NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – NATURE OF THE ORGANIZATION AND BUSINESS
Nature of the Business
NaturalShrimp
Incorporated (“NaturalShrimp” “the
Company”), a Nevada corporation, is a biotechnology company
and has developed a proprietary technology that allows it to grow
Pacific White shrimp (Litopenaeus vannamei, formerly Penaeus
vannamei) in an ecologically controlled, high-density, low-cost
environment, and in fully contained and independent production
facilities. The Company’s system uses technology which allows
it to produce a naturally-grown shrimp “crop” weekly,
and accomplishes this without the use of antibiotics or toxic
chemicals. The Company has developed several proprietary technology
assets, including a knowledge base that allows it to produce
commercial quantities of shrimp in a closed system with a computer
monitoring system that automates, monitors and maintains proper
levels of oxygen, salinity and temperature for optimal shrimp
production. Its initial production facility is located outside of
San Antonio, Texas.
The
Company has three wholly-owned subsidiaries including NaturalShrimp
Corporation, NaturalShrimp Global, Inc. and Natural Aquatic
Systems, Inc.
Going Concern
The
accompanying consolidated financial statements have been prepared
in conformity with accounting principles generally accepted in the
United States of America, assuming the Company will continue as a
going concern, which contemplates the realization of assets and
satisfaction of liabilities in the normal course of business. For
the year ended March 31, 2018, the Company had a net loss of
approximately $5,285,000. At March 31, 2018, the Company had an
accumulated deficit of approximately $34,013,000 and a working
capital deficit of approximately $6,764,000. These factors raise
substantial doubt about the Company’s ability to continue as
a going concern, within one year from the issuance date of this
filing. The Company’s ability to continue as a going concern
is dependent on its ability to raise the required additional
capital or debt financing to meet short and long-term operating
requirements. During the 2018 fiscal year, the Company received net
cash proceeds of approximately $1,088,000 from the issuance of
convertible debentures, $180,000 from the issuance of convertible
debt to a related party and $25,000 from the sale of the
Company’s common stock. Subsequent to March 31, 2018, the
Company received $105,000 in net proceeds from three convertible
debentures (See Note 12). Management believes that private
placements of equity capital and/or additional debt financing will
be needed to fund the Company’s long-term operating
requirements. The Company may also encounter business endeavors
that require significant cash commitments or unanticipated problems
or expenses that could result in a requirement for additional cash.
If the Company raises additional funds through the issuance of
equity or convertible debt securities, the percentage ownership of
its current shareholders could be reduced, and such securities
might have rights, preferences or privileges senior to our common
stock. Additional financing may not be available upon acceptable
terms, or at all. If adequate funds are not available or are not
available on acceptable terms, the Company may not be able to take
advantage of prospective business endeavors or opportunities, which
could significantly and materially restrict our operations. The
Company continues to pursue external financing alternatives to
improve its working capital position. If the Company is unable to
obtain the necessary capital, the Company may have to cease
operations.
The
Company plans to improve the growth rate of the shrimp and the
environmental conditions of its production facilities. Management
also plans to acquire a hatchery in which the Company can better
control the environment in which to develop the post larvaes. If
management is unsuccessful in these efforts, discontinuance of
operations is possible. The consolidated financial statements do
not include any adjustments that might result from the outcome of
these uncertainties.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Consolidation
The
consolidated financial statements include the accounts of
NaturalShrimp Incorporated and its wholly-owned subsidiaries,
NaturalShrimp Corporation, NaturalShrimp Global and Natural Aquatic
Systems, Inc. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Use of Estimates
Preparing 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.
Basic and Diluted Earnings/Loss per Common Share
Basic
and diluted earnings or loss per share (“EPS”) amounts
in the consolidated financial statements are computed in accordance
with ASC 260 – 10 “
Earnings per Share
”, which
establishes the requirements for presenting EPS. Basic EPS is based
on the weighted average number of common shares outstanding.
Diluted EPS is based on the weighted average number of common
shares outstanding and dilutive common stock equivalents. Basic EPS
is computed by dividing net income or loss available to common
stockholders (numerator) by the weighted average number of common
shares outstanding (denominator) during the period. For the year
ended March 31, 2018, the Company had approximately $1,293,000 in
convertible debentures whose approximately 46,170,000 underlying
shares are convertible at the holders’ option at conversion
prices ranging from 34 - 60% of the defined trading price and
approximately 4,625,000 warrants with an exercise price of 50% to
57% of the market price of the Company’s common stock, which
were not included in the calculation of diluted EPS as their effect
would be anti-dilutive. Included in the diluted EPS for the year
ended March 31, 2017, the Company had $150,000 in convertible
debentures whose underlying shares are convertible at the
holders’ option at initial fixed conversion prices ranging
from $0.30 to $0.35.
Fair Value Measurements
ASC
Topic 820, “
Fair Value
Measurement”
, requires that certain financial
instruments be recognized at their fair values at our balance sheet
dates. However, other financial instruments, such as debt
obligations, are not required to be recognized at their fair
values, but Generally Accepted Accounting Principles in the United
States (“GAAP”) provides an option to elect fair value
accounting for these instruments. GAAP requires the disclosure of
the fair values of all financial instruments, regardless of whether
they are recognized at their fair values or carrying amounts in our
balance sheets. For financial instruments recognized at fair value,
GAAP requires the disclosure of their fair values by type of
instrument, along with other information, including changes in the
fair values of certain financial instruments recognized in income
or other comprehensive income. For financial instruments not
recognized at fair value, the disclosure of their fair values is
provided below under
“Financial
Instruments.”
Nonfinancial
assets, such as property, plant and equipment, and nonfinancial
liabilities are recognized at their carrying amounts in the
Company’s balance sheets. GAAP does not permit nonfinancial
assets and liabilities to be remeasured at their fair values.
However, GAAP requires the remeasurement of such assets and
liabilities to their fair values upon the occurrence of certain
events, such as the impairment of property, plant and equipment. In
addition, if such an event occurs, GAAP requires the disclosure of
the fair value of the asset or liability along with other
information, including the gain or loss recognized in income in the
period the remeasurement occurred.
The
Company did not have any Level 1 or Level 2 assets and liabilities
at March 31, 2018 and 2017.
The
Derivative liabilities are Level 3 fair value
measurements.
The
following is a summary of activity of Level 3 liabilities during
the year ended March 31, 2018:
Derivative
liability balance at March 31, 2017
|
$
218,000
|
Additions to
derivative liability for new debt
|
2,213,000
|
Reclass to equity
upon conversion
|
(236,000
)
|
Derecognition of
notes redeemed for cash
|
(340,000
)
|
Change in fair
value
|
1,600,000
|
Balance at March
31, 2018
|
$
3,455,000
|
At
March 31, 2018, the fair value of the derivative liabilities of
convertible notes was estimated using the following
weighted-average inputs: the price of the Company’s common
stock of $0.06; a risk-free interest rate ranging from 1.73% to
2.09%, and expected volatility of the Company’s common stock
ranging from 272.06% to 375.93%, and the various estimated reset
exercise prices weighted by probability.
Financial Instruments
The
Company’s financial instruments include cash and cash
equivalents, receivables, payables, and debt and are accounted for
under the provisions of ASC Topic 825, “
Financial Instruments”
. The
carrying amount of these financial instruments, with the exception
of discounted debt, as reflected in the consolidated balance sheets
approximates fair value.
Cash and Cash Equivalents
For the
purpose of the consolidated statements of cash flows, the Company
considers all highly liquid instruments purchased with a maturity
of three months or less to be cash equivalents. There were no cash
equivalents at March 31, 2018 and 2017.
Fixed Assets
Equipment is
carried at historical value or cost and is depreciated over the
estimated useful lives of the related assets. Depreciation on
buildings is computed using the straight-line method, while
depreciation on all other fixed assets is computed using the
Modified Accelerated Cost Recovery System (MACRS) method, which
does not materially differ from GAAP. Estimated useful lives are as
follows:
Buildings
|
27.5
– 39 years
|
Other
Depreciable Property
|
5
– 10 years
|
Furniture
and Fixtures
|
3
– 10 years
|
Maintenance and
repairs are charged to expense as incurred. At the time of
retirement or other disposition of equipment, the cost and
accumulated depreciation will be removed from the accounts and the
resulting gain or loss, if any, will be reflected in
operations.
