Cautionary Note Regarding Forward-Looking Information and Factors That May
Affect Future Results
This quarterly report on Form 10-Q contains forward-looking statements regarding
our business, financial condition, results of operations and prospects. The
Securities and Exchange Commission (the "SEC") encourages companies to disclose
forward-looking information so that investors can better understand a company's
future prospects and make informed investment decisions. This quarterly report
on Form 10-Q and other written and oral statements that we make from time to
time contain such forward-looking statements that set out anticipated results
based on management's plans and assumptions regarding future events or
performance. We have tried, wherever possible, to identify such statements by
using words such as "anticipate," "estimate," "expect," "project," "intend,"
"plan," "believe," "will" and similar expressions in connection with any
discussion of future operating or financial performance. In particular, these
include statements relating to future actions, future performance or results of
current and anticipated sales efforts, expenses, the outcome of contingencies,
such as legal proceedings, and financial results. Factors that could cause our
actual results of operations and financial condition to differ materially are
set forth in the "Risk Factors" section of our annual report on Form 10-K for
the fiscal year ended September 30, 2021 as filed with the SEC on January 7,
2022.
We caution that these factors could cause our actual results of operations and
financial condition to differ materially from those expressed in any
forward-looking statements we make and that investors should not place undue
reliance on any such forward-looking statements. Further, any forward-looking
statement speaks only as of the date on which such statement is made, and we
undertake no obligation to update any forward-looking statement to reflect
events or circumstances after the date on which such statement is made or to
reflect the occurrence of anticipated or unanticipated events or circumstances.
New factors emerge from time to time, and it is not possible for us to predict
all of such factors. Further, we cannot assess the impact of each such factor on
our results of operations or the extent to which any factor, or combination of
factors, may cause actual results to differ materially from those contained in
any forward-looking statements.
The following discussion should be read in conjunction with our condensed
consolidated financial statements and the related notes that appear elsewhere in
this quarterly report on Form 10-Q.
Overview
Bantec, Inc. is a distributor, construction, environmental and drone company.
Through Howco Distributing Co, Bantec provides product procurement,
distribution, and logistics services, to the United States Department of Defense
and Defense Logistics Agency. . The Company established Bantec Sanitizing in
fiscal 2021, which offers sanitizing products and equipment through its new
store bantec.store. Bantec Sanitizing is currently offering Bantec Sanitizing
franchises for sale. The Company has operations based in Little Falls, New
Jersey and Vancouver, Washington. The Company continues to seek strategic
acquisitions and partnerships with distributor, construction, environmental and
drone firms that offer growth opportunities in well established markets, as well
as acquisitions and partnerships with firms that have complementary
technologies, services, products and infrastructure.
Liquidity and Capital Resources
As of March 31, 2022 we had $684,392 in current assets, including $387,830 in
cash, compared to $1,205,058 in current assets, including $985,953 in cash, at
September 30, 2021. Current liabilities at March 31, 2022, totaled $15,990,293
compared to $15,914,650, at September 30, 2021. The decrease in current assets
from September 30, 2021 to March 31, 2022 is primarily due to decreases in: cash
of $598,123, and prepaid expenses $23,948, partially offset by increases of
approximately $41,000 and $60,000 in accounts receivable and inventory,
respectively. The increase in current liabilities from September 30, 2021 to
March 31, 2022, of approximately $76,000, is primarily due to the increases in
accrued expenses of approximately $397,000. While we have revenues from UAV
sales as of this date, no significant UAV revenues are anticipated until we have
implemented our full plan of operations, specifically, initiating sales
campaigns for our UAV internet and social media platforms. We must raise cash to
implement our strategy to grow and expand per our business plan. We anticipate
over the next 12 months the cost of being a reporting public company will be
approximately $250,000.
We are currently issuing shares under the S-1 offering but expect to raise
additional proceeds with debt securities, and/or more loans, however if
sufficient funding is not available, we would be required to cease business
operations. As a result, investors would lose all of their investment. Under the
terms of our credit agreement with TCA, all potential new investments must first
be reviewed and approved by TCA, which may constrain our options for new
fundraising. However, we have been in contact with the receiver for the TCA
management companies and funds and do not expect any such objections over
investment opportunities. We are currently in discussion to undertake a second
S1 offering.
