principal face amount of $100,000.  The promissory note bears interest at a rate of 10.0%, per annum, payable quarterly. The promissory note is payable in full plus all unpaid interest by August 2019. In connection with the note, the Company issued five-year warrants to purchase up to 10,000 shares of the Company’s common stock at an exercise price of $3.00 per share. The relative fair value of the debt and warrants recorded resulted in debt discount of $10,435 upon execution of the promissory note. For the periodthree months ended March 31,September 30, 2018, accretion of debt discount was $1,314. For the nine months ended September 30, 2018, accretion of the debt discount was $1,287,$3,907. Accretion of debt discount is included in other expenses on the statements of operations.

In September 2017, the Company issued an unsecured promissory note to a member of its Board of Directors in the principal face amount of $500,000.  The promissory note bears interest at a rate of 10.0%, per annum, payable quarterly. The promissory note is payable in full plus all unpaid interest by September 2019. In connection with the note, the Company issued five-year warrants to purchase up to 50,000 shares of the Company’s common stock at an exercise price of $3.00 per share. The relative fair value of the debt and warrants recorded resulted in debt discount of $52,166 upon execution of the promissory note. For the three and nine months ended March 31,September 30, 2018, accretion of the debt discount was $6,431,$6,574 and $19,508 respectively, included in other expenses on the statements of operations.

In October 2017, the Company issued to Rio Vista Investments, LLC, a Nevada limited liability company (“Rio Vista”), (i) an unsecured promissory note in the principal face amount of $500,000 and (ii) a warrant to purchase up to 50,000 shares of the Company’s common stock. The note issued to Rio Vista bears interest at the rate of ten percent (10%) per annum, such interest being payable by the Company to Rio Vista quarterly in cash. The note is payable in full by the Company, plus all unpaid interest, by October 26, 2019. Prepayment of all unpaid principal and interest may be made by the Company prior to the date of maturity without penalty or premium. Additionally, the Company issued to Rio Vista a five-year warrant to purchase up to 50,000 shares of the Company’s common stock at an exercise price of $3.00 per share. The relative fair value of the debt and warrantwarrants recorded resulted in debt discount of $50,229 upon execution of the promissory note.  For the three and nine months ended March 31,September 30, 2018, accretion of the debt discount was $6,193,$6,330 and $18,784, respectively, included in other expenses on the statements of operations. A member of the Company’s Board of Directors is a beneficiary of certain trusts that own Rio Vista.

In January 2018, the Company issued an unsecured note to its then in-house corporate counsel in the principal face amount of $100,000.  The note bears interest at a rate of 10.0%, per annum, payable quarterly. The promissory note was paid during the three month period ended March 31, 2018. In connection with the note, the Company issued five-year warrants to purchase up to 5,000 shares of the Company’s common stock at an exercise price of $3.00 per share. The relative fair value of the debt and warrants recorded resulted in debt discount of $3,831 upon execution of the note. For the period ended March 31, 2018, accretion of the debt discount was $3,831, included in other expenses on the statements of operations.

On or about January 17, 2018, the Company received $500,000 from an accredited investor, and in exchange the Company issued to the investor (a) an unsecured promissory note dated January 16, 2018, maturing on October 26, 2019, in the principal face amount of $500,000, and (b) a warrant dated January 18, 2018 to purchase up to 50,000 shares of the Company’s common stock. A member of the Company’s Board of Directors is a beneficiary of certain trusts that own Rio Vista, the holder of this note and warrant. The note bears interest at the rate of ten percent (10%) per annum, such interest being payable by the Company to the holder thereof quarterly in cash. The note is payable in full by the Company, plus all unpaid interest thereon, by October 26, 2019. Prepayment of all unpaid principal and interest on the note may be made by the Company prior to the maturity date, of maturity, provided that the holder thereof shall receive a minimum amount of interest equal to one year of interest under such note, based on the full principal amount. In addition to the foregoing, the Company must repay the note to Rio Vista Investments, LLC within 30 days of the date the Company possesses an amount of cash equal to the outstanding balance of principal and interest due under the note plus an amount reasonably anticipated to be necessary to operate the Company over the succeeding 6 months. The warrant iswarrants are exercisable within 5 years of issuance into shares of the Company’s common stock, at $3.00 per share. The relative fair value of the note and warrant recorded resulted in debt discount of $35,590 upon execution.  The Company also incurred $15,000 inof lender fees. For the three and nine months ended March 31,September 30, 2018, accretion of the debt discount was $7,215 and lender fees was $5,678,$20,111, respectively, included in other expenses on the statements of operations.