The
consolidated statements of operations reflect depreciation expense
of approximately $71,000 and $60,000 for the years ended March 31,
2018 and 2017, respectively.
Income Taxes
Deferred income tax
assets and liabilities are computed for differences between the
financial statement and tax basis of assets and liabilities that
will result in taxable or deductible amounts in the future based on
enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation
allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized. Income tax expense is
the tax payable or refundable for the period plus or minus the
change during the period in deferred tax assets and
liabilities.
In
addition, the Company’s management performs an evaluation of
all uncertain income tax positions taken or expected to be taken in
the course of preparing the Company’s income tax returns to
determine whether the income tax positions meet a “more
likely than not” standard of being sustained under
examination by the applicable taxing authorities. This evaluation
is required to be performed for all open tax years, as defined by
the various statutes of limitations, for federal and state
purposes.
On
December 22, 2017, the President of the United States signed and
enacted into law H.R. 1 (the “Tax Reform Law”). The Tax
Reform Law, effective for tax years beginning on or after January
1, 2018, except for certain provisions, resulted in significant
changes to existing United States tax law, including various
provisions that are expected to impact the Company. The Tax Reform
Law reduces the federal corporate tax rate from 35% to 21%
effective January 1, 2018. The Company will continue to analyze the
provisions of the Tax Reform Law to assess the impact on the
Company’s consolidated financial statements.
Stock-Based Compensation
The
Company accounts for stock-based compensation to employees in
accordance with ASC 718. “
Stock-based Compensation to
Employees
” is measured at the grant date, based on the
fair value of the award, and is recognized as expense over the
requisite employee service period. The Company accounts for
stock-based compensation to other than employees in accordance with
ASC 505-50
“Equity
Instruments Issued to Other than Employees”
and are
valued at the earlier of a commitment date or upon completion of
the services, based on the fair value of the equity instruments and
is recognized as expense over the service period. The Company
estimates the fair value of stock-based payments using the
Black-Scholes option-pricing model for common stock options and
warrants and the closing price of the Company’s common stock
for common share issuances. Once the stock is issued the
appropriate expense account is charged.
Impairment of LongLived Assets and LongLived
Assets
The
Company will periodically evaluate the carrying value of
longlived assets to be held and used when events and
circumstances warrant such a review and at least annually. The
carrying value of a longlived asset is considered impaired
when the anticipated undiscounted cash flow from such asset is
separately identifiable and is less than its carrying value. In
that event, a loss is recognized based on the amount by which the
carrying value exceeds the fair value of the longlived asset.
Fair value is determined primarily using the anticipated cash flows
discounted at a rate commensurate with the risk involved. Losses on
longlived assets to be disposed of are determined in a
similar manner, except that fair values are reduced for the cost to
dispose.
Commitments and Contingencies
Certain
conditions may exist as of the date the consolidated financial
statements are issued, which may result in a loss to the Company
but which will only be resolved when one or more future events
occur or fail to occur. The Company’s management and its
legal counsel assess such contingent liabilities, and such
assessment inherently involves an exercise of judgment. In
assessing loss contingencies related to legal proceedings that are
pending against the Company or unasserted claims that may result in
such proceedings, the Company’s legal counsel evaluates the
perceived merits of any legal proceedings or unasserted claims as
well as the perceived merits of the amount of relief sought or
expected to be sought therein.
If
the assessment of a contingency indicates that it is probable that
a material loss has been incurred and the amount of the liability
can be estimated, then the estimated liability would be accrued in
the Company’s consolidated financial statements. If the
assessment indicates that a potentially material loss contingency
is not probable, but is reasonably possible, or is probable but
cannot be estimated, then the nature of the contingent liability,
together with an estimate of the range of possible loss if
determinable and material, would be disclosed.
Loss
contingencies considered remote are generally not disclosed unless
they involve guarantees, in which case the nature of the guarantee
would be disclosed.
Recently Issued Accounting Standards
In May 2014, the Financial Accounting Standards
Board (“FASB”) issued Accounting Standards Update
(“ASU”) No. 2014-09, “Revenue from Contracts with
Customers,” which requires an entity to recognize the amount
of revenue to which it expects to be entitled for the transfer of
promised goods or services to customers. ASU 2014-09 will replace
most existing revenue recognition guidance in U.S. GAAP when it
becomes effective. The new standard is effective for annual
reporting periods for public business entities beginning after
December 15, 2017, including interim periods within that reporting
period. The new standard permits the use of either the
retrospective or cumulative effect transition method. The Company
is currently evaluating the effect that ASU 2014-09 will have on
its financial statements and related
disclosures.
As
there have been no significant revenues to date, the Company does
not expect the adoption to have a material impact and no transition
method will be necessary upon adoption.
In February 2016, the FASB issued ASU No.
2016-02,
Leases
(Topic 842) The standard requires all leases that
have a term of over 12 months to be recognized on the balance sheet
with the liability for lease payments and the corresponding
right-of-use asset initially measured at the present value of
amounts expected to be paid over the term. Recognition of the costs
of these leases on the income statement will be dependent upon
their classification as either an operating or a financing lease.
Costs of an operating lease will continue to be recognized as a
single operating expense on a straight-line basis over the lease
term. Costs for a financing lease will be disaggregated and
recognized as both an operating expense (for the amortization of
the right-of-use asset) and interest expense (for interest on the
lease liability). This standard will be effective for our interim
and annual periods beginning January 1, 2019, and must be applied
on a modified retrospective basis to leases existing at, or entered
into after, the beginning of the earliest comparative period
presented in the financial statements. Early adoption is permitted.
We are currently evaluating the timing of adoption and the
potential impact of this standard on our financial position, but we
do not expect it to have a material impact on our results of
operations.
During
the year ended March 31, 2018, there were several new accounting
pronouncements issued by the Financial Accounting Standards Board.
Each of these pronouncements, as applicable, has been or will be
adopted by the Company. Management does not believe the adoption of
any of these accounting pronouncements has had or will have a
material impact on the Company’s consolidated financial
statements.
Management’s Evaluation of Subsequent Events
The
Company evaluates events that have occurred after the balance sheet
date of March 31, 2018, through the date which the consolidated
financial statements were issued. Based upon the review, other than
described in Note 12 – Subsequent Events, the Company did not
identify any recognized or non-recognized subsequent events that
would have required adjustment or disclosure in the consolidated
financial statements.
NOTE 3 – SHORT-TERM NOTE AND LINES OF CREDIT
On
November 3, 2015, the Company entered into a short-term note
agreement with Community National Bank for a total value of
$50,000. The short-term note has a stated interest rate of 5.25%,
maturity date of December 15, 2017 and had an initial interest only
payment on February 3, 2016. The short-term note is guaranteed by
an officer and director. The balance of the line of credit at both
March 31, 2018 and 2017 was $25,298.
The
Company also has a working capital line of credit with Extraco
Bank. On April 30, 2018, the Company renewed the line of credit for
$475,000. The line of credit bears an interest rate of 5.0% that is
compounded monthly on unpaid balances and is payable monthly. The
line of credit matures on April 30, 2019, and is secured by
certificates of deposit and letters of credit owned by directors
and shareholders of the Company. The balance of the line of credit
is $472,675 and $473,029 at March 31, 2018 and March 31, 2017,
respectively, included in non-current liabilities.
The
Company also has additional lines of credit with Extraco Bank for
$100,000 and $200,000, which were renewed on January 19, 2018 and
April 30, 2018, respectively, with maturity dates of January 19,
2019 and April 30, 2019, respectively. The $200,000 line of credit
is included in non-current liabilities as of March 31, 2018, with
an outstanding balance of $178,778. The lines of credit bear an
interest rate of 4.5% (increased to 6.5% and 5%, respectively, upon
renewal in 2017) that is compounded monthly on unpaid balances and
is payable monthly. They are secured by certificates of deposit and
letters of credit owned by directors and shareholders of the
Company. The balance of the lines of credit was $278,470 at both
March 31, 2018 and March 31, 2017.
The
Company also has a working capital line of credit with Capital One
Bank for $50,000. The line of credit bears an interest rate of
prime plus 25.9 basis points, which totaled 30.7% as of March 31,
2018. The line of credit is unsecured. The balance of the line of
credit was $9,580 at both March 31, 2018 and March 31,
2017.