We anticipate our short-term liquidity needs to be approximately $5,000,000
which will be used to satisfy certain of our existing current liabilities and we
expect gross profits of approximately $1,000,000. To meet these needs, we intend
to complete our equity financing and refinance or restructure certain existing
liabilities. Once this is completed, and we implement our sales and marketing
plan to sell UAV products, we anticipate minimal long-term liquidity needs which
we expect to meet through equity financing or short-term borrowings.
Additionally, we will have to meet all the financial disclosure and reporting
requirements associated with being a publicly reporting company. Our management
will have to spend additional time on policies and procedures to make sure it is
compliant with various regulatory requirements, especially that of Section 404
of the Sarbanes-Oxley Act of 2002. This additional corporate governance time
required of management could limit the amount of time management has to
implement the business plan and may impede the speed of its operations.
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The following is a summary of the Company's cash flows provided by (used in)
operating, investing and financing activities:
Six Months Six Months
Ended Ended
March 31, March 31,
2022 2021
Net Cash Provided by (Used in) Operating Activities $ (985,226 ) $ (591,628 )
Net Cash Used in Investing - -
Net Cash Provided by (Used in) Financing Activities $ 387,103 $ 659,018
Net Increase (Decrease) in Cash $ (598,123 ) $ 67,390
2022, Net cash used in operating activities of $985,226, is largely the result
of net losses of $1,575,676, partially offset by non-cash charges for premiums
on stock settled debt, debt discount amortization, non-cash charges for services
and increases to accrued expenses.
2022, Cash provided by financing activities of $387,103 is largely the result of
stock sales for cash of $574,589 and cash received from issuance of convertible
notes totaling $101,250, somewhat offset by repayments of various debts
including bank loan and other financing arrangements at Howco.
Refer also to the Consolidated Statements of Cash Flows included in the
financial statement section of this report.
Results of Operations
Three months Ended March 31, 2022 and 2021
We generated sales of $369,908 and $664,896 for the three months ended March 31,
2022 and 2021, respectively, a decrease of $294,988, or 44%. For the three
months ended March 31, 2022 and 2021, we reported cost of goods sold of $322,053
and $455,041, respectively, a decrease of $132,988, or 29%. The decrease in
sales and cost of goods sold for the 2022 period as compared to the 2021 period
is due to lower sales in current period due to liquidity issues and to lesser
extent by our efforts to increase gross margins by reducing sales of lower
margin products. While management's focus on increasing gross margins has
impacted sales levels, we believe that the Company is situated to capture
greater sales without incurring significant fixed costs through three
initiatives. Gross margins were 13% and 32% for the three months ended March 31,
2022 and 2021, respectively. Efforts are underway to market an expanded suite of
Howco product lines on the east coast. We are expanding product offerings with
high tech tactical gear to regular federal government entities (Howco lines of
business), adding the high-tech tactical gear to our traditional drone
assemblies along with newer more rapidly deployed drones focused on
municipalities and lastly, we are adding construction contracting and sanitizing
services.
For the three months ended March 31, 2022 and 2021, we reported selling,
general, and administrative expenses of $547,529 as compared to $698,573, a
decrease of approximately $151,000, or 22%. For the three months ended March 31,
2022 and 2021, selling, general, and administrative expenses consisted of the
following:
For the For the
Three Three
Months Months
ended ended
March 31, March 31,
2022 2021
Compensation and related benefits $ 321,580 $ 434,715
Professional fees 187,003 196,802
Other selling, general and administrative expenses 38,946 67,056
Total selling, general and administrative expenses $ 547,529 $ 698,573
The decrease in selling, general, and administrative costs for the 2022 period
as compared to the 2021 period was due to the decrease in compensation,
professional fees and in other selling, general and administrative costs
stemming from lower levels of management and staff at Howco and general
decreased operations (also at Howco).
For the three months ended March 31, 2022 and 2021, depreciation expense
amounted to $0 and $2,458, respectively, and related to the depreciation of
demonstration drones in the 2021 period. The demonstration drones were fully
depreciated as of September 30, 2021.