ZERO GRAVITY SOLUTIONS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2018

(Unaudited)

On or about March 8, 2018, the Company received $200,000 from an accredited investor and member of our Board of Directors, and in exchange the Company issued (a) an unsecured promissory note dated March 8, 2018 and (b) a warrant dated March 9, 2018 to purchase up to 20,000 shares of the Company’s common stock. The note bears interest at the rate of ten percent (10%) per annum, such interest being payable by the Company to the holder quarterly in cash. The note is payable in full by the Company, plus all unpaid interest thereon, by March 7, 2020. Prepayment of all unpaid principal due on the note may be made by the Company prior to the note’s maturity date, provided that the holder thereof shall receive a minimum amount of interest equal to one year of interest due under the note, based on the note’s principal balance as of the origination date. The note contains customary provisions for events of default and acceleration of sums due. The warrant is exercisable within 5 years of issuance into shares of the Company’s common stock, at $3.00 per share. The relative fair value of the note and warrant recorded resulted in debt discount of $14,281 upon execution.  The Company also incurred $6,000 inof lender fees. For the three and nine months ended March 31,September 30, 2018, accretion of the debt discount and lender fees was $555,$2,556 and $5,695, respectively, included in other expenses on the statements of operations.

On or about March 12, 2018, the Company received $200,000 from Boies Partners, Inc. (“BPI”), an accredited investor, and in exchange the Company issued to BPI (a) an unsecured promissory note dated March 12, 2018, and (b) a warrant dated March 12, 2018 to purchase up to 20,000 shares of the Company’s common stock. Alex Boies, a member of our Board of Directors, has no financial interest in or control over BPI and does not otherwise have any beneficial ownership in any securities owned by BPI, but BPI is owned by a family member of Alex Boies. The note bears interest at the rate of ten percent (10%) per annum, such interest being payable by the Company to the holder thereof quarterly in cash. The note is payable in full by the Company, plus all unpaid interest thereon, by March 11, 2020. Prepayment of all unpaid principal due on the note may be made by the Company prior to the note’s maturity date, provided that the holder thereof shall receive a minimum amount of interest equal to one year of interest due under the note, based on the note’s principal balance as of the origination date. The note contains customary provisions for events of default and acceleration of sums due. The warrants are exercisable within 5 years of issuance into shares of the Company’s common stock, at $3.00 per share. The relative fair value of the note and warrant recorded resulted in debt discount of $14,279 upon execution.  The Company also incurred $6,000 inof lender fees. For the three and nine months ended March 31,September 30, 2018, accretion of the debt discount and lender fees was $498,$19,781 and $20,279, respectively, included in other expenses on the statements of operations. This note further provides that within 30 days of receipt of payment of any amount principal outstanding under the note, (the "Conversion Window") the note holder shall have the right to convert any portion of such payment into the Company’s common stock at the lesser of $3.00 per share or the lowest price per share of any sale by the Company of its common stock occurring between the date of the note and the end of the Conversion Window. This note was subsequently repaid during the quarterthree months ended June 30, 2018.

On May 2, 2018, the Company received $300,001 from an accredited investor and member of our Board of Directors, and in exchange the Company issued (a) an unsecured promissory note dated May 2, 2018, and (b) a warrant dated May 2, 2018 to purchase up to 30,000 shares of the Company’s common stock. The note bears interest at the rate of ten percent (10%) per annum, payable quarterly in cash. The note is payable in full plus all unpaid interest thereon, by May 1, 2020. The note contains a contingent conversion feature that allows the value of the note to be converted at $3 per share or such lower price at which the Company has issued stock subsequent to May 2, 2018, if any part of the principle balance is paid. The intrinsic value of contingent conversion will be determined and recognized when the contingency occurs. Prepayment of all unpaid principal and interest may be made by the Company prior to the maturity date, provided that the holder thereof shall receive a minimum amount of interest equal to one year of interest, based on the full principal amount. The warrant is exercisable within 5 years of issuance into shares of the Company’s common stock, at $3.00 per share. 