The
Company also has a working capital line of credit with Chase Bank
for $25,000. The line of credit bears an interest rate of prime
plus 10 basis points, which totaled 14.75% as of March 31, 2018.
The line of credit is secured by assets of the Company’s
subsidiaries. The balance of the line of credit is $10,237 and
$11,197 at March 31, 2018 and March 31, 2017,
respectively.
NOTE 4 – BANK LOAN
On
January 10, 2017, the Company
entered
into a promissory note with Community National Bank for $245,000,
at an annual interest rate of 5% and a maturity date of January 10,
2020 (the “CNB Note”). The CNB Note is secured by
certain real property owned by the Company in LaCoste, Texas, and
is also personally guaranteed by the Company’s President, as
well as certain shareholders of the Company. As consideration for
the guarantee, the Company issued 600,000 of its common stock to
the shareholders, which was recognized as debt issuance costs with
a fair value of $264,000, based on the market value of the
Company’s common stock of $0.44 on the date of issuance. As
the fair value of the debt issuance costs exceeded the face amount
of the promissory note, the excess of the fair value was recognized
as financing costs in the statement of operations. The resulting
debt discount is to be amortized over the term of the CNB Note
under the effective interest method. As the debt discount is in
excess of the face amount of the promissory note, the effective
interest rate is not determinable, and as such, all of the discount
was immediately expensed.
Maturities
on Bank loan is as follows:
Years
ending:
|
|
March 31,
2019
|
$
7,497
|
March 31,
2020
|
228,916
|
|
$
236,413
|
NOTE 5 – CONVERTIBLE DEBENTURES
January Debentures
On
January 23, 2017, the Company entered into a Securities Purchase
Agreement (“January SPA”) for the sale of a convertible
debenture (“January debenture”) with an original
principal amount of $262,500, for consideration of $250,000, with a
prorated five percent original issue discount (“OID”).
The debenture has a one-time interest charge of twelve percent
applied on the issuance date and due on the maturity date, which is
two years from the date of each payment of consideration. The
January SPA included a warrant to purchase 350,000 shares of the
Company’s common stock. The warrants have a five year term
and vest such that the buyer shall receive 1.4 warrants for every
dollar funded to the Company under the January debenture. The
Company received $50,000 at closing, with additional consideration
to be paid at the holder’s option. Upon the closing the buyer
was granted a warrant to purchase 70,000 shares of the
Company’s common stock.
The
January debentures are convertible at an original conversion price
of $0.35, subject to adjustment if the Company’s common stock
trades at a price lower than $0.60 per share during the forty-five
day period immediately preceding August 15, 2017, in which case the
conversion price is reset to sixty percent of the lowest trade
occurring during the twenty-five days prior to the conversion date.
Additionally, the conversion price, as well as other terms
including interest rates, original issue discounts, warrant
coverage, adjusts if any future financings have more favorable
terms. The January debenture also has piggyback registration
rights.
The
conversion feature of the January debenture meets the definition of
a derivative and due to the adjustment to the conversion price to
occur upon subsequent sales of securities at a price lower than the
original conversion price, requires bifurcation and is accounted
for as a derivative liability. The derivative was initially
recognized at an estimated fair value of $85,000 and created a
discount on the January debentures that will be amortized over the
life of the debentures using the effective interest rate method.
The fair value of the embedded derivative is measured and
recognized at fair value each subsequent reporting period and the
changes in fair value are recognized in the Consolidated Statement
of Operations as a change in fair value of derivative
liability.
The
Company estimated the fair value of the conversion feature
derivatives embedded in the convertible debentures based on
weighted probabilities of assumptions used in the Black Scholes
pricing model. The key valuation assumptions used consist, in part,
of the price of the Company’s common stock of $0.46 at
issuance date; a risk free interest rate of 1.16% and expected
volatility of the Company’s common stock, of 384.75%, and the
various estimated reset exercise prices weighted by probability.
This resulted in the calculated fair value of the debt discount
being greater than the face amount of the debt, and the excess
amount of $35,000 was immediately expensed as Financing costs. As
the discount was in excess of the face amount of the debenture, the
effective interest rate is not determinable, and as such, all of
the discount was immediately expensed.
The
derivative was remeasured as of March 31, 2017, resulting in an
estimated fair value of $74,000, for a decrease in fair value of
$11,000. The key valuation assumptions used consist, in part, of
the price of the Company’s common stock of $0.40; a risk free
interest rate of 1.16% and expected volatility of the
Company’s common stock, of 388.06%, and the various estimated
reset exercise prices weighted by probability.
During
the three months ended September 30, 2017, the holder converted
$40,000 of the January debentures to common shares of the Company,
leaving outstanding principal of $10,000 as of September 30, 2017.
As a result of the conversion the derivative liability was
remeasured immediately prior to the conversion with a fair value of
$55,000, with an increase of $2,000 recognized, with the fair value
of the derivative liability related to the converted portion, of
$44,000 being reclassified to equity. The key valuation assumptions
used consist, in part, of the price of the Company’s common
stock of $0.17; a risk-free interest rate of 1.12% and expected
volatility of the Company’s common stock, of 190.70%, and the
various estimated reset exercise prices weighted by
probability.
During
the three months ended December 31, 2017, the holder converted the
remaining $10,000 of the January debentures to common shares of the
Company. As a result of the conversion the derivative liability was
remeasured immediately prior to the conversion with a fair value of
$16,000, with an increase of $4,000 recognized, with the fair value
of the derivative liability related to the converted portion being
reclassified to equity. The key valuation assumptions used consist,
in part, of the price of the Company’s common stock of $0.10;
a risk-free interest rate of 1.46% and expected volatility of the
Company’s common stock, of 200.17%, and the various estimated
reset exercise prices weighted by probability.
The
warrants have an original exercise price of $0.60, which adjusts
for any future dilutive issuances. As a result of the dilutive
issuance adjustment provision, the warrants have been classified
out of equity as a warrant liability. The Company estimated the
fair value of the warrant liability using the Black Scholes pricing
model. The key valuation assumptions used consist, in part, of the
price of the Company’s common stock of $0.46 at issuance
date; a risk free interest rate of 1.88% and expected volatility of
the Company’s common stock, of 309.96%, resulting in a fair
value of $32,000. As noted above, the calculated fair value of the
discount is greater than the face amount of the debt, and
therefore, the excess amount of $32,000 was immediately expensed as
Financing costs.
March Debentures
On
March 28, 2017, the Company entered into a Securities Purchase
Agreement (“SPA”) for the purchase of up to $400,000 in
convertible debentures (“March debentures”), due 3
years from issuance. The SPA consists of three separate convertible
debentures, the first purchase which occurred at the signing
closing date on March 28, 2017, for $100,000 with a purchase price
of $90,000 (an OID of $10,000). The second closing is to occur by
mutual agreement of the buyer and Company, at any time sixty to
ninety days following the signing closing date, for $150,0000 with
a purchase price of $135,000 (an OID of $15,000). The third closing
is to occur sixty to ninety days after the second closing for
$150,000 with a purchase price of $135,000 (an OID of $15,000). The
SPA also includes a commitment fee to include 100,000 restricted
shares of common stock of the Company upon the signing closing
date. The commitment shares fair value was calculated as $34,000,
based on the market value of the common shares at the closing date
of $0.34, and was recognized as a debt discount. The conversion
price is fixed at $0.30 for the first 180 days. After 180 days, or
in the event of a default, the conversion price becomes the lower
of $0.30 or 60% (or 55% based on certain conditions) of the lowest
closing bid price for the past 20 days.
On July
5, 2017, the March Debenture was amended. The total principal
amount of the convertible debentures issuable under the SPA was
reduced to $325,000, for a total purchase price of $292,500, and
the second closing was reduced to $75,000 with a purchase price of
$67,500. The second closing occurred on July 5, 2017. As a fee in
connection with the second closing, the Company issued 75,000 of
its restricted common shares to the debenture holder. The fair
value of the fee shares was calculated as $26,625, based on the
market value of the common shares at the closing date of $0.36,
which will be recognized as a debt discount and amortized over the
life of the note with a 34.4% effective interest rate.