For the three months ended March 31, 2022 and 2021, other income (expense)
amounted to ($223,030) and $281,190, respectively, a decrease of approximately
$504,000. The decrease was attributable gains on debt extinguishment of $75,087
and fair market value changes of derivative liabilities of $11,424 for the
current period compared to $572,465 gains on debt extinguishment and fair market
value changes of derivative liabilities of $22,840 from the 2021 period costs.
As a result, we reported net losses of $722,704, or $0.00 per common share, and
$209,986, or $0.00 per common share, for the three months ended March 31, 2022
and 2021, respectively.
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Six months Ended March 31, 2022 and 2021
We generated sales of $772,025 and $1,411,904 for the six months ended March 31,
2022 and 2021, respectively, a decrease of approximately $640,000, or 45%. For
the six months ended March 31, 2022 and 2021, we reported cost of goods sold of
$629,353 and $735,241, respectively, a decrease of approximately $106,000, or
14%. The decrease in sales and cost of goods sold for the 2022 period as
compared to the 2021 period is due to liquidity issues and ceasing our sales of
certain products from certain vendors. While management's focus on increasing
gross margins has impacted sales levels, we believe that the Company is situated
to recapture sales without incurring significant fixed costs through three
initiatives. Gross margins were 18% and 48% for the six months ended March 31,
2022 and 2021, respectively. Efforts are underway to market an expanded suite of
Howco product lines on the east coast. We are expanding product offerings with
high tech tactical gear to regular federal government entities (Howco lines of
business), adding the high tech tactical gear to our traditional drone
assemblies along with newer more rapidly deployed drones focused on
municipalities and lastly we are adding construction contracting.
For the six months ended March 31, 2022 and 2021, we reported selling, general,
and administrative expenses of $1,201,825 as compared to $1,486,879, a decrease
of approximately $285,000, or 19%. For the six months ended March 31, 2022 and
2021, selling, general, and administrative expenses consisted of the following:
For the For the
Six Months Six Months
ended ended
March 31, March 31,
2022 2021
Compensation and related benefits $ 640,420 $ 917,345
Professional fees 459,543 435,906
Other selling, general and administrative expenses 101,862 133,628
Total selling, general and administrative expenses $ 1,201,825 $ 1,486,879
The decrease in selling, general, and administrative costs for the 2022 period
as compared to the 2021 period was due to decreases: in compensation of
approximately $278,000 or 30% and other selling, general and administrative
expenses of approximately $33,000 or 24%, slightly offset by the increase of
approximately $24,000 or 5% in professional fees.
For the six months ended March 31, 2022 and 2021, depreciation expense amounted
to $0 and $4,916, respectively, and related to the depreciation of demonstration
drones in the 2021 period. The demonstration drones were fully depreciated as of
September 30, 2021.
For the six months ended March 31, 2022 and 2021, other income (expense)
amounted to ($516,523) and $625,692, respectively, a decrease of approximately
$1,142,000. The decrease was attributable to gains recognized on debt and other
liability extinguishment of $75,087 in the current period, compared to
$1,365,988 the prior year period.
As a result, we reported a net loss of $1,575,676 or $0.00 per common share, and
$189,440 or $0.00 per common share, for the six months ended March 31, 2022 and
2021, respectively.
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Going Concern
The accompanying unaudited consolidated financial statements have been prepared
assuming the Company will continue as a going concern, which contemplates the
recoverability of assets and the satisfaction of liabilities in the normal
course of business. For the six months ended March 31, 2022, the Company has
incurred a net loss of $1,575,676 and used cash in operations of $985,226. The
working capital deficit, stockholders' deficit and accumulated deficit was
$15,305,901, $15,377,405 and $34,532,516, respectively, at March 31, 2022.
Furthermore, on September 6, 2019 the Company received a default notice on its
payment obligations under the senior secured credit facility agreement (see Note
10), defaulted on its Note Payable - Seller in September 2017 and has since
defaulted on other promissory notes. As of March 31, 2022 the Company has
received demands for payment of past due amounts from several consultants and
service providers. It is management's opinion that these matters raise
substantial doubt about the Company's ability to continue as a going concern for
a period of twelve months from the issuance date of this report. The ability of
the Company to continue as a going concern is dependent upon management's
ability to further implement its business plan and raise additional capital as
needed from the sales of stock or debt. The Company has continued to implement
cost-cutting measures and restructuring or setting up payment plans with vendors
and service providers and plans to raise equity through a private placement, and
restructure or repay its secured obligations. The accompanying consolidated
financial statements do not include any adjustments that might be required
should the Company be unable to continue as a going concern.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably
likely to have a current or future effect on our financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources that are material to investors.