The relative fair value of the note and warrant recorded resulted in debt discount of $21,452 upon execution. The Company also incurred $9,000 of lender fees. For the three and nine months ended September 30, 2018, accretion of the debt discount and lender fees was $3,841 and $5,572, respectively, included in other expenses on the statements of operations.

ZERO GRAVITY SOLUTIONS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31,September 30, 2018

(Unaudited)

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 also a minimum monthly payment of $2,500$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 $3,470$0 and $255$4,355 for the periodsthree months and $33,070 and $65,545 for the nine months ended March 31,September 30, 2018 and 2017, respectively. As of March 31,September 30, 2018, and December 31, 2017, $0$0 and $319,441$319,441 of prepaid royalties, respectively, are available to be offset against future royalty obligations. Management recorded an allowance for collectability of $123,560$6,020 during the three months ended March 31, 2018. June 30, 2018 and $129,580 during the nine months ended September 30, 2018 which is included in general and administrative expenses. Sales during the third quarter were not subject to the royalty agreement.

Included in advance of future royalties was $203,208 in legal fees relating to patent defense.  During the threenine months ended March 31,September 30, 2018, this amount was reclassified to an intangible asset patent defense fees, and was determined to be impaired and charged to general and administrative expense.expenses.

Consulting Agreement

In March 2015, the Company entered into a consulting agreement with a former Director. The agreement had a term of sixnine months and required payments of $200,000$200,000 of which $200,000$200,000 was recorded as a component of general and administrative expense in the 2015 statement of operations. An obligation of $75,000$65,000 and $75,000 was payable to the former Director and is included in accounts payable at March 31,September 30, 2018 and December 31, 2017.2017, respectively.

In December 2017, the Company received $200,000$200,000 from an investor, and in exchange the Company issued the investor (a) an unsecured promissory note dated December 14, 2017, maturing on December 13, 2019, in the principal face amount of $200,000,$200,000, and (b) a warrant dated December 18, 2017 to purchase up to 50,000 shares of the Company’s common stock. The note bears interest at the rate of ten percent (10%(10%) per annum, payable quarterly. The note is repayable in full by the Company, plus all unpaid interest thereon, by the maturity date. Prepayment of all unpaid principal and interest on the note may be made by the Company prior to the maturity date, provided that the holder thereof shall receive a minimum amount of interest equal to one year of interest under the note, based on the full principal amount. The warrants are exercisable within 5 years of issuance into shares of the Company’s common stock, at $3.00$3.00 per share. The relative fair value of the debt and warrants recorded resulted in a debt discount of $18,652$18,652 upon execution of the promissory note. For the periodthree and nine months ended March 31,September 30, 2018, accretion of the debt discount was $2,300,$2,351 and $7,410, respectively, included in other expenses on the statements of operations.

On or about January 18, 2018, the Company received $100,000 from an accredited investor, and in exchange the Company issued to the investor (a) an unsecured promissory note dated January 19, 2018, maturing on January 18, 2020, in the principal face amount of $100,000, and (b) a warrant dated January 19, 2018 to purchase up to 10,000 shares of the Company’s common stock. The note bears interest at the rate of ten percent (10%(10%) per annum, payable quarterly. The note is repayable in full by the Company, plus all unpaid interest thereon, by the maturity date (the “Maturity Date”).date. Prepayment of all unpaid principal and interest on the note may be made by the Company prior to the Maturity Date,maturity date, provided that the holder thereof shall receive a minimum amount of interest equal to one year of interest under the note, based on the full principal amount. The warrants are exercisable within 5 years of issuance into shares of the Company’s common stock, at $3.00$3.00 per share. The relative fair value of the debt and warrants recorded resulted in a debt discount of $7,124$7,124 upon execution of the promissory note. For the periodthree and nine months ended March 31,September 30, 2018, accretion of the debt discount was $703,$898 and $2,486, respectively, included in other expenses on the statements of operations.

