UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
———————
FORM
———————
(Mark One)
For the quarterly period ended:
or
For the transition period from: _____________ to _____________
Commission File Number:
———————
(Exact name of registrant as specified in its charter)
———————
| (State or other jurisdiction | (I.R.S. Employer |
| of incorporation or organization) | Identification No.) |
(Address of Principal Executive Office) (Zip Code)
(Registrant’s telephone number, including area code)
_______________________________________________
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
———————
Securities registered pursuant to Section 12(b) of the Act: None.
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. ☒
Indicate by check mark whether the registrant
has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit
and post such files). ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ¨ | Accelerated filer ¨ | |
| Smaller reporting company | ||
| Emerging growth company |
If an emerging growth company, indicate by checkmark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). ¨ Yes ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.
| Class | Shares Outstanding as of November 21, 2022 | |
| common stock, $0.001 par value per share |
BASANITE, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PART I. – FINANCIAL INFORMATION
| ITEM 1. | FINANCIAL STATEMENTS |
BASANITE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
| September 30, 2022 | December 31, 2021 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| CURRENT ASSETS | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Inventory | ||||||||
| Prepaid expenses | ||||||||
| Deposits and other current assets | ||||||||
| TOTAL CURRENT ASSETS | ||||||||
| Lease right-of-use asset, operating | ||||||||
| Lease right-of-use asset, financing | ||||||||
| Lease right-of-use asset, financing, related-party | ||||||||
| Fixed assets, net | ||||||||
| TOTAL NON CURRENT ASSETS | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY | ||||||||
| CURRENT LIABILITIES | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Accrued legal liability | ||||||||
| Subscription liability | ||||||||
| Notes payable | ||||||||
| Notes payable - related party | ||||||||
| Notes payable - convertible - related party, net | ||||||||
| Lease liability – operating, current portion | ||||||||
| Lease liability – financing, current portion | ||||||||
| Lease liability – financing, related party, current portion | ||||||||
| TOTAL CURRENT LIABILITIES | ||||||||
| Lease liability – operating, net of current portion | ||||||||
| Lease liability – net of current portion | ||||||||
| Lease liability – financing, related party, net of current portion | ||||||||
| TOTAL LIABILITIES | ||||||||
| STOCKHOLDERS’ (DEFICIT) EQUITY | ||||||||
| Preferred stock, $ par value, shares authorized, issued and outstanding | ||||||||
| Common stock, $ par value, shares authorized, and shares issued and outstanding, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| TOTAL STOCKHOLDERS' (DEFICIT) EQUITY | ( | ) | ||||||
| TOTAL LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY | $ | $ | ||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
| 1 |
BASANITE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
| For the three months ended | For the nine months ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Revenue | ||||||||||||||||
| Products sales - rebar | $ | $ | $ | $ | ||||||||||||
| Total cost of goods sold | ||||||||||||||||
| Gross (loss) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| OPERATING EXPENSES | ||||||||||||||||
| Sales, general, and administrative | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| NET LOSS FROM OPERATIONS | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| OTHER INCOME (EXPENSE) | ||||||||||||||||
| Gain on settlement of legal contingency | ||||||||||||||||
| Liquidated damages – loan commitment | ( | ) | ||||||||||||||
| Miscellaneous income | ||||||||||||||||
| Loss on extinguishment of debt | ( | ) | ||||||||||||||
| Gain on loan forgiveness | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total other income (expense) | ( | ) | ( | ) | ( | ) | ||||||||||
| NET LOSS | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Net loss per share – | ||||||||||||||||
| Basic | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Weighted average number of shares outstanding – | ||||||||||||||||
| Basic | ||||||||||||||||
| Diluted | ||||||||||||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
| 2 |
BASANITE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
(UNAUDITED)
| Additional | Total | |||||||||||||||||||
| Common Stock | Paid-in | Accumulated | Stockholders’ | |||||||||||||||||
| Shares | Par Value | Capital | Deficit | Deficit | ||||||||||||||||
| Balance January 1, 2021 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
| Warrants exercised for cash | ||||||||||||||||||||
| Stock-based compensation | ||||||||||||||||||||
| Stock issued for cash | ||||||||||||||||||||
| Warrants Issued | — | |||||||||||||||||||
| Net loss | — | ( | ) | ( | ) | |||||||||||||||
| Balance March 31, 2021 | ( | ) | ( | ) | ||||||||||||||||
| Stock issued for cash | ||||||||||||||||||||
| Stock-based compensation | ||||||||||||||||||||
| Warrants issued | — | |||||||||||||||||||
| Net loss | — | ( | ) | ( | ) | |||||||||||||||
| Balance June 30, 2021 | ( | ) | ( | ) | ||||||||||||||||
| Stock issued for cash | ||||||||||||||||||||
| Stock-based compensation | ||||||||||||||||||||
| Warrants issued | — | |||||||||||||||||||
| Net loss | — | ( | ) | ( | ) | |||||||||||||||
| Balance September 30, 2021 | $ | $ | $ | ( | ) | $ | ||||||||||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
| 3 |
BASANITE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
(UNAUDITED)
| Total | ||||||||||||||||||||
| Stockholders’ | ||||||||||||||||||||
| Common Stock | Paid-in | Accumulated | Equity | |||||||||||||||||
| Shares | Par Value | Capital | Deficit | (Deficit) | ||||||||||||||||
| Balance January 1, 2022 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Stock issued for cash, net of costs of $ | ||||||||||||||||||||
| Stock issued for exercise of warrants | ||||||||||||||||||||
| Stock issued to service provider | ||||||||||||||||||||
| Warrants issued to management | — | |||||||||||||||||||
| Net loss | — | ( | ) | ( | ) | |||||||||||||||
| Balance March 31, 2022 | ( | ) | ( | ) | ||||||||||||||||
| Shares issued to related party for services | ||||||||||||||||||||
| Vesting of warrants issued to management | — | |||||||||||||||||||
| Warrants issued to Related Party for services provided | — | |||||||||||||||||||
| Net loss | — | ( | ) | ( | ) | |||||||||||||||
| Balance June 30, 2022 | ( | ) | ( | ) | ||||||||||||||||
| Shares issued for exercise of warrants | ||||||||||||||||||||
| Warrants issued to service provider | — | |||||||||||||||||||
| Net loss | — | ( | ) | ( | ) | |||||||||||||||
| Balance September 30, 2022 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
| 4 |
BASANITE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| For the nine months ended | ||||||||
| September 30, | ||||||||
| 2022 | 2021 | |||||||
| (Unaudited) | ||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Lease right-of-use lease amortization | ||||||||
| Lease right-of-use asset amortization, financing lease | ( | ) | ||||||
| Lease right-of-use asset amortization, financing lease, related party | ( | ) | ||||||
| Depreciation and amortization | ||||||||
| Gain on settlement of legal contingency | ( | ) | ||||||
| Gains on settlement of payable | ( | ) | ||||||
| Loss on extinguishment of debt | ||||||||
| Loan forgiveness | ( | ) | ( | ) | ||||
| Stock-based compensation | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Prepaid expenses | ( | ) | ( | ) | ||||
| Inventory | ( | ) | ||||||
| Accounts receivable | ( | ) | ( | ) | ||||
| Deposits and other current assets | ( | ) | ||||||
| Accounts payable and accrued expenses | ( | ) | ||||||
| Subscription liability | ( | ) | ||||||
| Lease liability, operating lease | ( | ) | ( | ) | ||||
| Lease liability, financing lease | ( | ) | ||||||
| Lease liability, financing lease – related party | ( | ) | ||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Purchase of equipment | ( | ) | ( | ) | ||||
| Proceeds from sale of equipment | ||||||||
| Deposits on equipment | ( | ) | ||||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Proceeds from sale of common stock, net of costs | ||||||||
| Proceeds from exercise of warrants | ||||||||
| Proceeds of convertible notes payable and convertible notes payable related party | ||||||||
| Repayments of convertible notes payable and convertible notes payable related party | ( | ) | ||||||
| Proceeds from notes payable and notes payable related party | ||||||||
| Repayments of notes payable and notes payable related party | ( | ) | ||||||
| Net cash provided by financing activities | ||||||||
| NET (DECREASE) INCREASE IN CASH | ( | ) | ||||||
| CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | ||||||||
| CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | $ | ||||||
| Supplemental cash flow information: | ||||||||
| Cash paid for income taxes | $ | $ | ||||||
| Cash paid for interest | $ | $ | ||||||
| Forgiveness of Paycheck Protection Program loan and accrued interest | $ | $ | ||||||
| Supplemental disclosure of non-cash investing and financing activities: | ||||||||
| Accounts payable paid by financing lease, related party | $ | ( | ) | $ | ||||
| ROU Asset from financing leases | $ | $ | ||||||
| Conversion of notes payable into common stock | $ | $ | ||||||
| Issuance of warrants for services | $ | $ | ||||||
| Conversion of note payable in exchange for cash | $ | $ | ||||||
| Extension of convertible note interest rolled in | $ | $ | ||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
| 5 |
BASANITE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 – ORGANIZATION, NATURE OF BUSINESS AND GOING CONCERN
(A) Description of Business
Basanite, Inc., a Nevada corporation (the “Company”, “Basanite”, “we”, “us”, “our” or similar terminology), through our wholly owned subsidiary, Basanite Industries, LLC, a Delaware limited liability company (“BI”), manufactures a range of “green” (environmentally friendly), sustainable, non-corrosive, lightweight, composite products used in concrete reinforcement by the construction industry. Our core product is BasaFlex™, a basalt fiber reinforced polymer reinforcing bar (“rebar”) which we believe is a stronger, lighter, sustainable, non-conductive and corrosion-proof alternative to traditional steel.