Critical Accounting Policies and Significant Accounting Estimates
Our consolidated financial statements and accompanying notes have been prepared
in accordance with United States generally accepted accounting principles
applied on a consistent basis. The preparation of financial statements in
conformity with U.S. generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting periods.
We regularly evaluate the accounting policies and estimates that we use to
prepare our consolidated financial statements. In general, management's
estimates are based on historical experience, and on various other assumptions
that are believed to be reasonable under the facts and circumstances. Actual
results could differ from those estimates made by management.
The preparation of consolidated financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent liabilities at
the date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates. Significant estimates include the allowance for bad debt
on accounts receivable, reserves on inventory, valuation of intangible assets
for impairment analysis, valuation of the lease liability and related
right-of-use asset, valuation of stock-based compensation, the valuation of
derivative liabilities and the valuation allowance on deferred tax assets.
We have identified the accounting policies below as critical to our business
operations.
Accounts Receivable
Trade receivables are recorded at net realizable value consisting of the
carrying amount less the allowance for doubtful accounts, as needed. Factors
used to establish an allowance include the credit quality of the customer and
whether the balance is significant. The Company may also use the direct
write-off method to account for uncollectible accounts that are not received.
Using the direct write-off method, trade receivable balances are written off to
bad debt expense when an account balance is deemed to be uncollectible.
Goodwill and Intangible Assets
The Company acquired a patent for a new product during the year ended September
30, 2021. The Company capitalized acquisition and related legal fees related to
the patent totaling $44,650. The capitalized amount will be amortized over the
five years, following the commencement of related sales. Impairment will be
tested annually or as indicators of impairment are available.
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Long-Lived Assets
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying value may not be recoverable.
Impairment is determined by comparing the carrying value of the long-lived
assets to the estimated undiscounted future cash flows expected to result from
use of the assets and their ultimate disposition. In instances where impairment
is determined to exist, the Company writes down the asset to its fair value
based on the present value of estimated future cash flows.
Revenue Recognition
Effective October 1, 2018, the Company adopted Accounting Standards Codification
("ASC") 606, Revenue From Contracts With Customers, which is effective for
public business entities with annual reporting periods beginning after December
15, 2017. This new revenue recognition standard (new guidance) has a five-step
process: a) Determine whether a contract exists; b) Identify the performance
obligations; c) Determine the transaction price; d) Allocate the transaction
price; and e) Recognize revenue when (or as) performance obligations are
satisfied. The Company's initial application of ASC 606 did not have a material
impact on its financial statements and disclosures and there was no cumulative
effect of the adoption of ASC 606.
The Company sells a variety of products to government entities. The purchase
orders received specifies each item and its manufacturer; the Company only needs
to fulfill the performance obligation by shipping the specified items. No other
performance obligations exist under the terms of the contracts. The Company
recognizes revenue for the agreed upon sales price when the product is shipped
to the customer, which satisfies the performance obligation.
During the three months ended March 31, 2022, the Company through its subsidiary
Howco entered into contracts to package products for a third-party company
servicing the same government customer base. The contracts were on job lot basis
as shipped to Howco for packaging. The customer was billed upon completion each
job lot at which time revenue was recognized.
The Company sells drones and related products manufactured by third parties to
various parties. The Company also offers technical services related to drone
utilization and performs other services. The Company began offering insulation
jackets for commercial and government facilities to insulate and monitor heating
and cooling equipment. Contracts for drone related products and services and
insulating jacket related sales will be evaluated using the five-step process
outline above. There have been no material sales for drone products or other
services for which full compliance with performance obligations has not been
met. Sales of insulation jackets have not yet commenced. Upon significant sales
for drone products and services and insulation jackets, the Company will
disaggregate sales by these lines of business and within the lines of business
to the extent that the product or service has different revenue recognition
characteristics.
The Company began sales of sanitizing products and services during the three
months ended March 31, 2022. Revenue for this line of business is recognized
upon shipment and delivery of training services (as applicable).