The Company has an outstanding note payable for financing corporate insurance premiums. The original principle value was $223,707. The note carries a rate of interest of 7.5% and is due in November 2018. The note calls for eleven payments of $19,353. The balance at September 30, 2018 was $38,706.

ZERO GRAVITY SOLUTIONS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31,September 30, 2018

(Unaudited)

The aggregate intrinsic value in the table above represents the total intrinsic value (the difference between the estimated fair value of the Company’s stock price on March 31,September 30, 2018 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,September 30, 2018.

Stock incentive plan options

In November 2015, the Company adopted its 2015 Equity Incentive Plan. The Plan provides stock based compensation to employees, directors and consultants, as more fully described in the Plan. The Company has reserved 4,000,000 shares under the Plan. During the threenine months ended March 31,September 30, 2018 the Company granted options to purchase up to 25,000 shares of common stock each, to an employeetwo employees with an exercise price of $1.25$3.00 per share and a term of 10 years. The estimated fair value of $19,208$38,441 of the grants for the threenine months ended March 31, 2108September 30, 2018 was based upon the following management assumptions: For the nine month period March 31,ended September 30, 2018, expected dividends of $0, volatility of 101.7% based on comparative volatility, risk free interest rates of 2.58%2.58 - 2.69%, and expected term of the options of 5 years.

The Company recognizes compensation expense for stock option grants based on the fair value at the date of grant using the Black-Scholes option pricing model. As the Company does not currently have reliably determined historic stock prices, the Company uses management estimates of stock value. The Company uses historical data, among other factors, to estimate the expected option life and the expected forfeiture rate. The Company estimates expected term considering factors such as historical exercise patterns and the recipients of the options granted. The risk-free rate is based on the United States Treasury Department yield curve in effect at the time of grant for the expected life of the option. The Company assumes an expected dividend yield of zero for all periods.  For employee, consultant and director stock based compensation, the Company used management's fair value estimates of $1.21$1.21 for the period March 31,September 30, 2018.

Stock option expense for the nine months ended September 30, 2018. was $146,277.

ZERO GRAVITY SOLUTIONS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31,September 30, 2018

(Unaudited)

The Company has elected to account for forfeitures as they occur.

The aggregate intrinsic value in the table above represents the total intrinsic value (the difference between the estimated fair value of the Company’s stock price on March 31,September 30, 2018 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders, had all option holders been able to, and in fact had, exercised their options on March 31,September 30, 2018.

ZERO GRAVITY SOLUTIONS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31,September 30, 2018

(Unaudited)

Overview

Zero Gravity Solutions, Inc., a Nevada corporation, 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’s business model is currently focused on one primary business, generating revenue from agricultural application of BAM-FX™, a cost effective, micro-nutrient delivery platform for plants that efficiently delivers minerals and micro-nutrients to plants.  The Company's secondary business, Directed Selection™, relates to the production and alteration of new varieties of novel stem cells with unique and beneficial characteristics in the prolonged zero/micro gravity environment of the ISS. These novel stem cells, if developed, could be patented for commercial sale to third parties in the agricultural and human regenerative medical markets. ZGSIThe Company is headquartered in Boca Raton, Florida.

Our business activities are separated between two primary wholly owned subsidiaries. BAM Agricultural Solutions, Inc., (“BAM Inc.”) oversees product development, introduction and business development through in-field trials and validation tests with crop growers and channel partners, product analysis through academic institutions and NASA, manufacturing, and sale of and agronomy support for our BAM-FX™ product. Zero Gravity Life Sciences Inc. (“ZGLS”) is expected to be responsible for any future space research projects, life science applications of our technology and conducting research on future BAM Inc. product lines.

The Company is focused on near-term revenue generation through the introduction of the Company’s first commercial product, BAM-FX™, to domestic and international agricultural markets. BAM-FX™ is licensed in and registered for sale as a fertilizer application with forty-five (45) domestic states and has been approved for import and commercial sales in Chile, Paraguay, Colombia, Brazil and China. The Company is also pursuing import approval through proper governmental officials and agencies to begin commercial sales in Haiti, Philippines and India. International operations are conducted through in-country established businesses with which a distribution agreement has been executed.