Our two other main product lines are BasaMix™, which are fine denier basalt fibers available in various sizes, and BasaMesh™, a line of Basalt Geogrid Mesh Rolls, intended to replace welded wire mesh (made of steel) and other fiber reinforced polymer (“FRB”) grids and mesh.
BasaMix™ is designed to help absorb the stresses associated with early-aged plastic shrinkage and settlement cracking in concrete, as well as providing an increased toughness for enhanced reinforcement in Slab-on-Grade (“SOG”) and precast elements. BasaMix™ also serves in a “system approach” for optimum performance of a concrete element when used in conjunction with our BasaFlex™ rebar.
BasaMesh™ is designed for secondary and temperature shrinkage reinforcement. BasaMesh™ can also work in conjunction with the BasaFlex™ rebar or BasaMix™ for a total reinforcement program.
Each of our products is specifically designed to extend the lifecycle of concrete products by eliminating “concrete spalling.” Spalling results from the steel reinforcing materials embedded within the concrete member rusting (contrary to popular belief, concrete is porous and water can permeate into concrete). Rusting leads to the steel expanding and eventually causing the surrounding concrete to delaminate, crack, or even break off, resulting in potential structural failure. We believe that each Basanite product addresses this important need along with other key requirements in today’s construction market.
(B) Liquidity and Management Plans
Since inception, the Company has incurred net operating losses and used cash in operations. As of September 30, 2022, and December 31, 2021, respectively, the Company reported:
| · | an accumulated deficit of $ |
| · | a working capital deficiency of $ |
| · | cash used in operations of
$ |
Losses have principally occurred as a result of the substantial resources required for product research and development, establishment and upgrading of our manufacturing facility and equipment, and for certification, government approval and marketing of the Company’s products; including the general and administrative expenses associated with the organization.
Due to our cash flow and liquidity challenges, we have received demand letters from a number of vendors to our company seeking payment of past due amounts to such vendors. As of the date of this report, such demands have not become formal litigations or other proceedings against our company, but they may become litigations against us in the future.
While we have generated relatively little revenue to date, revenue from sales of product began to increase during the nine months of 2022 (including the quarter ended September 30, 2022), and we continue to receive inquiries and solicit orders from a range of customers for our products, indicating what we believe is a significant level of market interest for BasaFlex™ and BasaMix ™ products. We also spent time and resources during the three quarters of 2022 in introducing our products to, and receiving approvals and certifications from, various county and local government agencies to have our products used in such agencies’ construction projects, While the Company plans to expand its manufacturing capacity in the future, based on our current limited manufacturing capacity, and given that we plan to vacate our current facility in Pompano Beach, Florida due to a recent dispute with our landlord (see note 12), there is no guarantee that orders secured from marketing and governmental approval activities will actually be received or that orders, if received, can be properly fulfilled. On September 27, 2022, we furloughed the majority of our staff to reduce costs during a period of reduced production. We anticipate re-staffing as soon as we obtain adequate funding and are in a new facility with the new equipment.
| 6 |
BASANITE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) |
NOTE 1 – ORGANIZATION, NATURE OF BUSINESS AND GOING CONCERN (CONTINUED)
We have historically satisfied our working capital requirements through the sale of restricted common stock of the Company, $ par value per share (the “Common Stock”), and the issuance of warrants to purchase Common Stock and promissory notes, some of which were or are convertible into shares of Common Stock. Until we are able to internally generate meaningful revenue and positive cash flow, we will attempt to fund working capital requirements through third party financing, including through potential private or public offerings of our securities as well as bridge or other loan arrangements. However, a number of factors continue to hinder the Company’s ability to attract new capital investment. We cannot provide any assurances that the required capital will be obtained at all, or that the terms of such required capital may be acceptable to us. If we are unable to obtain adequate financing, we may reduce our operating activities to reduce our cash use until sufficient funding is secured. If we are unable to secure funding when needed, our results of operations may suffer, and our business may fail.
These conditions raise substantial doubt about the Company’s ability to continue as a going concern. These condensed consolidated financial statements do not include any adjustments to reflect the possible future effect on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from the outcome of these uncertainties.
At September 30, 2022, the Company had cash of $
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) Use of Estimates in Financial Statements
The presentation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Stock-based compensation and stock awards related to convertible debt instruments are recognized based on the fair value of the awards granted. The fair value of each award or conversion feature is typically estimated on the grant date using the Black-Scholes pricing model. The Black-Scholes pricing model requires the input of highly subjective assumptions, including the fair value of the underlying Common Stock, the expected term of the option, the expected volatility of the price of our Common Stock, risk-free interest rates and the expected dividend yield of our Common Stock. The assumptions used to determine the fair value of the stock awards represent management’s best estimates. These estimates involve inherent uncertainties and the application of management’s judgment.
The Company used the Black Scholes valuation model to determine the fair value of the warrants and options issued, using the following key assumptions for the nine months ended September 30, 2022. There were no such valuations during the nine months ended September 30, 2021:
| Nine months | Nine months | |||||||
| ended | ended | |||||||
| September 30, | September 30, | |||||||
| 2022 | 2021 | |||||||
| (Unaudited) | ||||||||
| Expected price volatility | -% | N/A | ||||||
| Risk-free interest rate | - | N/A | ||||||
| Expected life in years | N/A | |||||||
| Dividend yield | N/A | |||||||
(B) Principles of Consolidation
The condensed consolidated financial statements include the accounts of Basanite, Inc. and its wholly owned subsidiaries, Basanite Industries, LLC and Basalt America, LLC. All intercompany balances have been eliminated in consolidation. The Company’s operations are conducted primarily through Basanite Industries, LLC. Basalt America, LLC is currently inactive.
| 7 |
BASANITE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) |
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(C) Cash
The Company considers all highly
liquid temporary cash instruments with an original maturity of three months or less to be cash equivalents. The Company places its cash,
cash equivalents and restricted cash on deposit with financial institutions in the United States, which are insured by the Federal Deposit
Insurance Company “(“FDIC”) up to $
(D) Inventories
The Company’s inventories consist of raw materials, work in process and finished goods, both purchased and manufactured. Inventories are stated at lower of cost or net realizable value. Cost is determined on a first-in, first-out basis. Raw materials inventory consists of basalt fiber and other necessary elements to produce BasaFlex™ rebar and our other products. On a quarterly basis, the Company analyzes its inventory levels and records allowances for inventory that has become obsolete and inventory that has a cost basis in excess of the expected net realizable value.