The
conversion feature of the March debenture meets the definition of a
derivative as it would not be classified as equity were it a
stand-alone instrument, and therefore requires bifurcation and is
accounted for as a derivative liability. The derivative was
initially recognized at an estimated fair value of $170,000 and
created a discount on the March debentures that will be amortized
over the life of the debentures using the effective interest rate
method. The fair value of the embedded derivative is measured and
recognized at fair value each subsequent reporting period and the
changes in fair value are recognized in the Consolidated Statement
of Operations as Change in fair value of derivative
liability.
The
Company estimated the fair value of the conversion feature
derivatives embedded in the convertible debentures based on
weighted probabilities of assumptions used in the Black Scholes
pricing model. The key valuation assumptions used consist, in part,
of the price of the Company’s common stock of $0.40 at
issuance date; a risk free interest rate of 1.56% and expected
volatility of the Company’s common stock, of 333.75%, and the
various estimated reset exercise prices weighted by probability.
This resulted in the calculated fair value of the debt discount
being greater than the face amount of the debt, and the excess
amount of $104,000, including the commitment fees, was immediately
expensed as financing costs.
The
debenture is also redeemable at the option of the Company, at
amounts ranging from 105% to 140% of the principal and accrued
interest balance, based on the redemption date’s passage of
time ranging from 90 days to 180 days from the date of issuance of
each debenture.
On
September 22, 2017, the Company exercised its option to redeem the
first closing of the March debenture, for a redemption price at
$130,000, 130% of the principal amount. The principal of $100,000
was derecognized with the additional $30,000 paid upon redemption
recognized as a financing cost. As a result of the redemption, the
unamortized discount related to the converted balance of $91,667
was immediately expensed. Additionally, the derivative was
remeasured upon redemption of the debenture, resulting in an
estimated fair value of $189,000, for an increase in fair value of
$45,000. The key valuation assumptions used consist, in part, of
the price of the Company’s common stock of $0.17; a risk-free
interest rate of 1.58% and expected volatility of the
Company’s common stock, of 290.41%, and the various estimated
reset exercise prices weighted by probability.
On
December 28, 2017, the Company exercised its option to redeem the
second closing of the March debenture, for a redemption price at
$97,500, 130% of the principal amount. Upon redemption, the
principal of $75,000 was relieved, with the additional $22,500 paid
recognized as a financing cost. As a result of the redemption, the
unamortized discount related to the converted balance of $68,750
was immediately expensed. Additionally, the derivative was
remeasured upon redemption of the debenture, resulting in an
estimated fair value of $151,000, for an increase in fair value of
$63,000. The key valuation assumptions used consist, in part, of
the price of the Company’s common stock of $0.15; a risk-free
interest rate of 1.89% and expected volatility of the
Company’s common stock, of 260.54%, and the various estimated
reset exercise prices weighted by probability.
July Debenture
On July
31, 2017, the Company entered into a 5% Securities Purchase
Agreement. The agreement calls for the purchase of up to $135,000
in convertible debentures, due 12 months from issuance, with a
$13,500 OID. The first closing was for principal of $45,000 with a
purchase price of $40,500 (an OID of $4,500), with additional
closings at the sole discretion of the holder. On October 2, 2017,
the Company entered into a second closing of the July 31, 2017
debenture, in the principal amount of $22,500 for a purchase price
of $20,250, with $1,500 deducted for legal fees, resulting in net
cash proceeds of $18,750. The July 31 debenture is convertible at a
conversion price of 60% of the lowest trading price during the
twenty-five days prior to the conversion date, and is also subject
to equitable adjustments for stock splits, stock dividends or
rights offerings by the Company. A further adjustment occurs if the
trading price at any time is equal to or lower than $0.10, whereby
an additional 10% discount to the market price shall be factored
into the conversion rate, as well as an adjustment to occur upon
subsequent sales of securities at a price lower than the original
conversion price. The conversion feature meets the definition of a
derivative and therefore requires bifurcation and is accounted for
as a derivative liability.
On
February 5, 2018, the Company entered into an amendment to the July
Debenture, whereby in exchange for a payment of $6,500 the note
holder, except for a conversion of up to 125,000 shares of the
Company’s common shares, would be only entitled to effectuate
a conversion under the note on or after March 2, 2018.
The
Company estimated the fair value of the conversion feature
derivatives embedded in the convertible debentures at issuance at
$61,000, based on weighted probabilities of assumptions used in the
Black Scholes pricing model. The key valuation assumptions used
consist, in part, of the price of the Company’s common stock
of $0.33 at issuance date; a risk-free interest rate of 1.23% and
expected volatility of the Company’s common stock, of
192.43%, and the various estimated reset exercise prices weighted
by probability. This resulted in the calculated fair value of the
debt discount being greater than the face amount of the debt, and
the excess amount of $45,500, including the commitment fees, was
immediately expensed as financing costs.
On
February 20, 2018, the holder converted $4,431 of the January
debentures into 125,000 common shares of the Company. As a result
of the conversion the derivative liability relating to the portion
converted was remeasured immediately prior to the conversion with a
fair value of $11,000, with an increase of $4,000 recognized, with
the fair value of the derivative liability related to the converted
portion being reclassified to equity. The key valuation assumptions
used consist, in part, of the price of the Company’s common
stock of $0.12; a risk-free interest rate of 1.87% and expected
volatility of the Company’s common stock, of 353.27%, and the
various estimated reset exercise prices weighted by
probability.
During
March, 2018, the holder converted an additional $17,113 of the July
debentures into 630,000 common shares of the Company. As a result
of the conversion the derivative liability was remeasured
immediately prior to the conversion with a fair value of $138,000,
with an increase of $74,000 recognized, with the fair value of the
derivative liability related to the converted portion being
reclassified to equity. The key valuation assumptions used consist,
in part, of the price of the Company’s common stock of $0.11;
a risk-free interest rate of 1.77% and expected volatility of the
Company’s common stock, of 375.93%, and the various estimated
reset exercise prices weighted by probability. Subsequent to year
end the remainder of the two notes were fully
converted.
Additionally, with
each tranche under the note, the Company shall issue a warrant to
purchase an amount of shares of its common stock equal to the face
value of each respective tranche divided by $0.60 as a commitment
fee. The Company issued a warrant to purchase 75,000 shares of the
Company’s common stock with the first closing, with an
exercise price of $0.60. The warrant has an anti-dilution provision
for future issuances, whereby the exercise price would reset. The
exercise price was adjusted to $0.15 and the warrants issued
increased to 300,000, upon a warrant issuance related to a new
convertible debenture on September 11, 2017. The warrants exercise
price was subsequently reset to 50% of the market price during the
third quarter of fiscal 2018, and the warrants issued increased
accordingly. As a result of the dilutive issuance adjustment
provision, the warrants have been classified out of equity as a
warrant liability. The Company estimated the fair value of the
warrant liability using the Black Scholes pricing model. The key
valuation assumptions used consist, in part, of the price of the
Company’s common stock of $0.33 at issuance date; a risk-free
interest rate of 1.84% and expected volatility of the
Company’s common stock, of 316.69%, resulting in a fair value
of $25,000.
August Debenture
On
August 28, 2017, the Company entered into a 12% convertible
promissory note for $110,000, with an OID of $10,000, which matures
on February 28, 2018. The note is convertible at a variable
conversion rate that is the lesser of 60% of the lowest trading
price for last 20 days prior to issuance of the note or 60% of the
lowest market price over the 20 days prior to conversion. The
conversion price shall be adjusted upon subsequent sales of
securities at a price lower than the original conversion price.
There are additional adjustments to the conversion price for events
set forth in the agreement, including if the Company is not DTC
eligible, the Company is no longer a reporting company, or the note
cannot be converted into free trading shares on or after nine
months from issue date. Per the agreement, the Company is required
at all times to have authorized and reserved five times the number
of shares that is actually issuable upon full conversion of the
note. The conversion feature meets the definition of a derivative
and therefore requires bifurcation and is accounted for as a
derivative liability. The note was sold to the holder of the
January 29, 2018 note (below) on February 8, 2018, with an
amendment entered into to extend the note until March 5, 2018. In
exchange for a cash payment of $5,000 and the issuance of 50,000
shares of common stock, on March 5, 2018, the holder agreed to not
convert any of the outstanding debt into common stock of the
Company until April 8, 2018. Subsequent to year end the new holder
issued a waiver as to the maturity date of the note and a technical
default provision. The note has subsequently been fully
converted.