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. Our trials show significant yield, nutritional value and biomass improvements for crops treated. We continue to use validation trials with growers to increase our understanding of application rates and protocols for our product and show its efficacy. These trials are critical in both market and product development.development efforts. During the past four years, the Company increasingly focused on obtaining third-party validated results, through studies with academic institutions and NASA, in accordance with the Company’s SAA.Space Act Agreement ("SSA").

During 2016, the Company shifted domestic business development efforts from a direct to grower approach to developing business relationships with channel partners, in general, large agricultural product distributors with which the Company executed a distribution agreement. Three distribution agreements with agricultural product distributors in Ohio and California were signed during 2016 with three additional in 2017, expanding into Pennsylvania. These efforts have had limited success domestically, due to limited third party crop data from USDA agricultural extension or affiliated universities to support crop yield and performance predictability, combined economic factors including product pricing and risk aversion which, in some instances, did not result in sufficient return on investment for channel partners or growers, and slow adoption practices found within the agricultural industry. We believe slow adoption by channel partners is due to their perceived commitment risk based upon the Company’s lack of adequate capital and capital reserves to address long term operations and sustainability.

The Company began to see limited success penetrating domestic and international markets during 2017. Domestically, the agronomy team conducted in excess of one hundred and fifty grower trials to replicate positive results from prior years using established product protocols and to refine product protocols on a variety of crops in addition to a number of third party validated trials. We believe a number of growers and channel partners will place product orders during the fourth quarter of 2018 as BAM-FX™ gains a market foothold in California, Texas, Iowa, Kentucky and Pennsylvania. International trials were conducted in China, India, Paraguay, Colombia, Brazil and Chile during 2017. We believe positive results in soybean in Paraguay could generate revenue in 2018 through a channel partner in Paraguay. We expect to begin generating revenue in other countries during 2018 as a result of our 2017 trial results and expected positive results from trials in 2018.  Our ability to sell in international markets is dependent upon obtaining government approval for commercial import and sale in country and developing and maintaining strong working relationships with distributors in those countries.

We developed a ready to use, home and garden product, Gardener’s Choice, during 2017 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 significant interest from prospective purchasers. During the first quarter of 2018, the Company introduced Gardener’s Choice directly to Ace Hardware retailers at their annual trade show. In October 2018, the Company attended and managed its show booth at the GIE+EXPO, considered to be the industry’s largest showcase for lawn and garden products distributed through home centers, dealers and retailers, in Louisville, Kentucky. The Company generated significant product interest and distributed in excess of one hundred and thirty product order forms to interested parties. We have received positive feedback from retailers and expect to secure purchase commitments for the product during the fourth quarter of 2018.

We believe we will obtain state registration for sale in all states in the United States, complete promotional material for Gardener’s Choice and have product available for distribution during the fourth quarter of 2018.

To support commercialization and revenue generation efforts, the Company employs certified crop advisors and agronomists for the technical requirements of product introduction domestically and internationally. Reductions in our consulting agronomy staff occurred during the fourth quarter of 2017 due to curtailed operations in Chile, and domestically due to our focus on specific geographies in Texas, California and the Midwest and targeted high value crops.

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. During the first quarter of 2016, the Company executed a new five-year SAA with NASA ARC. The SAA gives the Company access to NASA scientists and laboratories, which assist in identifying and documenting additional attributes of the Company’s science and potential applications in other segments of agricultural markets. We continued working with NASA ARC through the second quarter of 2017, however have not funded additional research pursuant to the SAA due to lack of adequate resources. We maintain our relationship with researchers and specialists and expect to continue research when resources are available.

The Company manufactures its product in a manufacturing facility in Okeechobee, Florida. Manufacturing is conductedFlorida, 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 process improvements and equipment modifications to existing equipment to enhance efficiencies and improve quality control and assurance though March 31,September 30, 2018. Our process improvements more closely align production with a continuous flow production process. The Company expects to engineer, design and build a scale model of a continuous flow process manufacturing facility during 2019 given financial resources are available.