The Company’s inventory at September 30, 2022 and December 31, 2021 was comprised of:
| September 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| (Unaudited) | ||||||||
| Finished goods | $ | $ | ||||||
| Work in process | ||||||||
| Raw materials | ||||||||
| Other inventory | ||||||||
| Total Inventory | $ | $ | ||||||
(E) Fixed assets
Fixed assets consist of the following:
| September 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| (Unaudited) | ||||||||
| Computer equipment | $ | $ | ||||||
| Machinery | ||||||||
| Leasehold improvements | ||||||||
| Office furniture and equipment | ||||||||
| Land improvements | ||||||||
| Website development | ||||||||
| Construction in process | ||||||||
| Accumulated depreciation and amortization | ( | ) | ( | ) | ||||
| $ | $ | |||||||
Depreciation expense for the
three and nine months ended September 30, 2022, was $
| 8 |
BASANITE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) |
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(F) Deposits and other current assets
The Company’s deposits and other current assets consist of the deposits made on equipment, security deposits, utility deposits and other receivables. The deposits are reclassified as part of the fixed asset cost when received and placed into service.
The basic loss per share is calculated by dividing the Company’s net loss available to common shareholders by the weighted average number of common shares during the period. The diluted loss per share is calculated by dividing the Company’s net loss by the diluted weighted average number of shares outstanding during the period. The diluted weighted average number of shares outstanding is the basic weighted number of shares adjusted for any potentially dilutive debt or equity.
The following are potentially dilutive shares not included in the loss per share computation:
| September 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| (Unaudited) | ||||||||
| Options | ||||||||
| Warrants | ||||||||
| Convertible securities | ||||||||
| Total | ||||||||
The Company recognizes compensation costs to employees under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 718, Compensation – Stock Compensation. Under FASB ASC Topic 718, companies are required to measure the compensation costs of share-based compensation arrangements based on the grant-date fair value and recognize the costs in the financial statements over the period during which employees are required to provide services. Share based compensation arrangements include stock options, restricted share plans, performance-based awards, share appreciation rights and employee share purchase plans. As such, compensation cost is measured on the date of grant at their fair value. Such compensation amounts, if any, are amortized over the respective vesting periods of the grant.
(I) Revenue Recognition
We recognize revenue when control of the promised goods or services is transferred to the Company’s customers in an amount that reflects the consideration we expected to be entitled to in exchange for those goods or services. The timing of revenue recognition largely is dependent on shipping terms. Revenue is recorded at the time of shipment for terms designated free on board (“FOB”) shipping point. For sales transactions designated FOB destination, revenue is recorded when the product is delivered to the customer’s delivery site.
| 9 |
BASANITE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) |
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
All revenues recognized are net
of trade allowances, cash discounts, and sales returns. Trade allowances are based on the estimated obligations. Adjustments to earnings
resulting from revisions to estimates on discounts and returns have been immaterial for each of the reported periods. Shipping and handling
amounts billed to a customer as part of a sales transaction are included in revenues, and the related costs are included in cost of goods
sold. Shipping and handling are treated as fulfillment activities, rather than promised services, and therefore are not considered separate
performance obligations. During the three and nine months ended September 30, 2022, and 2021, the Company incurred shipping and handling
costs in the amount of $
NOTE 3 – OPERATING LEASE
On January 18, 2019, the Company
entered into an agreement to lease approximately 25,470 square feet of office and manufacturing space in Pompano Beach, Florida through
March 2024. On March 25, 2019, the Company entered into an amendment to the agreement to increase the square footage of leased premises
to 36,900 square feet, increasing the Company’s base rent obligation to be approximately $
The right-of-use asset is composed of the sum of all remaining lease payments plus any initial direct costs and is amortized over the life of the expected lease term. For the expected term of the lease, the Company used the initial term of the five-year lease. If the Company does elect to exercise its option to extend the lease for another five years, for which the election will be treated as a lease modification, the lease will be reviewed for remeasurement.
The future minimum lease payments to be made under the operating lease as of September 30, 2022, are as follows:
| 2022 | $ | ||||
| 2023 | |||||
| 2024 | |||||
| Total minimum lease payments | |||||
| Discount | ( | ) | |||
| Operating lease liability | $ |
Operating lease liabilities are
based on the net present value of the remaining lease payments over the remaining lease term. In determining the present value of lease
payments, the Company used the incremental borrowing rate based on the information available at the lease commencement date. As of September
30, 2022, the weighted-average remaining lease term is
NOTE 4 – FINANCING LEASE
On
July 11, 2022, the Company entered into an equipment financing agreement (the “Agreement”) with Quayco, LLC, a Pennsylvania
limited liability company (the “Lessor”). The Company had previously ordered certain specialized BasaMax™ Pultrusion
Machines (the “Machines”) from Upstate Custom Products LLC, a South Carolina limited liability company (the “Manufacturer”).
The Machines are to be used to manufacture the Company’s basalt fiber reinforced polymer (BFRP) rebar products. Pursuant to the
Agreement, the Lessor will pay the Company (Lessee) $
The future minimum lease payments to be made under the financing lease as of September 30, 2022, are as follows:
| 2022 | $ | ||||
| 2023 | |||||
| 2024 | |||||
| Total minimum lease payments | |||||
| Present value discount | ( | ) | |||
| Financing lease liability | $ |
| 10 |
BASANITE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) |
NOTE 5 – FINANCING LEASE – RELATED PARTY
On April 27, 2022, the Company entered into an Equipment Rental Agreement (the “Agreement”) with First New Haven Mortgage Company, LLC, a Connecticut limited liability company and an affiliate of the Company (the “Lessor”). Ronald J. LoRicco, the Chairman of the Company’s Board of Directors, is the co-managing member of the Lessor and has an indirect pecuniary interest in the Lessor. In accordance with Nevada corporate law, the Agreement was independently reviewed and approved by the unanimous vote of the disinterested directors of the Company, with Mr. LoRicco recusing himself from voting.