Stock-Based Compensation
Stock-based compensation is accounted for based on the requirements of ASC 718 -
"Compensation -Stock Compensation", which requires recognition in the financial
statements of the cost of employee and director services received in exchange
for an award of equity instruments over the period the employee or director is
required to perform the services in exchange for the award (presumptively, the
vesting period). The ASC also requires measurement of the cost of employee and
director services received in exchange for an award based on the grant-date fair
value of the award. The Company utilizes the Black-Sholes option pricing model
and uses the simplified method to determine expected term because of lack of
sufficient exercise history. Additionally, effective October 1, 2016, the
Company adopted the Accounting Standards Update No. 2016-09 ("ASU 2016-09"),
Improvements to Employee Share-Based Payment Accounting. Among other changes,
ASU 2016-09 permits the election of an accounting policy for forfeitures of
share-based payment awards, either to recognize forfeitures as they occur or
estimate forfeitures over the vesting period of the award. The Company has
elected to recognize forfeitures as they occur and the cumulative impact of this
change did not have any effect on the Company's consolidated financial
statements and related disclosures.
As of October 1, 2018, the Company has early adopted ASU 2018-7
Compensation-Stock Compensation which conforms the accounting for non-employees
to the accounting treatment for employees. The new standard replaces using a
fair value as of each reporting date with use of the calculated fair value as of
the grant date. The implementation of the standard provides for the use of the
fair market value as of the adoption date, rather than using the value as of the
original grant date. Therefore, the values calculated and reported at September
30, 2018 become a proxy for the grant date value. The Company utilizes the
Black-Sholes option pricing model and uses the simplified method to determine
expected term because of lack of sufficient exercise history. There was no
cumulative effect on the adoption date.
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Derivative Liabilities
The Company has certain financial instruments that are derivatives or contain
embedded derivatives. The Company evaluates all its financial instruments to
determine if those contracts or any potential embedded components of those
contracts qualify as derivatives to be separately accounted for in accordance
with ASC 810-10-05-4 and 815-40. This accounting treatment requires that the
carrying amount of any derivatives be recorded at fair value at issuance and
marked-to-market at each balance sheet date. In the event that the fair value is
recorded as a liability, as is the case with the Company, the change in the fair
value during the period is recorded as either other income or expense. Upon
conversion, exercise or repayment, the respective derivative liability is marked
to fair value at the conversion, repayment or exercise date and then the related
fair value amount is reclassified to other income or expense as part of gain or
loss on extinguishment.
Convertible Notes with Fixed Rate Conversion Options
The Company may enter into convertible notes, some of which contain,
predominantly, fixed rate conversion features, whereby the outstanding principal
and accrued interest may be converted by the holder, into common shares at a
fixed discount to the market price of the common stock at the time of
conversion. This results in a fair value of the convertible note being equal to
a fixed monetary amount. The Company records the convertible note liability at
its fixed monetary amount by measuring and recording a premium, as applicable,
on the Note date with a charge to interest expense in accordance with ASC 480 -
"Distinguishing Liabilities from Equity".
Net Loss Per Share
Basic loss per share is calculated by dividing the loss attributable to
stockholders by the weighted-average number of shares outstanding for the
period. Diluted loss per share reflects the potential dilution that could occur
if securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock that
shared in the earnings (loss) of the Company. Diluted loss per share is computed
by dividing the loss available to stockholders by the weighted average number of
shares outstanding for the period and dilutive potential shares outstanding
unless such dilutive potential shares would result in anti-dilution.
Lease Accounting
In February 2016, the FASB issued a new accounting standard on leases. The new
standard, among other changes, will require lessees to recognize a right-of-use
asset and a lease liability on the balance sheet for all leases. The lease
liability will be measured at the present value of the lease payments over the
lease term. The right-of-use asset will be measured at the lease liability
amount, adjusted for lease prepayments, lease incentives received and the
lessee's initial direct costs (e.g. commissions). The new standard is effective
for annual reporting periods beginning after December 15, 2018, including
interim reporting periods within those annual reporting periods. The adoption
will require a modified retrospective approach for leases that exist or are
entered into after the beginning of the earliest period presented.
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