We began developing new formulations of BAM-FX™ to address nutritional needs of plants that are additive to our product’s current zinc and copper formulation in 2015.formulation. New formulations can include boron, manganese, magnesium and iron, which address known plant deficiencies. We believe formulations can be manufactured to include all or numerous combinations of these elements. Certain new formulations have been laboratory tested and these tests confirmed the ability to combine those elements.  Testing the efficacy of these formulations on field crops is expected to begin during the fourth quarter of 2018.

We successfully lab tested a dry formulation, which maintains the attributes of our product, during 2017. If the dry formulation produces the same efficacy as BAM-FX™, a concentrated liquid product, transportation and handling costs would be reduced significantly and we believe we could increase addressable markets due to lower cost to purchasers. We expect to continue developing new formulations and dry formulations in a laboratory setting, begin to perform efficacy trials and design a scale production process during the fourth quarter of 2018, with the intent of adding a number of new specialized products to our current product offering.

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.

On February 27, 2015, we closed a private offering that commenced in March 2013 and raised gross proceeds of $4,448,297 of which $1,253,800 was received during 2015. During May 2015, we began a second offering from which, as of December 31, 2015, we received $4,542,500 in gross proceeds. Direct offering costs relating to these offerings were $536,250 as of December 31, 2015. During 2016, we received an additional $1,717,500 in gross proceeds from this offering.

During 2016, the Company commenced a private offering of up to $10,000,000 of the Company’s securities consisting of 3,333,333 shares of common sharesstock for $3.00 per common share.  ProceedsThrough December 31, 2017, proceeds from the offering were $665,001 with offering costs of $53,200 as of December 31, 2017.$53,200. During the threenine months ended March 31,September 30, 2018, gross proceeds from the offering were $166,002$911,154 with cash offering costs of $1,680.  $25,680.  Effective June 28, 2018, the Company terminated its 2016 private offering. 

On June 29, 2018, the Company initiated the June 2018 Offering of its securities to certain prospective accredited investors, including certain members of the Board of Directors and/or their respective affiliates, consisting of up to $2,000,000 of 10% secured convertible promissory notes, and two-year warrants to purchase up to 2,000,000 shares of the Company's common stock at an exercise price of $1.00 per share. During the nine months ended September 30, 2018, gross proceeds from the June 2018 Offering were $2,050,000, with cash offering costs of $61,500. The June 2018 Offering terminated on July 31, 2018, and consisted of one or more closings.

We have generated nominal revenues from our operations thus far and expect that product sales will increase significantly in 2018 primarily from direct sales to end users, domestic and international channel partners’ distribution efforts, initial revenues from our retail product, Gardner’s Choice and introduction of product into specialty crop markets.

We cannot, however, guarantee we will be successful in generating significant revenue in 2018 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 2018 business plan and realize revenues expected.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based on our unaudited Condensed Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and assumptions that affect the amounts reported in our unaudited Condensed Consolidated Financial Statements and accompanying notes. Note 1: Summary of Significant Accounting Policies in our Condensed Consolidated Financial Statements contains a description of the accounting policies used in the preparation of our consolidated financial statements as well as the consideration of recently issued accounting standards and the estimated impact these standards will have on our consolidated financial statements. We evaluate our estimates on an ongoing basis, including those related to revenue recognition and stock-based compensation. 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 financial condition and 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 Condensed Consolidated Financial Statements. In addition, there are other items within our Condensed Consolidated Financial Statements that require estimates but are not deemed critical as defined in this paragraph.

Revenue Recognition

In accordance with ASC 606 we consider persuasive evidence of an arrangementa contract with a customer, 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 unaudited condensed 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.

Employee Stock-Based Compensation and Share-Based payment to non-employees

We measure 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. 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).

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:

The Company accounts for stock-based compensation awards to non-employees in accordance with ASC 505-50, Equity-Based Payments to Non-Employees. Under ASC 505-50, the Company determines the fair value of the warrants or stock-based compensation awards granted as either the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. Any stock options or warrants issued to non-employees are recorded in expense and additional paid-in capital in shareholders' deficit over the applicable service periods using variable accounting through the vesting dates based on the fair value of the options or warrants at the end of each period.

Results of Operations - For the Three Months Ended September 30, 2018 Compared to the Three Months Ended September 30, 2017