Pursuant to the Agreement, the Lessor
paid approximately $
The future minimum lease payments to be made under the financing lease as of September 30, 2022, are as follows:
| 2022 | $ | ||||
| 2023 | |||||
| 2024 | |||||
| Total minimum lease payments | |||||
| Discount | ( | ) | |||
| Financing lease liability | $ |
NOTE 6 – NOTES PAYABLE
Notes payable totaled an
aggregate of $
On February 25, 2021, the Company
entered a promissory note agreement with a bank for $
On
April 2, 2021, the Company issued a promissory note with an investor in exchange for $
On
April 9, 2021, the Company issued a promissory note with an investor in exchange for $
On
April 16, 2021, the Company issued a promissory note with an investor in exchange for $
On
April 16, 2021, the Company issued a promissory note with an investor in exchange for $
The Company enters into financing
arrangements for its liability insurance premiums. The financings have a term of one year and an interest rate of
Interest expense for the
Company’s promissory notes payable for the three and nine months ended September 30, 2022 was, in the aggregate, $
Accrued interest for the
Company’s promissory notes payable on September 30, 2022 and December 31, 2021 was, in the aggregate, $
| 11 |
BASANITE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) |
NOTE 7 – NOTES PAYABLE – RELATED PARTY
Notes payable – Related
Party, totaled an aggregate of $
On August 31, 2022 the Company issued a promissory note
to a board member in exchange for $
On August 22, 2022 the Company issued a promissory note
to a board member in exchange for $
On August 22, 2022 the Company issued a promissory note
to a board member in exchange for $
On August 29, 2022 the Company issued a promissory note
to a board member in exchange for $
On August 29, 2022 the Company issued a promissory note
to a board member in exchange for $
On August 31, 2022 the Company issued a promissory note
to a board member in exchange for $
On September 9, 2022 the Company issued a promissory
note to a board member in exchange for $
On September 9, 2022 the Company issued a promissory
note to a board member in exchange for $
On September 9, 2022 the Company issued a promissory
note to a strategic partner in exchange for $
On September 9, 2022 the Company issued a promissory
note to a strategic partner in exchange for $
On September 9, 2022 the Company issued a promissory
note to an investor and advisor to the board, in exchange for $
On September 22, 2022 the Company issued a promissory
note to a board member in exchange for $
On September 22, 2022 the Company issued a promissory
note to an investor and advisor to the board in exchange for $
On April 2, 2021, the Company issued
a promissory note to Paul Sallarulo, a member of our Board of Directors, in exchange for $
On April 2, 2021, the Company issued
a promissory note to Michael V. Barbera, our Chairman of the Board, in exchange for $
Interest expense for the Company’s
notes payable – related party for the three and nine months ended September 30, 2022 was $
Accrued interest for the
Company’s notes payable - related party on September 30, 2022, and December 31, 2021, was an aggregate of $
| 12 |
BASANITE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) |
NOTE 8 – NOTES PAYABLE – CONVERTIBLE – RELATED PARTY
Convertible Notes payable
– related party totaled an aggregate of $
On August 3, 2020, the Company
issued a secured convertible promissory note to certain investors in exchange for $
On February 12, 2021, the Company
exchanged the original debt for a newly issued amended and restated secured convertible promissory note with a new principal balance of
$
On May 12, 2021, the Company extended
the debt for a newly issued amended and restated secured convertible promissory note with a new principal balance of $1,689,746 bearing
an interest rate of
On September 15, 2022, the Company
extended the debt for a newly issued amended and restated secured convertible promissory note with a new principal balance of $
Interest expense for the
Company’s convertible notes payable – related parties for the three and nine months ended September 30, 2022, was an
aggregate of $
Accrued interest for the
Company’s convertible notes payable – related parties on September 30, 2022, and December 31, 2021, was an aggregate of
$
NOTE 9 – COMMITMENTS AND CONTINGENCIES
The Company is the obligor under certain promissory notes that are currently past due (although formal events of default have not been declared).
The Company is presently in default
of its obligations under the terms of the Company’s private placement which closed in August 2021 to file a registration statement
for an underwritten public offering and concurrently an application for listing on a national stock exchange. As a result, the Company
is required to pay liquidated damages in the amount of $
NOTE 10 – STOCKHOLDERS’ DEFICIT
The Company raised $ pursuant to a private placement of Common Stock and warrants in 2022 – this amount is carried on the balance sheet as a current liability as of September 30, 2022 because the shares have not been issued to the investors. The related transactions are:
During the three months ended September 30, 2022, the company charged the amount of $ to non-cash compensation representing the vesting of warrants issued to consultants for services.
| 13 |
BASANITE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) |
Stock Options:
The following table provides the activity in options for the respective periods:
| Total Options | Weighted Average | Aggregate Intrinsic | ||||||||||
| Outstanding | Exercise Price | Value | ||||||||||
| Balance at January 1, 2021 | $ | $ | ||||||||||
| Issued | — | |||||||||||
| Cancelled / Expired | ( | ) | — | |||||||||
| Balance at December 31, 2021 | $ | $ | ||||||||||
| Exercised | ( | ) | — | |||||||||
| Cancelled / Expired | ( | ) | — | |||||||||
| Balance at March 31, 2022 | ) | $ | $ | |||||||||
| Cancelled / Expired | ( | ) | ||||||||||
| Balance at June 30, 2022 | $ | $ | ||||||||||
| Balance at September 30, 2022 | $ | $ | ||||||||||
Options exercisable and outstanding at September 30, 2022 are as follows:
| Weighted Average | ||||||||
| Remaining | ||||||||
| Range of | Number | Contractual | Weighted Average | Aggregate | ||||
| Exercise Prices | Outstanding | Life (Years) | Exercise Price | Intrinsic Value | ||||
| $ - $ | $ |
Stock Warrants:
The following table provides the activity in warrants to purchase shares of Common Stock for the respective periods:
| Weighted | ||||||||||||
| Average | Aggregate | |||||||||||
| Total Warrants | Exercise Price | Intrinsic Value | ||||||||||
| Balance at January 1, 2021 | $ | $ | ||||||||||
| Granted | — | |||||||||||
| Exercised | ( | ) | — | |||||||||
| Balance at December 31, 2021 | $ | $ | ||||||||||
| Granted | — | |||||||||||
| Balance at March 31, 2022 | $ | $ | ||||||||||
| Granted | ||||||||||||
| Expired – cancelled | ( | ) | ||||||||||
| Balance at June 30, 2022 | $ | $ | ||||||||||
| Granted | — | |||||||||||
| Exercised | ( | ) | ||||||||||
| Expired – cancelled | ( | ) | — | |||||||||
| Balance at September 30, 2022 | $ | $ | ||||||||||
Warrants exercisable and outstanding at September 30, 2022 are as follows:
| Weighted Average | ||||||||
| Remaining | ||||||||
| Range of | Number | Contractual | Weighted Average | Aggregate | ||||
| Exercise Prices | Outstanding | Life (Years) | Exercise Price | Intrinsic Value | ||||
| $ - $ | $ |
$ | ||||||
| $ - $ | $ |
|||||||
| $ |
| 14 |
BASANITE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) |
NOTE 12 – SUBSEQUENT EVENTS
On October 17, 2022, the Company was presented with a written notice from Camton, LLC (the “Landlord”), the landlord of the Company’s headquarters and principal manufacturing facility in Pompano Beach, Florida, demanding the Company pay past due rent or relinquish possession of its facilities. On October 25, 2022, the Landlord filed a complaint in the Broward County Court, Fort Lauderdale, Florida, and on November 1, 2022, the Company received an eviction summons. On November 3, 2022, in accordance with the instructions within the complaint, the Company presented 100% of the past due amount payable to the Broward County Court and commenced negotiations with the Landlord for an early exit of its lease.
On
October 31, 2022, the Company entered into an Equipment Rental Agreement (the “Agreement”) with LoRicco Enterprises,
LLC, a Connecticut limited liability company and an affiliate of the Company (the “Lessor”). Ronald J. LoRicco, the
Chairman of the Company’s Board of Directors, is the co-managing member of the Lessor and has an indirect pecuniary interest
in the Lessor. In accordance with Nevada corporate law, the Agreement was independently reviewed and approved by the unanimous vote
of the disinterested directors of the Company, with Mr. LoRicco recusing himself from voting. The Company used a discount
rate of
On October 20, 2022, shares of Common Stock and warrants to purchase Common Stock were issued in satisfaction of the amounts held in stock subscriptions at September 30, 2022.