The
Company estimated the fair value of the conversion feature
derivatives embedded in the convertible debentures at issuance at
$150,000, based on weighted probabilities of assumptions used in
the Black Scholes pricing model. The key valuation assumptions used
consist, in part, of the price of the Company’s common stock
of $0.17 at issuance date; a risk-free interest rate of 1.12% and
expected volatility of the Company’s common stock, of
190.70%, and the various estimated reset exercise prices weighted
by probability. This resulted in the calculated fair value of the
debt discount being greater than the face amount of the debt, and
the excess amount of $116,438, was immediately expensed as
financing costs.
In
connection with the note, the Company issued 50,000 warrants,
exercisable at $0.20, with a five-year term. The exercise price is
adjustable upon certain events, as set forth in the agreement,
including for future dilutive issuance. The exercise price was
adjusted to $0.15 and the warrants outstanding increased to 66,667,
upon a warrant issuance related to a new convertible debenture on
September 11, 2017. The warrants exercise price was subsequently
reset to 50% of the market price during the third quarter of fiscal
2018, and the warrants issued increased accordingly. As a result of
the dilutive issuance adjustment provision, the warrants have been
classified out of equity as a warrant liability. The Company
estimated the fair value of the warrant liability using the Black
Scholes pricing model. The key valuation assumptions used consist,
in part, of the price of the Company’s common stock of $0.17
at issuance date; a risk-free interest rate of 1.74% and expected
volatility of the Company’s common stock, of 276.90%,
resulting in a fair value of $8,000.
Additionally, in
connection with the debenture the Company also issued 343,750
shares of common stock of the Company as a commitment fee. The
commitment shares fair value was calculated as $58,438, based on
the market value of the common shares at the closing date of $0.17,
and was recognized as part of the debt discount. The shares are to
be returned to the Treasury of the Company in the event the
debenture is fully repaid prior to the date which is 180 days
following the issue date. On February 22, 2018, in connection with
the sale of the note to the Janaury 29, 2019 note holder, 171,965
of the shares were returned to the Company and cancelled. The
remaining shares are not required to be returned to the Company, as
the note was not redeemed prior to the date 180 days following the
issue date.
On
October 31, 2017, there was a second closing to the August
debenture, in the principal amount of $66,000, maturing on April
30, 2018. The second closing has the same conversion terms as the
first closing, however there were no additional warrants issued
with the second closing. The conversion feature meets the
definition of a derivative and therefore requires bifurcation and
is accounted for as a derivative liability. Subsequent to year end
the holder issued a waiver as to the maturity date of the note and
a technical default provision. The note has subsequently been fully
converted.
The
Company estimated the fair value of the conversion feature
derivatives embedded in the convertible debentures at issuance at
$94,000, based on weighted probabilities of assumptions used in the
Black Scholes pricing model. The key valuation assumptions used
consist, in part, of the price of the Company’s common stock
of $0.11 at issuance date; a risk-free interest rate of 1.28% and
expected volatility of the Company’s common stock, of
193.79%, and the various estimated reset exercise prices weighted
by probability. This resulted in the calculated fair value of the
debt discount being greater than the face amount of the debt, and
the excess amount of $69,877, was immediately expensed as financing
costs.
Additionally, in
connection with the second closing, the Company also issued 332,500
shares of common stock of the Company as a commitment fee. The
commitment shares fair value was calculated as $35,877, based on
the market value of the common shares at the closing date of $0.11,
and was recognized as part of the debt discount. The shares are to
be returned to the Treasury of the Company in the event the
debenture is fully repaid prior to the date which is 180 days
following the issue date.
September 11, 2017 Debenture
On
September 11, 2017, the Company entered into a 12% convertible
promissory note for $146,000, with an OID of $13,500, which matures
on June 11, 2018. The note is convertible at a variable conversion
rate that is the lower of the trading price for last 25 days prior
to issuance of the note or 50% of the lowest market price over the
25 days prior to conversion. Furthermore, the conversion rate may
be adjusted downward if, within three business days of the
transmittal of the notice of conversion, the common stock has a
closing bid which is 5% or lower than that set forth in the notice
of conversion. There are additional adjustments to the conversion
price for events set forth in the agreement, if any third party has
the right to convert monies at a discount to market greater than
the conversion price in effect at that time then the holder, may
utilize such greater discount percentage. Per the agreement, the
Company is required at all times to have authorized and reserved
seven times the number of shares that is actually issuable upon
full conversion of the note. The conversion feature meets the
definition of a derivative and therefore requires bifurcation and
is accounted for as a derivative liability. Subsequent to year end
approximately $85,000 of the note was converted.
The
Company estimated the fair value of the conversion feature
derivatives embedded in the convertible debentures at issuance at
$269,000, based on weighted probabilities of assumptions used in
the Black Scholes pricing model. The key valuation assumptions used
consist, in part, of the price of the Company’s common stock
of $0.17 at issuance date; a risk-free interest rate of 1.16% and
expected volatility of the Company’s common stock, of
190.70%, and the various estimated reset exercise prices weighted
by probability. This resulted in the calculated fair value of the
debt discount being greater than the face amount of the debt, and
the excess amount of $168,250, was immediately expensed as
financing costs.
In
connection with the note, the Company issued 243,333 warrants,
exercisable at $0.15, with a five-year term. The exercise price is
adjustable upon certain events, as set forth in the agreement,
including for future dilutive issuance. The warrants exercise price
was subsequently reset to 50% of the market price during the third
quarter of fiscal 2018, and the warrants issued increased
accordingly. As a result of the dilutive issuance adjustment
provision, the warrants have been classified out of equity as a
warrant liability. The Company estimated the fair value of the
warrant liability using the Black Scholes pricing model. The key
valuation assumptions used consist, in part, of the price of the
Company’s common stock of $0.13 at issuance date; a risk-free
interest rate of 1.71% and expected volatility of the
Company’s common stock, of 276.90%, resulting in a fair value
of $32,000.
September 12, 2017 Debenture
On
September 12, 2017, the Company entered into a 12% convertible
promissory note for principal amount of $96,500 with a $4,500 OID,
which matures on June 12, 2018. The note is able to be prepaid
prior to the maturity date, at a cash redemption premium, at
various stages as set forth in the agreement. The note is
convertible commencing 180 days after issuance date (or upon an
event of Default), or March 11, 2018, with a variable conversion
rate at 60% of market price, defined as the lowest trading price
during the twenty days prior to the conversion date. Additionally,
the conversion price adjusts if the Company is not able to issue
the shares requested to be converted, or upon any future financings
have more favorable terms. Per the agreement, the Company is
required at all times to have authorized and reserved six times the
number of shares that is actually issuable upon full conversion of
the note. The conversion feature meets the definition of a
derivative and therefore requires bifurcation and is accounted for
as a derivative liability.
On
March 20, 2018, the holder converted $32,500 of the September 12,
2017 debentures into 1,031,746 common shares of the Company. As a
result of the conversion the derivative liability was remeasured
immediately prior to the conversion with a fair value of $318,000,
with an increase of $165,000 recognized, with the fair value of the
derivative liability related to the converted portion of $107,000
being reclassified to equity. The key valuation assumptions used
consist, in part, of the price of the Company’s common stock
of $0.09; a risk-free interest rate of 1.81% and expected
volatility of the Company’s common stock, of 375.93%, and the
various estimated reset exercise prices weighted by probability.
Subsequent to year end the remainder of the note has been fully
converted.
The
Company estimated the fair value of the conversion feature
derivatives embedded in the convertible debentures at issuance at
$110,000, based on weighted probabilities of assumptions used in
the Black Scholes pricing model. The key valuation assumptions used
consist, in part, of the price of the Company’s common stock
of $0.13 at issuance date; a risk-free interest rate of 1.16% and
expected volatility of the Company’s common stock, of
190.70%, and the various estimated reset exercise prices weighted
by probability. This resulted in the calculated fair value of the
debt discount being greater than the face amount of the debt, and
the excess amount of $18,000 was immediately expensed as financing
costs.
