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 endedSeptember 30, 2022 as filed with theSEC onJanuary 12, 2023 .
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.
OverviewBantec, Inc. is a product and service company targeting theU.S. Government , state governments, municipalities, hospitals, universities, manufacturers and other building owners.Bantec also provides product procurement, distribution, and logistics services through its wholly-owned subsidiary,Howco Distributing Co. , ("Howco") (collectively, the "Company") to theUnited States Department of Defense andDefense Logistics Agency . The Company established Bantec Sanitizing in fiscal 2021, which offers sanitizing products and equipment through its new store bantec.store. The Company has operations based inLittle Falls, New Jersey andVancouver, Washington . The Company continues to seek strategic acquisitions and partnerships that offer us an opportunity to grow sales and profit. The Impact of COVID-19
The Company is a wholesale vendor to theDepartment of Defense through its wholly owned subsidiary Howco whose 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 three months endedDecember 31, 2022 sales and shipments at Howco have increased modestly from the three months endedDecember 31, 2021 . It is anticipated that COVID-19 restrictions had an impact on the Company's operations during the year endedSeptember 30, 2022 , however the Company cannot assess the financial impact of the related COVID-19 restrictions as compared to other economic and business factors.
Liquidity and Capital Resources
As ofDecember 31, 2022 we had$308,515 in current assets, including$94,938 in cash, compared to$703,917 in current assets, including$186,386 in cash, atSeptember 30, 2022 . Current liabilities atDecember 31, 2022 , totaled$16,676,618 compared to$16,504,500 , atSeptember 30, 2022 . The decrease in current assets fromSeptember 30, 2022 toDecember 31, 2022 is primarily due to decreases in: cash of$91,448 , and accounts receivable of$303,409 . The increase in current liabilities fromSeptember 30, 2022 toDecember 31, 2022 , of approximately$172,000 , is primarily due to the increases in: accrued expenses of approximately$261,000 , with slight offsets in accounts payable, settlements payable and lease liability. 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. 27
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.
The following is a summary of the Company's cash flows provided by (used in) operating, investing and financing activities:
Three Months Ended Three Months Ended December 31, December 31, 2022 2021 Net Cash (Used) Provided in Operating Activities $ (133,503 ) $ (349,571 ) Net Cash (Used) Provided by Financing Activities $ 42,055 $ 145,359 Net (Decrease) Increase in Cash $
(91,448 ) $ (204,212 ) 2022, Net cash used in operating activities of$133,503 , is largely the result of net losses of$781,675 , 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 is largely the result of stock sales for cash of$99,333 , somewhat offset by repayments of various debts including loans and other financing arrangements at Howco.
Refer also to the Consolidated Statements of Changes in Cash Flows included in the financial statement section of this report.
Results of Operations
Three months Ended
We generated sales of$606,166 and$402,117 for the three months endedDecember 31, 2022 and 2021, respectively, an increase of$204,049 , or 51%. For the three months endedDecember 31, 2022 and 2021, we reported cost of goods sold of$511,216 and$307,300 , respectively, an increase of$203,916 , or 66%. The increase in sales and increase in cost of goods sold for the 2022 period as compared to the 2021 period is due to capture of a greater amount of government sales. Revenue in 2021 also included revenue from packaging services which
have lower cost of goods sold. For the three months endedDecember 31, 2022 and 2021, we reported selling, general, and administrative expenses of$514,290 as compared to$654,296 , a decrease of$140,006 , or 21%. For the three months endedDecember 31, 2022 and 2021, selling, general, and administrative expenses consisted of the following: For the Three For the Three Months ended Months ended December 31, December 31, 2022 2021 Compensation and related benefits$ 259,982 $ 319,046 Professional fees 207,925 272,540 Other selling, general and administrative expenses 46,383 62,710 Total selling, general and administrative expenses$ 514,290 $ 654,296 28 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 costs of approximately$59,000 , professional costs of approximately$65,000 and other SGA of approximately$17,000 . For the three months endedDecember 31, 2022 and 2021, other income (expense) amounted to ($362,335 ), and ($293,493 ), respectively, an increase of$68,842 . The increase was attributable to increases in debt financing and default interest on recent debt financing. As a result, we reported a net losses of$781,675 , or$0.00 per common share, and$852,972 , or$0.00 per common share, for the three months endedDecember 31, 2022 and 2021, respectively. Including the deemed dividend of$36,960 related to the temporary equity, the net loss attributed to common shareholders was$818,635 . There was no temporary equity with a related dividend in 2021 comparative period. Going Concern The accompanying 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 three months endedDecember 31, 2022 , the Company has incurred a net loss of$781,675 and used cash in operations of$133,503 . The working capital deficit, stockholders' deficit and accumulated deficit was$16,368,103 ,$17,195,238 and$36,411,861 , respectively, atDecember 31, 2022 . OnSeptember 6, 2019 the Company received a default notice on its payment obligations under the senior secured credit facility agreement (see Note 9), defaulted on its Note Payable - Seller inSeptember 2017 and has since defaulted on other promissory notes. As ofDecember 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 withUnited States generally accepted accounting principles applied on a consistent basis. The preparation of financial statements in conformity withU.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, valuation of redeemable preferred stock 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. 29 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 order 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. The Company through its subsidiary Howco may enter into contracts to package products for a third-party company servicing the same government customer base. The contracts are based on the job lot as shipped to Howco for packaging. The customer is billed upon completion each job lot at which time revenue is 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 year
ended
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, effectiveOctober 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 ofOctober 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 atSeptember 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. 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. 30
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
InFebruary 2016 , the FASB issued ASU No. 2016-02, Leases , which requires lessees to report on their balance sheets a right-of-use asset and a lease liability in connection with most lease agreements classified as operating leases under the prior guidance (ASC Topic 840). Under the new guidance, codified as ASC Topic 842, the lease liability must be measured initially based on the present value of future lease payments, subject to certain conditions. The right-of-use asset must be measured initially based on the amount of the liability, plus certain initial direct costs. The new guidance further requires that leases be classified at inception as either (a) operating leases or (b) finance leases. For operating leases, periodic expense generally is flat (straight-line) throughout the life of the lease. For finance leases, periodic expense declines over the life of the lease. The new standard, as amended, provides an option for entities to use the cumulative-effect transition method. As permitted, the Company adopted ASC Topic 842 effectiveJune 1, 2020 . The adoption of ASC Topic 842 did not have a material impact on the Company's consolidated financial statements.
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