On November 14, 2022, Simon Kay, the Company’s Chief Executive Officer and President, resigned his positions with the Company.
Pursuant to her employment agreement with the Company, Lisa Gainsborg, the Company’s Chief Financial Officer, is entitled to receive options to purchase Common Stock which vest in quarterly increments over time. The initial tranche of options vested on November 17, 2022, but as a courtesy to the Company. Ms. Gainsborg has waived her right to such options.
| 15 |
| ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following provides a high-level discussion of our operating results and some of the trends that affect our business. We believe that an understanding of these trends is important to understand our financial results for the three and nine months ended September 30, 2022, and 2021, respectively. This summary is not intended to be exhaustive, nor is it intended to be a substitute for the detailed discussion and analysis provided elsewhere in this report, and our audited consolidated financial statements and accompanying notes included in the Annual Report in Form-10-K for the period ended December 31, 2021 and filed with the SEC on April 15, 2022.
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains “forward-looking statements” (as defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended). These forward-looking statements are based on our management’s beliefs, assumptions, and expectations and on information currently available to our management. Generally, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “would,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “projects,” “predicts,” “potential” and similar expressions intended to identify forward-looking statements, which generally are not historical in nature. All statements that address operating or financial performance, events, or developments that we expect or anticipate will occur in the future are forward-looking statements, including without limitation our expectations with respect to the timing for our planned manufacturing expansion and/or new lease for manufacturing and headquarters space, the benefits of our products, customer leads, product sales, financings, or the commercial viability of, and prospects for, our business model. We may not actually achieve the plans, projections or expectations disclosed in forward-looking statements, and actual results, developments or events (including, without limitation, those related to our planned manufacturing relocation and expansion and our sales and marketing initiatives) could differ materially from those disclosed in the forward-looking statements. Our management believes that these forward-looking statements are reasonable as and when made. However, you should not place undue reliance on forward-looking statements because they speak only as of the date when made. We do not assume any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required by federal securities laws and the rules of the Securities and Exchange Commission (the “SEC”). We may not actually achieve the plans, projections or expectations disclosed in our forward-looking statements, and actual results, developments or events could differ materially and adversely from those disclosed in the forward-looking statements. Forward-looking statements are subject to a number of significant risks and uncertainties, including without limitation those described from time to time in our reports filed with the SEC.
The following discussion and analysis of our financial condition and results of operations should be read together with our unaudited interim condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q as well as the risk factors and other disclosures contained in our Annual Report on Form 10-K for the period ended December 31, 2021.
Basanite, Inc., and its wholly owned subsidiaries are referred to in this discussion as the “Company”, “we”, “our”, or “us”. “Common Stock” refers to the Common Stock of the Company.
Overview
On May 30, 2006, Basanite, Inc. was formed as a Nevada corporation. Through our wholly owned subsidiary, Basanite Industries, LLC, a Delaware limited liability company (“BI”), we manufacture a range of “green” (environmentally friendly), sustainable, non-corrosive, lightweight, composite products used in concrete reinforcement by the construction industry. Our core product is BasaFlex™, a basalt fiber reinforced polymer reinforcing bar (“rebar”) which we believe is a stronger, lighter, sustainable, non-conductive and corrosion-proof alternative to traditional steel.
Our two other main product lines are BasaMix™, which are fine denier basalt fibers available in various chopped sizes, and BasaMesh™, a line of Basalt Geogrid Mesh Rolls, intended to replace welded wire mesh (made of steel) and other fiber reinforced polymer grids and mesh.
BasaMix™ is designed to help absorb the stresses associated with early-aged plastic shrinkage and settlement cracking in concrete, as well as providing an increased toughness for enhanced reinforcement in Slab on Grade (SOG) and precast elements. BasaMix™ also serves in a “system approach” for optimum performance of a concrete element when used in conjunction with our BasaFlex™ rebar.
BasaMesh™ is designed for secondary and temperature shrinkage reinforcement. BasaMesh™ can also work in conjunction with the BasaFlex™ rebar or BasaMix™ for a total reinforcement program.
Each of our products is specifically designed to extend the lifecycle of concrete products by eliminating “concrete spalling.” Spalling results from the steel reinforcing materials embedded within the concrete member rusting (contrary to popular belief, concrete is porous, and water can permeate into concrete). Rusting leads to the steel expanding and eventually causing the surrounding concrete to delaminate, crack, or even break off, resulting in potential structural failure. We believe that each of our products addresses this important need along with other key requirements in today’s construction market.
| 16 |
We believe that the following attributes of BasaFlex™ provide it with a competitive advantage in the marketplace:
| · | BasaFlex™ never corrodes: steel reinforcement products rust, leading to spalling and significant repair costs down the road; |
| · | BasaFlex™ is sustainable: BasaFlex™ is made from Basalt rock, the most abundant rock found on Earth’s surface, and offers a longer product lifecycle than traditional steel (the lack of corrosion allows the life span of concrete products reinforced with BasaFlex to be significantly longer); |
| · | BasaFlex™ is “green”: From mining, through production, to installation at the building site, BasaFlex™ has an exceptionally low carbon footprint when compared with that of steel or with carbon fiber or glass fiber reinforced polymer rebar products; and |
| · | BasaFlex™ has a lower in-place cost: the physical nature of our products relative to steel result in a lower net cost to the contractor once installed, such as: BasaFlex™ is one-quarter of the weight of equivalent sized steel, meaning 4 times the quantity of material can be delivered by the same truck (or container); all Basanite products can be loaded/unloaded and moved around the jobsite by hand – no expensive handling equipment is needed; less concrete is required as BasaFlex™ does not require the extra concrete cover needed when using steel; and Basanite products are safer and easier to use. We believe all these factors materially reduce the net in-place cost of concrete reinforcement. |
BI is currently leasing a fully permitted, 36,900 square foot facility located in Pompano Beach, Florida equipped with five customized, Underwriters Laboratories approved, pultrusion manufacturing machines for BasaFlex™ production; one proprietary BasaMaxTM pultrusion manufacturing machine (see following paragraph) for BasaFlex™ production; plus additional composite manufacturing equipment. Pultrusion is a manufacturing process for converting reinforced fibers and liquid resin into a fiber-reinforced polymer product. Each of our current pultrusion machines has up to two linear production lines or “cavities” (we use one or two lines per machine depending on rebar size) giving a maximum capacity of 10 manufacturing lines (smaller bar sizes only). To date, BI’s operations team has successfully optimized and scaled the capacity of our manufacturing plant to be able to produce up to 22,800 linear feet of BasaFlex™ rebar per shift, per working day, depending on the product mix. We are planning on vacating this facility on Pompano Beach and relocating to a new facility to accommodate our current and planned additional manufacturing machines (see note 12 to the accompanying financial statements for further information).
During the past year, we designed, developed, and prototyped a next generation Pultrusion manufacturing system for BasaFlexTM rebar we call BasaMax™. This new system has been designed in two versions, a quad-line system named “Tetrad” (for smaller bar sizes) and a dual-line system named “Dyad” (for larger bar sizes). Each machine not only offers double the manufacturing capacity of the current machines for a given bar size, but they also run faster, and they fit in the same manufacturing floorspace. We currently have five of these new BasaMax pultrusion machines manufactured and ready for delivery: three quad-line machines and two dual-line machines.