October 17, 2017 Debenture
On
September 28, 2017, the Company entered into a Securities Purchase
Agreement, pursuant to which the Company agreed to sell a 12%
Convertible Note for $55,000 with a maturity date of September 28,
2018, for a purchase price of $51,700, and $2,200 deducted for
legal fees, resulting in net cash proceeds of $49,500. The
effective closing date of the Securities Purchase Agreement and
Note is October 17, 2017. The note is convertible at the
holders’ option, at any time, at a conversion price equal to
the lower of (i) the closing sale price of the Company’s
common stock on the closing date, or (ii) 60% of either the lowest
sale price for the Company’s common stock during the twenty
(20) consecutive trading days including and immediately preceding
the closing date, or the closing bid price, whichever is lower ,
provided that, if the price of the Company’s common stock
loses a bid, then the conversion price may be reduced, at the
holder’s absolute discretion, to a fixed conversion price of
$0.00001. If at any time the adjusted conversion price for any
conversion would be less than par value of the Company’s
common stock, then the conversion price shall equal such par value
for any such conversion and the conversion amount for such
conversion shall be increased to include additional principal to
the extent necessary to cause the number of shares issuable upon
conversion equal the same number of shares as would have been
issued had the Conversion Price not been subject to the minimum par
value price. The conversion feature meets the definition of a
derivative and therefore requires bifurcation and is accounted for
as a derivative liability. Subsequent to year end approximately
$43,000 of the note was converted.
The
Company estimated the fair value of the conversion feature
derivatives embedded in the convertible debentures at issuance at
$91,000, based on weighted probabilities of assumptions used in the
Black Scholes pricing model. The key valuation assumptions used
consist, in part, of the price of the Company’s common stock
of $0.11 at issuance date; a risk-free interest rate of 1.41% and
expected volatility of the Company’s common stock, of
193.79%, and the various estimated reset exercise prices weighted
by probability. This resulted in the calculated fair value of the
debt discount being greater than the face amount of the debt, and
the excess amount of $41,500 was immediately expensed as financing
costs.
November 14, 2017 Debenture
On
November 14, 2017, the Company entered into two 8% convertible
redeemable notes, in the aggregate principal amount of $112,000,
convertible into shares of common stock of the Company, with
maturity dates of November 14, 2018. Each note was in the face
amount of $56,000, with an original issue discount of $2,800,
resulting in a purchase price for each note of $53,200. The first
of the two notes was paid for by the buyer in cash upon closing,
with the second note initially paid for by the issuance of an
offsetting $53,200 secured promissory note issued to the Company by
the buyer (“Buyer Note”). The Buyer Note is due on July
14, 2018. The notes are convertible at 57% of the lowest of trading
price for last 20 days, or lowest closing bid price for last 20
days, with the discount increased to 47% in the event of a DTC
chill, with the second note not being convertible until the buyer
has settled the Buyer Note in cash payment. The Buyer Note is
included in Notes Receivable in the accompanying financial
statements. The first note has been fully converted subsequent to
year end.
During
the first six months, the convertible redeemable notes are in
effect, the Company may redeem the note at amounts ranging from
120% to 140% of the principal and accrued interest balance, based
on the redemption date’s passage of time ranging from 90 days
to 180 days from the date of issuance of each
debenture.
The
conversion feature meets the definition of a derivative and
therefore requires bifurcation and is accounted for as a derivative
liability.
The
Company estimated the aggregate fair value of the conversion
feature derivatives embedded in the two convertible debentures at
issuance at $164,000, based on weighted probabilities of
assumptions used in the Black Scholes pricing model. The key
valuation assumptions used consist, in part, of the price of the
Company’s common stock of $0.10 at issuance date; a risk-free
interest rate of 1.59% and expected volatility of the
Company’s common stock, of 192.64%, and the various estimated
reset exercise prices weighted by probability. This resulted in the
calculated fair value of the debt discount being greater than the
face amount of the debt, and the excess amount of $63,200 was
immediately expensed as financing costs.
December 20, 2017 Debenture
On
December 20, 2017, the Company entered into two 8% convertible
redeemable notes, in the aggregate principal amount of $240,000,
convertible into shares of common stock, of the Company, with the
same buyers as the November 14, 2017 debenture. Both notes are due
on December 20, 2018. The first note has face amount of $160,000,
with a $4,000 OID, resulting in a purchase price of $156,000. The
second note has a face amount of $80,000, with an OID of $2,000,
for a purchase price of $78,000. The first of the two notes was
paid for by the buyer in cash upon closing, with the second note
initially paid for by the issuance of an offsetting $78,000 secured
promissory note issued to the Company by the buyer (“Buyer
Note”). The Buyer Note is due on August 20, 2018. The notes
are convertible at 60% of the lower of: (i) lowest trading price or
(ii) lowest closing bid price, of the Company’s common stock
for the last 20 trading days prior to conversion, with the discount
increased to 50% in the event of a DTC chill, with the second note
not being convertible until the buyer has settled the Buyer Note in
cash payment. The Buyer Note is included in Notes Receivable in the
accompanying financial statements.
During
the first six months, the convertible redeemable notes are in
effect, the Company may redeem the note at amounts ranging from
120% to 136% of the principal and accrued interest balance, based
on the redemption date’s passage of time ranging from 90 days
to 180 days from the date of issuance of each
debenture.
The
conversion feature meets the definition of a derivative and
therefore requires bifurcation and is accounted for as a derivative
liability.
The
Company estimated the aggregate fair value of the conversion
feature derivatives embedded in the two convertible debentures at
issuance at $403,000, based on weighted probabilities of
assumptions used in the Black Scholes pricing model. The key
valuation assumptions used consist, in part, of the price of the
Company’s common stock of $0.15 at issuance date; a risk-free
interest rate of 1.72% and expected volatility of the
Company’s common stock, of 215.40%, and the various estimated
reset exercise prices weighted by probability. This resulted in the
calculated fair value of the debt discount being greater than the
face amount of the debt, and the excess amount of $181,000 was
immediately expensed as financing costs.
January 29, 2018 Debenture
On
January 29, 2 018, the Company entered into three 12% convertible
notes of the Company in the aggregate principal amount of $120,000,
convertible into shares of common stock of the Company, with
maturity dates of January 29, 2019. The interest upon an event of
default, as defined in the note, is 24% per annum. Each note was in
the face amount of $40,000, with $2,000 legal fees, for net
proceeds of $38,000. The first of the three notes was paid for by
the buyer in cash upon closing, with the other two notes initially
paid for by the issuance of an offsetting $40,000 secured
promissory note issued to the Company by the buyer (“Buyer
Note”). The Buyer Notes are due on September 29, 2018. The
notes are convertible at 60% of the lowest closing bid price for
the last 20 days, with the discount increased to 50% in the event
of a DTC chill. The second and third notes not being convertible
until the buyer has settled the Buyer Notes in a cash payment. The
conversion feature meets the definition of a derivative and
therefore requires bifurcation and will be accounted for as a
derivative liability.
During
the first 180 days, the convertible redeemable notes are in effect,
the Company may redeem the note at amounts ranging from 115% to
140% of the principal and accrued interest balance, based on the
redemption date’s passage of time ranging from 30 days to 180
days from the date of issuance of each debenture. Upon any sale
event, as defined, at the holder’s request the Company will
redeem the note for 150% of the principal and accrued
interest.
The
Company estimated the aggregate fair value of the conversion
feature derivatives embedded in the three convertible debentures at
issuance at $185,000, based on weighted probabilities of
assumptions used in the Black Scholes pricing model. The key
valuation assumptions used consist, in part, of the price of the
Company’s common stock of $0.12 at issuance date; a risk-free
interest rate of 1.80% and expected volatility of the
Company’s common stock, of 215.40%, and the various estimated
reset exercise prices weighted by probability. This resulted in the
calculated fair value of the debt discount being greater than the
face amount of the debt, and the excess amount of $71,000 was
immediately expensed as financing costs.
January 30, 2018 Debenture
On
January 30, 2018, the Company entered into a 12% convertible note
for the principal amount of $80,000, convertible into shares of
common stock of the Company, which matures on January 30, 2019.
