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 June 30, 2022 we had $632,608 in current assets, including $243,126 in
cash, compared to $1,205,058 in current assets, including $985,953 in cash, at
September 30, 2021. Current liabilities at June 30, 2022, totaled $16,296,493
compared to $15,914,650, at September 30, 2021. The decrease in current assets
from September 30, 2021 to June 30, 2022 is primarily due to decreases in: cash
of $742,827, and prepaid expenses $24,219, partially offset by increases of
approximately $153,000 and $41,000 in accounts receivable and inventory,
respectively. The increase in current liabilities from September 30, 2021 to
June 30, 2022, of approximately $382,000, is primarily due to the increases in
accrued expenses of approximately $740,000. 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 $500,000. 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 Impact of COVID-19
The Company is a wholesale vendor to the Department of Defense through its
wholly owned subsidiary Howco's business has been affected due to the COVID-19
social distancing requirements mandated by the federal, state and local
governments where the Company's operations occur. For some businesses, like the
Company's, core business cannot always be done through "virtual" means, and even
when this is possible, it requires significant capital and time to achieve.
During the nine months ended June 30, 2022 sales and shipments at Howco have
continued at a lower rate than during the nine months ended June 30, 2021. It is
expected that COVID-19 restrictions had an impact on the Company's operations
during the nine months ended June 30, 2022, however the Company cannot assess
the financial impact of the related COVID-19 restrictions as compared to other
economic and business factors.
The following is a summary of the Company's cash flows provided by (used in)
operating, investing and financing activities:
Nine Months Nine Months
Ended Ended
June 30, June 30,
2022 2021
Net Cash Provided by (Used in) Operating Activities $ (1,240,506 ) $ (911,075 )
Net Cash Used in Investing - -
Net Cash Provided by (Used in) Financing Activities $ 497,679 $ 871,956
Net Increase (Decrease) in Cash $ (742,827 ) $ (39,119 )
2022, Net cash used in operating activities of $1,240,506, is largely the result
of net losses of $2,032,933, 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 (interest).
2022, Cash provided by financing activities of $497,679 is largely the result of
stock sales for cash of $699,589 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 June 30, 2022 and 2021
We generated sales of $750,756 and $622,423 for the three months ended June 30,
2022 and 2021, respectively, an increase of approximately $128,000, or 21%. For
the three months ended June 30, 2022 and 2021, we reported cost of goods sold of
$629,023 and $494,107, respectively, an increase of approximately $135,000, or
27%. The increase in sales and cost of goods sold for the 2022 period as
compared to the 2021 period is due to higher sales in current period due to
increased Department of Defense spending and lessening COVID 19 restrictions.
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
16% and 21% for the three months ended June 30, 2022 and 2021, respectively.
Gross margin contractions were due to increased direct sales as packaging
services have decreased. 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 June 30, 2022 and 2021, we reported selling, general,
and administrative expenses of $470,612 as compared to $790,539, a decrease of
approximately $320,000, or 40%. For the three months ended June 30, 2022 and
2021, selling, general, and administrative expenses consisted of the following:
For the For the
Three Months Three Months
ended ended
June 30, June 30,
2022 2021
Compensation and related benefits $ 259,605 $ 384,580
Professional fees 159,336 291,081
Other selling, general and administrative expenses 51,671 114,878
Total selling, general and administrative expenses $ 470,612 $ 790,539
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).
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For the three months ended June 30, 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.
Amortization expense for intangibles was $6,698 for the three months ended June
30, 2022, as the Company began amortization during the current quarter.
For the three months ended June 30, 2022 and 2021, other income (expense)
amounted to ($101,680) and ($299,001), respectively, a decrease of approximately
$197,000. The decrease was attributable gains on debt extinguishment of $159,846
and decrease in interest expense of approximately $78,000 during the current
period compared to three months ended June 30, 2021. This was offset by and
increase in fair market value of derivatives charge of approximately $40,000.
As a result, we reported net losses of $457,257, or $0.00 per common share, and
$963,682, or $0.00 per common share, for the three months ended June 30, 2022
and 2021, respectively.
Nine months Ended June 30, 2022 and 2021
We generated sales of $1,522,781 and $2,034,327 for the nine months ended June
30, 2022 and 2021, respectively, a decrease of approximately $512,000, or 25%.
For the nine months ended June 30, 2022 and 2021, we reported cost of goods sold
of $1,258,376 and $1,229,348, respectively, an increase of approximately
$29,000, or 2%. The increase in sales is largely due to increased Department of
Defense spending and lessening of the COVID 19 restrictions. The increase in
cost of goods sold for the 2022 period as compared to the 2021 period is due to
higher direct sales, and lower sales of packaging services. 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 17% and 40% for the nine months
ended June 30, 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 nine months ended June 30, 2022 and 2021, we reported selling, general,
and administrative expenses of $1,672,437 as compared to $2,277,418, a decrease
of approximately $605,000, or 27%. For the nine months ended June 30, 2022 and
2021, selling, general, and administrative expenses consisted of the following:
For the For the
Nine Months Nine Months
ended ended
June 30, June 30,
2022 2021
Compensation and related benefits $ 900,026 $ 1,301,925
Professional fees 618,879 726,986
Other selling, general and administrative expenses 153,532 248,507
Total selling, general and administrative expenses $ 1,672,437 $ 2,277,418
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 31% professional fees of 15% and other selling, general and
administrative expenses of approximately 38%.
For the nine months ended June 30, 2022 and 2021, depreciation expense amounted
to $0 and $7,374, respectively, and related to the depreciation of demonstration
drones in the 2021 period. The demonstration drones were fully depreciated as of
September 30, 2021.
Amortization expense for intangibles was $6,698 for the nine months ended June
30, 2022, as the Company began amortization during the current period.
For the nine months ended June 30 2022 and 2021, other income (expense) amounted
to ($618,203), and $326,691, respectively, a change of approximately $945,000.
The increase to other loss was attributable to gains recognized on debt and
other liability extinguishment of approximately $1,366,000 in the prior period,
compared to approximately $235,000 in the current period.
As a result, we reported a net loss of $2,032,933 or $0.00 per common share, and
$1,153,122 or $0.00 per common share, for the nine months ended June 30, 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 nine months ended June 30, 2022, the Company has
incurred a net loss of $2,032,933 and used cash in operations of $1,240,506. The
working capital deficit, stockholders' deficit and accumulated deficit was
$15,663,885, $15,588,253 and $34,989,773, respectively, at June 30, 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 June 30, 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
The Company follows Accounting Standards Codification ("ASC") 606, Revenue From
Contracts With Customers, which 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 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 year ended September 30, 2021 and the nine months ended June 30,
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, primarily local government entities. The Company also offers
technical services related to drone utilization and performs other services.
Contracts for drone related products and services 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. 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 nine
months ended June 30, 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, required 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.
The Company's subsidiary has renewed the lease for the warehouse and office
facility in Vancouver, Washington in May 2020 effective June 1, 2020, which
extends through May 30, 2023, and is accounted for under ASC 842. The corporate
office is an annual arrangement which provides for a single office in a shared
office environment and is exempt from ASC 842 treatment.
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