During the third quarter of 2022, we conducted an evaluation of our current facility in Pompano Beach with a longer-term view and determined that its current facility layout significantly limits our options for growth. In addition, due to limitations on our cash resources, we have been late in our payments to our current landlord, who has taken action to evict us. As a result of these factors, we have been looking for a new facility that will allow for future expansion and be better suited for our manufacturing processes. We have placed the planned installation of our new equipment temporarily on hold, and our current plan is to lease a new facility and accept delivery of new machines by the end of the fourth quarter of 2022 or early in 2023, with installation and calibration of our new machines to commence immediately thereafter. Assuming we are able to secure appropriate manufacturing space, with the introduction of this new equipment and the subsequent establishment of our planned two-shift operations, our maximum manufacturing capacity for BasaFlex™ rebar will increase to more than 100,000 linear feet per working day (on a two-shift basis).
Importantly, BI’s own fully equipped Test Lab is utilized to evaluate, validate, and verify each raw material and each batch of completed BasaFlex™ product, ensuring our finished goods meet the required specifications and performance attributes. We are also developing a new process specifically for manufacturing BasaFlex™ shapes (hoops; angles and stirrups) which we call BasaLinks™, which includes developing a next generation pultrusion system as part of this process. Again, assuming we are able to secure appropriate manufacturing space, we expect our first BasaLinks system to be in place and operational during the second quarter of 2023.
We believe that macroeconomic factors are pressuring the construction industry to consider the use of alternative reinforcement materials for the following reasons:
| · | the increasing need for global infrastructure repair; |
| · | recent design trends towards increasing the lifespan of projects and materials; |
| · | the global interest in promoting the use of sustainable products; |
| · | increasing consideration of both the long-term costs and environmental impacts of material selections. |
| · | more recently, due to rising steel prices, an increasing level of price equivalence between steel rebar and our BFRP rebar. |
We believe we are well positioned to benefit from this renewed focus, particularly in light of the interest of the U.S. government in funding infrastructure improvements and events such as the collapse of a residential building in Surfside, Florida.
| 17 |
Known Factors, Trends and Risks Impacting Our Business
Search for New Facilities and Manufacturing Expansion
Our business plan calls for scaling the manufacturing capability to enable the potential for increased revenues and cash flow positive operations, and ultimately to profitability, in as short a timeframe as possible. As discussed above, we are currently searching for a new headquarters and manufacturing facility. Once and assuming this new facility is established and fully operational, we plan to open additional facilities around the country based on demand, each designed to service a circular area roughly 1,000 miles in diameter, with the plant at the center.
However, our manufacturing expansion plans have been hindered by several factors: the COVID-19 pandemic, our slower than expected rate of fundraising and our slower than expected ramp-up in sales. This last item has been caused by multiple factors, including:
| · | Customer requirements for multiple additional product and facility certifications, in particular: |
| o | International Code Council (or ICC) Evaluation Service (known as “ICC-ES”) Certification to AC 454. ICC-ES is an industry leader in performing technical evaluations of building products, materials and systems for code compliance. Basanite’s Product ICC-ES certification testing and facility audit were both successfully completed in the third quarter of 2022, and we received ICC-ES approval in September 2022; |
| o | Approval by the Florida Department of Transportation (“FDOT”). We have previously received FDOT with facility approval (FRP22), and our product approval is pending successful completion of FDOT’s product certification testing program, which is nearing the end of the long-duration product testing currently underway at the University of Sherbrooke, Canada (9 month program). This FDOT testing is expected to complete during the fourth quarter of 2022 with final approval to follow in the first quarter of 2023; |
| o | The lack of an ASTM (formerly known as the American Society for Testing and Materials) product standard specifically for basalt fiber. A member of our board of directors, Fred Tingberg, who was appointed as our Chief Technology Officer in June 2022, was appointed to the ASTM committee to review this and helped bring the process to conclusion. The new ASTM Specification for Basalt Fiber, D-8448-22 was issued in September 2022; |
| o | The lack of an ASTM product standard covering basalt fiber rebar (this process is underway). A new ASTM Specification for High-Performance Rebar is expected to be issued in the first quarter of 2023; |
| · | Customer concerns about our current manufacturing capacity, which have precluded us from bidding or winning several larger potential orders; |
| · | The Surfside Condo disaster, which has resulted in some local engineers being cautious around new product introductions. We believe, however, that we will be able to make a strong case that BasaFlex™ (which is corrosion proof) can remedy the structural failures (such as what occurred in Surfside) associated with steel reinforcement corrosion; |
Our new manufacturing equipment mentioned above is expected to be delivered and the installation and calibration process to commence during the fourth quarter of 2022 or early in 2023, assuming we are able to secure a new manufacturing facility. The equipment is expected to become fully operational shortly thereafter. We believe the achievement of this would simultaneously resolve questions about our manufacturing capacity and will materially improve our ability to generate larger sales order.
| 18 |
Supply Chain Issues
In the past year, supply chain shortages or delays have had an immaterial impact on our operations. However, on October 31, 2022, we were notified by Mafic USA, LLC (our primary U.S. supplier of basalt fiber, which is the key component in our products) that they would be ceasing manufacturing operations in order to engage in a possible restructuring. As discussed below, we have a second supplier of basalt fiber located in Russia, but at the present time, we require a U.S. supplier of basalt fiber, and the absence of such a supplier, if it continues, would have a material adverse effect on our ability to conduct operations. We have been diligently researching other domestic sources of basalt fiber, and we continue to work with a domestic broker of international basalt fiber sourcing.
War in Ukraine
The recent war in Ukraine has led the world to issue sanctions on the government of Russia. This directly resulted in a significant price increase of basalt fiber material from our fiber supplier in Russia, Kamenny Vek. Of note, as described above under “Supply Chain” Kamenny Vek is presently our only operating suppler for basalt fiber, and this dependence is a risk factor for us until we can identify alternate suppliers. We have been fortunate as we have been able to raise our finished goods pricing to compensate without any notable affect to customer demand. We have also recently increased the levels of our safety stock of raw materials as an additional cushion. Nonetheless, we are currently qualifying alternate fiber and other materials from other global suppliers to preserve our options in case of further disruptions. We might experience further supply chain challenges in the future because of the war in Ukraine, which could harm our business and our results of operations.
Government Approvals and Specifying of our Products
We continue to pursue additional product and facility qualifications and approvals, and these qualifications and approvals are critical to the market acceptance of our products. As previously noted, we are currently testing products at an independent university laboratory (University of Sherbrooke) in the pursuit of FDOT certification. Formal FDOT approval is expected by the end of the first quarter of 2023. However, we are already selling to FDOT projects on an individual basis through exemptions or via previously issued material specs. Formal FDOT approval will allow us to bid on any FDOT project that is approved to use basalt fiber reinforced polymer products. Until we have obtained these additional approvals, our opportunities to bid on certain projects will be limited.
Inflation & Interest Rate Sensitivity
In the past two fiscal years, inflation has not had a significant impact on our business. However, during the second half of 2021 and into 2022, the U.S. economy has entered into a period of increasing inflation. Should inflation persist or increase, interest rates may continue to rise, and inflation overall could have a significant effect on the economy in general and the construction industry in particular, as well as create volatility in the capital markets. For example, inflation and increased interests could affect the prices of raw materials we use, demand for our products, our ability to attract and retain skilled labor and our ability to obtain financing. We are carefully watching chemical prices, which are following oil and gas prices, as a core component of BasaFlex™ is the chemical resin mix. Prices have risen, but we have been able to raise our own prices to support our margins, largely as the result of the increase in steel prices. We believe we have benefitted from the rapid rise in steel prices over the past several fiscal quarters as well as the reduced availability of steel rebar, both of which changes have opened opportunities to more readily introduce our products into the marketplace. As of the date of this report, BasaFlex™ has become competitive with steel on price alone, and it is relatively available, whereas steel has been impacted by raw material supply chain constraints. We will continue to seek opportunities to take advantage of high steel prices and restricted supply while these issues are prevalent.
| 19 |
Impact of COVID-19
The pandemic caused by the novel coronavirus (known as “COVID-19”) and governmental responses and efforts to curb the spread of the pandemic has caused great disruption to the U.S. national and international economies. We have been adversely impacted by COVID-19 in that we have been required to temporarily suspend operations during 2020 due to necessary quarantines, and the impact of COVID-19 on the construction industry we service has been significant. Government mandated shutdowns and other measures held less of an impact on our business during 2021, although we did have personnel absent for periods during the year due to COVID-19. During the first quarter of 2022, while certain of our personnel did contract COVID-19, overall COVID-19 did not have a material impact on our business, in part because we were operating with reduced personnel and personnel could work remotely in certain cases.