Upon an event of default, as defined in the note, the note becomes
immediately due and payable, in an amount equal to 150% of all
principal and accrued interest due on the note, with default
interest of 22% per annum (the “Default Amount”). If
the Company fails to deliver conversion shares within 2 days of a
conversion request, the note becomes immediately due and payable at
an amount of twice the Default Amount. The note is convertible at
61% of the lowest closing bid price for the last 15 days. Per the
agreement, the Company is required at all times to have authorized
and reserved six times the number of shares that is actually
issuable upon full conversion of the note. Failure to maintain the
reserved number of shares is considered an event of default if not
cured within three days of a notice of conversion. The Company has
not maintained the required share reservation under the terms of
the note agreement. The Company believes it has sufficient
available shares of the Company’s common stock in the event
of conversion for these notes. The conversion feature meets the
definition of a derivative and therefore requires bifurcation and
will be accounted for as a derivative liability.
During
the first 180 days, the convertible redeemable note is in effect,
the Company may redeem the note at amounts ranging from 115% to
140% of the principal and accrued interest balance, based on the
redemption date’s passage of time ranging from 30 days to 180
days from the date of issuance of the debenture.
The
Company estimated the aggregate fair value of the conversion
feature derivatives embedded in the convertible debenture at
issuance at $163,000, based on weighted probabilities of
assumptions used in the Black Scholes pricing model. The key
valuation assumptions used consist, in part, of the price of the
Company’s common stock of $0.08 at issuance date; a risk-free
interest rate of 1.88% and expected volatility of the
Company’s common stock, of 215.40%, and the various estimated
reset exercise prices weighted by probability. This resulted in the
calculated fair value of the debt discount being greater than the
face amount of the debt, and the excess amount of $83,000 was
immediately expensed as financing costs.
On
March 9, 2018, the Company entered into a 12% convertible note for
the principal amount of $43,000, with the holder of the January 30,
2018 debenture, convertible into shares of common stock of the
Company, which matures on March 9, 2019. Upon an event of default,
as defined in the note, the note becomes immediately due and
payable, in an amount equal to 150% of all principal and accrued
interest due on the note, with default interest of 22% per annum
(the “Default Amount”). If the Company fails to deliver
conversion shares within 2 days of a conversion request, the note
becomes immediately due and payable at an amount of twice the
Default Amount. The note is convertible on the date beginning 180
days after issuance of the note, at 61% of the lowest closing bid
price for the last 15 days. Per the agreement, the Company is
required at all times to have authorized and reserved six times the
number of shares that is actually issuable upon full conversion of
the note. Failure to maintain the reserved number of shares is
considered an event of default. The conversion feature meets the
definition of a derivative and therefore requires bifurcation and
will be accounted for as a derivative liability.
During
the first 180 days the convertible redeemable note is in effect,
the Company may redeem the note at amounts ranging from 115% to
140% of the principal and accrued interest balance, based on the
redemption date’s passage of time ranging from 30 days to 180
days from the date of issuance of the debenture.
The
Company estimated the aggregate fair value of the conversion
feature derivatives embedded in the convertible debenture at
issuance at $94,000, based on weighted probabilities of assumptions
used in the Black Scholes pricing model. The key valuation
assumptions used consist, in part, of the price of the
Company’s common stock of $0.09 at issuance date; a risk-free
interest rate of 2.03% and expected volatility of the
Company’s common stock, of 215.40%, and the various estimated
reset exercise prices weighted by probability. This resulted in the
calculated fair value of the debt discount being greater than the
face amount of the debt, and the excess amount of $54,000 was
immediately expensed as financing costs.
March 20, 2018 Debenture
On
March 20, 2018, the Company entered into a convertible note for the
principal amount of $84,000, convertible into shares of common
stock of the Company, which matures on December 20, 2018. The note
bears interest at 12% for the first 180 days, which increases to
18% after 180 days, and 24% upon an event of default. The note is
convertible on the date beginning 180 days after issuance of the
note, at the lower of 60% of the lowest trading price for the last
20 days prior to the issuance date of this note, or 60% of the
lowest trading price for the last 20 days prior to conversion. In
the event of a "DTC chill", the conversion rate is adjusted to 40%
of the market price. Per the agreement, the Company is required at
all times to have authorized and reserved ten times the number of
shares that is actually issuable upon full conversion of the note.
The Company has not maintained the required share reservation under
the terms of the note agreement. The Company believes it has
sufficient available shares of the Company’s common stock in
the event of conversion for these notes. The conversion feature
meets the definition of a derivative and therefore requires
bifurcation and will be accounted for as a derivative
liability.
Additionally, the
Company also issued 255,675 shares of common stock of the Company
as a commitment fee. The commitment shares fair value was
calculated as $28,124, based on the market value of the common
shares at the closing date of $0.11, and was recognized as part of
the debt discount.
The
Company estimated the aggregate fair value of the conversion
feature derivatives embedded in the convertible debenture at
issuance at $191,000, based on weighted probabilities of
assumptions used in the Black Scholes pricing model. The key
valuation assumptions used consist, in part, of the price of the
Company’s common stock of $0.06 at issuance date; a risk-free
interest rate of 2.09% and expected volatility of the
Company’s common stock, of 272.06%, and the various estimated
reset exercise prices weighted by probability. This resulted in the
calculated fair value of the debt discount being greater than the
face amount of the debt, and the excess amount of $144,124
(including the fair value of the common shares issued) was
immediately expensed as financing costs.
March 21, 2018 Debenture
On
March 21, 2018, the Company entered into a convertible note for the
principal amount of $39,199, which includes an OID of $4,199,
convertible into shares of common stock of the Company, which
matures on December 20, 2018. The note bears interest at 12% for
the first 180 days, which increases to 18% after 180 days, and 24%
upon an event of default. The note is convertible on the date
beginning 180 days after issuance of the note, at the lowest of 60%
of the lowest trading price for the last 20 days prior to the
issuance date of this note, or 60% of the lowest trading price for
the last 20 days prior to conversion. The discount is increased
upon certain events set forth in the agreement regarding the
obtainability of the shares, such as a DTC "chill". Additionally,
if the Company ceases to be a reporting company, or after 181 days
the note cannot be converted into freely traded shares, the
discount is increased an additional 15%. Per the agreement, the
Company is required at all times to have authorized and reserved
ten times the number of shares that is actually issuable upon full
conversion of the note. The Company has not maintained the required
share reservation under the terms of the note agreement. The
Company believes it has sufficient available shares of the
Company’s common stock in the event of conversion for these
notes. The conversion feature meets the definition of a derivative
and therefore requires bifurcation and will be accounted for as a
derivative liability.
Additionally, the
Company also issued 119,300 shares of common stock of the Company
as a commitment fee. The commitment shares fair value was
calculated as $13,123, based on the market value of the common
shares at the closing date of $0.11, and was recognized as part of
the debt discount.
The
Company estimated the aggregate fair value of the conversion
feature derivatives embedded in the two convertible debentures at
issuance at $89,000, based on weighted probabilities of assumptions
used in the Black Scholes pricing model. The key valuation
assumptions used consist, in part, of the price of the
Company’s common stock of $0.06 at issuance date; a risk-free
interest rate of 2.09% and expected volatility of the
Company’s common stock, of 272.06%, and the various estimated
reset exercise prices weighted by probability. This resulted in the
calculated fair value of the debt discount being greater than the
face amount of the debt, and the excess amount of $67,123
(including the fair value of the common shares issued) was
immediately expensed as financing costs.
The
derivative liability arising from all of the above discussed
debentures was revalued at March 31, 2018, resulting in an increase
of the fair value of the derivative liability of $1,616,000 for the
year ended March 31, 2018. The key valuation assumptions used
consist, in part, of the price of the Company’s common stock
of $0.06; a risk-free interest rate ranging from 1.73% to 2.09%,
and expected volatility of the Company’s common stock ranging
from 272.06% to 375.93%, and the various estimated reset exercise
prices weighted by probability.
The
warrant liability relating to all of the warrant issuances
discussed above was revalued at March 31, 2018, resulting in an
increase to the fair value of the warrant liability of $244,000 for
the year ended March 31, 2018. The key valuation assumptions used
consists, in part, of the price of the Company’s common stock
of $0.06; a risk-free interest rate ranging from 2.22% to 2.56%,
and expected volatility of the Company’s common stock of
358.6%. The warrant liability was remeasured as of March 31, 2017,
resulting in an estimated fair value of $28,000, for a decrease in
fair value of $4,000. The key valuation assumptions used consists,
in part, of the price of the Company’s common stock of $0.40;
a risk free interest rate of 1.88% and expected volatility of the
Company’s common stock, of 292.42%.