The continued prevalence of COVID-19 or outbreaks of new variants thereof could disrupt our supply chain, as well as our own operations due to absenteeism by infected or ill members of management or other employees, or absenteeism by members of management and other employees who elect not to come to work due to illness affecting others in our office or plant, or due to additional necessary quarantines. This could be particularly true as we seek to scale operations during 2022 and hire additional personnel. COVID-19 could also impact members of our Board of Directors as well as key providers of services to us, which could adversely impact the management of our affairs. Additionally, as the COVID-19 pandemic continues to develop, we may be required to continue to spend time and resources in monitoring and adhering to government regulations that impact both our company and our customers and potential customers as necessary, which could also adversely impact our business and results of operations. We continue to monitor our operations and applicable government recommendations and requirements.
Results of Operations for the Three Months Ended September 30, 2022, and 2021
Revenue: We had revenue of $235,579 from sales of finished goods for the three months ended September 30, 2022, an increase of $80,102 compared to $155,477 in the prior year. While the increase in revenue in the year over year periods was relatively significant due to our increasing sales success (across all product lines) in 2022, overall revenues continue to be minimal, largely due to our capacity constraints and limited working capital. We continued our efforts to increase our sales during the period.
Cost of goods sold: Cost of goods sold was $387,621 for the three months ended September 30, 2022, an increase of $210,627 compared to cost of goods sold of $176,994 during the prior period. Cost of goods sold reflects the fixed overhead costs absorbed by manufacturing, at low sales volumes this results in negative margins. Our gross profit during the three months ended September 30, 2022, was negative $152,042 compared to $21,517 during the prior period. This change is due to a reduction in selling price. We expect our gross profit to increase as fixed overhead costs are absorbed over a greater volume of sales.
Sales, general, and administrative: Sales, general, and administrative expenses were $595,310 during the three months ended September 30, 2022, a decrease of $1,037,646 compared to $1,632,956 during the prior period. For the current quarter, sales, general, and administrative costs consisted primarily of professional fees of $113,596; payroll and related costs of $200,572, not including stock-based compensation of $71,178; consulting fees of $54,895; investor relations costs of $11,630; research and development of $3,195; advertising and marketing of $24,452; rent of $55,956; computer and IT costs of $29,547, and office costs of $15,371. The primary reason for the decrease in sales, general, and administrative costs compared to the prior period was $774,749 decrease in compensation, professional fees and consulting plus a decrease of $156,439 in other overhead costs due to a reduction in production.
Gain on settlement of legal contingency: There was no gain on legal contingency during the three months ended September 30, 2022. During the prior period, the Company recognized a gain on settlement of legal contingency in the amount of $94,127 in connection with the settlement of accounts payable related to legal matters
Interest expense: Interest expense was $84,467 during the three months ended September 30, 2022, a decrease of $35,603 compared to interest expense of $120,070 during the prior period. Interest expense consists of interest on the Company’s notes and loans payable along with late fees on past due invoices charged by vendors.
Results of Operations for the Nine Months Ended September 30, 2022, and 2021
Revenue: The Company had revenue of $781,918 from sales of finished goods for the nine months ended September 30, 2022, compared to $175,162 in the prior year. While the increase in revenue in the year over year periods was relatively significant due to our increasing sales success (across all product lines) in 2022, overall revenues continue to be small, largely due to our capacity constraints and limited working capital.
Cost of goods sold: Cost of goods sold was $1,584,595 for the nine months ended September 30, 2022, an increase of $1,389,908 compared to cost of goods sold of $194,687 during the prior period. Cost of goods sold reflects the fixed overhead costs absorbed by manufacturing, at low sales volumes this results in negative margins. Our gross profit during the nine months ended September 30, 2022, was negative $802,677 compared to negative $19,525 during the prior period. We expect our gross profit to increase as fixed overhead costs are absorbed over a greater volume of sales.
Sales, general, and administrative: Sales, general, and administrative expenses were $2,678,405 during the nine months ended September 30, 2022, a decrease of $1,466,998 compared to $4,145,403 during the prior period. For the current nine-month period, sales, general, and administrative costs consisted primarily of payroll and related costs of $691,549, not including stock-based compensation of $509,013; professional fees of $500,492; consulting fees of $322,837; research and development of $184,227; investor relations costs of $122,843; advertising and marketing of $95,943; rent of $74,976; computer and IT costs of $71,152; and office costs of $50,531. The primary reason for the decrease in sales, general, and administrative costs compared to the prior period was $537,353 in overhead and depreciation charges in the prior period; these costs were absorbed by cost of sales during the nine months ended September 30, 2022 as well as a decrease in stock-based compensation of 477,654 and a decrease in payroll of 164,981 due to a reduction in production.
| 20 |
Gain on settlement of legal contingency: There was no gain on legal contingency during the nine months ended September 30, 2022. During the prior period, the Company recognized a gain on settlement of legal contingency in the amount of $438,649 in connection with the settlement of accounts payable related to legal matters.
Liquidated damages – loan commitment: During the nine months ended September 30, 2022, the company recognized liquidated damages – loan commitment in the amount of $426,759 in connection with our obligations under the terms of our private placement to file a registration statement for an underwritten public offering and concurrent listing on a national stock exchange. There were no such charges during the prior period.
Loss on extinguishment of debt: The Company recognized no loss on extinguishment of debt during the nine months ended September 30, 2022, compared to $6,743,015 during the nine months ended September 30, 2021. For more information about the transaction leading to the extinguishment of debt refer to footnote 7 of the financial statements included in this Form 10-Q.
Gain on loan forgiveness: The Company recognized a gain on loan forgiveness during the nine months ended September 30, 2022 and 2021 of $167,996 and $124,143 respectively due to the PPP loan forgiveness program. The Company received two PPP loans that were both fully forgiven. During the nine months ended September 20, 2022, the Company received a credit from a vendor forgiving an old outstanding balance of $2,100.
Interest expense: Interest expense was $388,701 during the nine months ended September 30, 2022, an increase of $62,757 compared to interest expense of $325,944 during the prior period. Interest expense consists of interest on the Company’s notes and loans payable along with late fees on past due invoices charged by vendors.
Liquidity and Capital Resources
Since inception, we have incurred net operating losses and negative cash flow. As of September 30, 2022, we had an accumulated deficit of $50,247,626. We have incurred general and administrative expenses associated with our product development and compliance while concurrently setting up our manufacturing facility, beginning operations, and developing our business plan. We also continue to incur legal fees arising from ongoing activities due to fundraising, ongoing public company costs and dispute resolution expenses. We expect operating losses to continue in the short term, and we require additional financing for securing and outfitting our proposed new headquarters and manufacturing space as well as ultimately expanding our manufacturing capability and generally scaling our business until we can generate sufficient revenues to achieve positive cash flow. These conditions raise substantial doubt about our ability to continue as a going concern.
We have historically satisfied our working capital requirements through the sale of restricted Common Stock and the issuance of warrants and promissory notes. We will continue our fundraising efforts until we have obtained positive cash flow to cover our expenses. No assurances can be given that we will be successful in raising capital at all or on terms acceptable to us, or at all, and no assurances can be given that even if we raise capital that we will be able to generate sufficient revenue to become cash flow positive.
On September 27, 2022, we furloughed the majority of our staff to reduce costs during a period of reduced production. We anticipate re-staffing as soon as we are in the new facility with the new equipment. In addition, due to our cash flow and liquidity challenges, we have received demand letters from a number of vendors to our company seeking payment of past due amounts to such vendors. As of the date of this report, such demands have not become formal litigations or other proceedings against our company, but they may become litigations against us in the future.
Notwithstanding proceeds from the sale of our securities, recent related party equipment lease transaction and warrant and option exercises in 2022 and 2021, our current working capital is extremely limited, and our projected sales revenue (together with our limited working capital) is presently insufficient to maintain our current operations. In order to establish and grow our manufacturing and sales and marketing operations and reach the level of revenue sufficient to provide positive cash flow, we require significant funding of both our expansion plans (which includes the finalization of our current manufacturing expansion plans and potential investments in other manufacturing facilities, as well as increased headcount necessary to operate our manufacturing at planned capacity). This will cover our significant operating deficit while we seek to establish and scale our manufacturing capability, secure orders from known potential customers, and introduce our products to new customers. We will attempt to raise this capital through third party financing, including potential private or public offerings of our securities (including a potential underwritten offering and listing of our Common Stock on a national securities exchange) as well as bridge or other loan arrangements. However, there is a material risk that we will be unable to secure the required capital (whether through an underwritten financing and/or uplisting to a national exchange or otherwise) at all or that the terms of such required financing may be available or acceptable to us. If we are unable to obtain adequate financing, we may reduce our operating activities to reduce our cash use until sufficient funding is secured. If we are unable to secure funding when needed, our results from operations may suffer, and our business may fail.
As of September 30, 2022, we had cash of $71,293 compared to $109,514 as of December 31, 2021. The decrease in cash was due to our net loss of $4,126,416, offset primarily by $658,090 in non-cash expenses, a $1,300,000 increase in stock subscription liability, an increase in accounts payable of $1,159,258. We used $780,476 of cash for the purchase of equipment during the period and raised $450,000 in a financing leases. We raised $874,591 from the sales for Common Stock and the exercise of warrants and stock options.
| 21 |
Cash Flows
Net cash used in operating activities amounted to negative $907,494 and $3,879,286 for the nine months ended September 30, 2022, and 2021, respectively. The decrease in net cash used in operating activities was primarily a result of an increase in subscription liability in the amount of $1,300,000, a decrease in net loss of $6,536,548 offset by a decrease in non-cash items of $6,816,896 and an increase in accounts payable in the amount of $1,159,268 and a decrease in inventory of $431,098 during the nine months ended September 30, 2022.
During the nine months ended September 30, 2022, we used $330,476 cash for investing activities compared to a negative $1,868,896 used in the same period in the prior fiscal year. The increase is largely due to a reduction in the costs associated with the customization, installation, and verification and validation testing of the prototype BasaMax™ pultrusion machine, for the modifications and UL listing of the current production machinery, and the final payments for the enhancements made to our production facility as compared to the deposits made on machinery and equipment offset by an equipment financing transactions totaling $450,000.
During the nine months ended September 30, 2022, we had $1,199,749 net cash provided by financing from the sale of Common Stock of $649,591, warrants for net proceeds of $225,000, proceeds from notes payable of $305,000, and repayments of notes payable of $20,158. During the prior period, cash provided by financing activities was $6,796,904.
Our cash on hand as of September 30, 2022 or as of the date of this report will not be sufficient to fund our current working capital requirements to the point where we are generating positive cash flow. We have recently entered into several convertible promissory notes and other loan transactions to help fund operations and will require substantial additional working capital in the short term. We continue working towards securing more working capital with a preference towards debt which may be convertible to equity. However, there is no assurance that we will be successful in our efforts or, if we are, that the terms will be beneficial to our shareholders.
Critical Accounting Estimates
The presentation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Please see note 2 to the condensed financial statements included in this report.
| ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Not applicable to smaller reporting companies.
| ITEM 4. | CONTROLS AND PROCEDURES |
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) that are designed to be effective in providing reasonable assurance that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to our management to allow timely decisions regarding required disclosure.
Our management, under the supervision and with the participation of our then serving Chief Executive Officer, our Chief Financial Officer and our Controller, carried out an evaluation of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Exchange Act) through September 30, 2022.
During our assessment of the effectiveness of internal control over financial reporting as of September 30, 2022, management identified material weaknesses related to (i) the U.S. GAAP expertise and experience of our internal accounting personnel and (ii) a lack of segregation of duties within accounting functions. As a result of these material weaknesses, our management concluded that our internal control over financial reporting was not effective as of September 30, 2022.
We are committed to maintaining a strong internal control environment and implementing measures designed to help ensure that the material weaknesses described above are remediated as soon as possible. We believe we will have the opportunity to remediate these weaknesses when adequate funding is secured. We will consider the material weaknesses remediated after the applicable controls operate for a sufficient period of time, and management has concluded, through testing, that the controls are operating effectively.
Because of its inherent limitations, however, readers are cautioned that internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.
Changes in Internal Control over Financial Reporting
No change in our system of internal control over financial reporting occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
| 22 |
PART II. – OTHER INFORMATION
| ITEM 1. | LEGAL PROCEEDINGS |
From time to time, we may become involved in legal proceedings that, individually or in the aggregate, could have a material adverse effect on our business, financial condition, cash flows, or results of operations.
On October 17, 2022, we were presented with a written notice from Camton, LLC (the “Landlord”), the landlord of our headquarters and principal manufacturing facility in Pompano Beach, Florida, demanding that we pay past due rent or relinquish possession of its facilities. On October 25, 2022, the Landlord filed a complaint in the Broward County Court, Fort Lauderdale, Florida, and on November 1, 2022, the Company received an eviction summons. On November 3, 2022, in accordance with the instructions within the complaint, we presented 100% of the past due amount payable to the Broward County Court and commenced negotiations with the Landlord for an early exit of our lease. We are presently searching for an alternative headquarters and manufacturing facility for our company.
Due to our cash flow and liquidity challenges, we have received demand letters from a number of vendors to our company seeking payment of past due amounts to such vendors. As of the date of this report, such demands have not become formal litigations or other proceedings against our company, but they may become litigations against us in the future.
Except as set forth above, as of the date of this report, we are not aware of any proceedings pending against our company.
| ITEM 1A. | RISK FACTORS |
Not required for smaller reporting companies.
| ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
None.
| ITEM 3. | DEFAULTS UPON SENIOR SECURITIES |
None.
| ITEM 4. | MINE SAFETY DISCLOSURE |
Not applicable.
| ITEM 5. | OTHER INFORMATION |
None.
| ITEM 6. | EXHIBITS |
| Exhibit | ||
| No. | Exhibit Description | |
| 31.1 | Certification of Chief Executive Officer pursuant to Rule 13A-14(a) or Rule 15d-14(a) of the Securities Exchange Act | |
| 31.2 | Certification of Chief Financial Officer pursuant to Rule 13A-14(a) or Rule 15d-14(a) of the Securities Exchange Act | |
| 32.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 32.2 | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 101.INS | Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document) | |
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document | |
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
| 23 |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: November 21, 2022
| Basanite, Inc. | ||
| By: | /s/ Michael V. Barbera | |
| Michael V. Barbera | ||
| Acting Interim Chief Executive Officer | ||
| By: | /s/ Lisa Gainsborg | |
| Lisa Gainsborg | ||
| Chief Financial Officer | ||
24