NOTE 6 – STOCKHOLDERS’ DEFICIT
Common Stock
On May
2, 2017, the Company sold 100,000 shares of its common stock at
$0.25 per share, for a total financing of $25,000.
On
August 1, 2016, the Company reached an agreement with a
professional advisor in which the Company issued 55,000 shares of
common stock with a fair value of $24,750. This amount was
recognized as stock compensation cost for the period ended December
31, 2016.
On
October 10, 2016, the Company entered into a form of Subscription
Agreement for $0.35 per common share and issued 28,571 common
shares for $10,000 in cash proceeds.
On
January 10, 2017, the Company issued 1,000,000 shares to a
consultant for services to be rendered over six months. The fair
value of the shares of $440,000, based on the market value of the
common stock on the date of issuance, will be recognized over the
term of the agreement. $220,000 was expensed in the year ending
March 31, 2017, with $220,000 included in prepaid assets as of
March 31, 2017. The prepaid balance of $220,000 was expensed in the
year ending March 31, 2018.
The
Company issued 1,225,715 shares to two unrelated parties on January
23, 2017, in exchange for the settlement of debt owed by
NaturalShrimp Holdings, Inc., a related party (Note 8), previous to
the Company’s January 2015 reverse acquisition. At the time
of the acquisition the Company was not made aware of the debt and
therefore did not assume the liability in the purchase agreement.
When the Company was presented with the debt during the fiscal year
ending March 31, 2017, the Company agreed to assume and settle this
debt by the issuance of common shares. The fair value of the shares
issued, based on the market value of the common shares on the date
of the settlement agreement, was $563,829.
NOTE 7 – OPTIONS AND WARRANTS
The
Company has not granted any options since inception. The Company
has granted approximately 4,958,000 warrants (after adjustment) in
connection with convertible debentures, or which 333,333 have been
exercised. For further discussion see Note 5.
NOTE 8 – RELATED PARTY TRANSACTIONS
Notes Payable – Related Parties
On
April 20, 2017, the Company entered into a convertible debenture
with an affiliate of the Company whose managing member is the
Treasurer, Chief Financial Officer, and a director of the Company
(the “affiliate”), for $140,000. The convertible
debenture matures one year from date of issuance, and bears
interest at 6%. Upon an event of default, as defined in the
debenture, the principal and any accrued interest becomes
immediately due, and the interest rate increases to 24%. The
convertible debenture is convertible at the holder’s option
at a conversion price of $0.30. As of March 31, 2018, the Company
has paid $52,400 on this note, with $87,600 remaining
outstanding.
On
January 20, 2017 and on March 14, 2017, the Company entered into
convertible debentures with an affiliate of the Company whose
managing member is the Treasurer, Chief Financial Officer, and a
director of the Company. The convertible debentures are each in the
amount of $20,000, mature one year from date of issuance, and bear
interest at 6%. Upon an event of default, as defined in the
debenture, the principal and any accrued interest becomes
immediately due, and the interest rate increases to 24%. The
convertible debentures are convertible at the holder’s option
at a conversion price of $0.30. As of March 31, 2018, the notes
have been paid off in full.
NaturalShrimp Holdings, Inc.
On
January 1, 2016 the Company entered into a notes payable agreement
with NaturalShrimp Holdings, Inc.(“NSH”), a
shareholder. Between January 16, 2016 and March 7, 2016, the
Company borrowed $134,750 under this agreement. An additional
$601,361 was borrowed under this agreement in the year ended March
31, 2017. The note payable has no set monthly payment or maturity
date with a stated interest rate of 2%.
Baptist Community Services (BCS)
On January 10, 2017, the Company agreed to pay
to
Baptist Community Services (BCS), a shareholder of NSH,
$200,000 of the proceeds from the CNB
Note (Note 4), in
satisfaction
of the outstanding amounts due on a promissory note with BCS of
$2,305,953, plus accrued interest of $233,398, resulting in a gain
on extinguishment of debt of $2,339,353 in the year ended March 31,
2017.
Shareholder Notes
The
Company has entered into several working capital notes payable to
multiple shareholders of NSH and Bill Williams, an officer, a
director, and a shareholder of the Company, for a total of
$486,500. These notes had stock issued in lieu of interest and have
no set monthly payment or maturity date. The balance of these notes
at March 31, 2018 and 2017 was $426,404 and $426,404, respectively,
and is classified as a current liability on the consolidated
balance sheets. At March 31, 2018 and 2017, accrued interest
payable was $206,920 and $172,808, respectively.
Shareholders
In
2009, the Company entered into a note payable to Randall Steele, a
shareholder of NSH, for $50,000. The note bears interest at 6.0%
and was payable upon maturity on January 20, 2011. In addition, the
Company issued 100,000 shares of common stock for consideration.
The shares were valued at the date of issuance at fair market
value. The value assigned to the shares of $50,000 was recorded as
increase in common stock and additional paid-in capital and was
limited to the value of the note. The assignment of a value to the
shares resulted in a financing fee being recorded for the same
amount. The note is unsecured. The balance of the note at March 31,
2018 and 2017 was $50,000, respectively, and is classified as a
current liability on the consolidated balance sheets. Interest
expense on the note was $3,000 and $3,000 during the years ended
March 31, 2018 and 2017, respectively.
Beginning in 2010,
the Company started entering into several working capital notes
payable with various shareholders of NSH for a total of $290,000
and bearing interest at 8%. The balance of these notes at March 31,
2018 and 2017 was $5,000 and is classified as a current liability
on the consolidated balance sheets. At March 31, 2018 and 2017,
accrued interest payable was $1,600 and $1,200,
respectively.
NOTE 9 – FEDERAL INCOME TAX
The
Company accounts for income taxes under ASC 740-10, which provides
for an asset and liability approach of accounting for income taxes.
Under this approach, deferred tax assets and liabilities are
recognized based on anticipated future tax consequences, using
currently enacted tax laws, attributed to temporary differences
between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts calculated for income
tax purposes.
The
components of income tax expense for the years ended March 31, 2018
and 2017 consist of the following:
|
|
|
Federal Tax
statutory rate
|
34.00
%
|
34.00
%
|
Permanent
differences
|
7.86
%
|
559.25
%
|
Valuation
allowance
|
(41.86
)%
|
(525.25
)%
|
Effective
rate
|
0.00
%
|
0.00
%
|
Significant
components of the Company’s deferred tax assets as of March
31, 2018 and 2017 are summarized below. The calculations presented
below at December 31, 2017 reflect the new U.S. federal statutory
corporate tax rate of 21% effective January 1, 2018 (see Note
2).
|
|
|
Deferred tax
assets:
|
|
|
Net operating loss
carryforwards
|
$
637,000
|
$
570,000
|
Deferred tax
benefit
|
408,000
|
350,000
|
Total deferred tax
asset
|
1,045,000
|
920,000
|
Valuation
allowance
|
(1,045,000
)
|
(920,000
)
|
|
$
-
|
$
-
|
As of
March 31, 2018, the Company had approximately $3,034,000 of federal
net operating loss carry forwards. These carry forwards, if not
used, will begin to expire in 2028. Future utilization of the net
operating loss carry forwards is subject to certain limitations
under Section 382 of the Internal Revenue Code. The Company
believes that the issuance of its common stock in exchange for
Multiplayer Online Dragon, Inc. January 30, 2015 resulted in an
“ownership change” under the rules and regulations of
Section 382. Accordingly, our ability to utilize our net operating
losses generated prior to this date is limited to approximately
$282,000 annually.
To the
extent that the tax deduction is included in a net operating loss
carry forward and is in excess of amounts recognized for book
purposes, no benefit will be recognized until the loss carry
forward is recognized. Upon utilization and realization of the
carry forward, the corresponding change in the deferred asset and
valuation allowance will be recorded as additional paid-in
capital.
The
Company provides for a valuation allowance when it is more likely
than not that it will not realize a portion of the deferred tax
assets. The Company has established a valuation allowance against
the net deferred tax asset due to the uncertainty that enough
taxable income will be generated in those taxing jurisdictions to
utilize the assets. Therefore, we have not reflected any benefit of
such deferred tax assets in the accompanying financial statements.
Our net deferred tax asset and valuation allowance increased by
$120,000 in the year ended March 31, 2018, $394,000 of which
related to the decrease in the expected future tax rate as a result
of the Tax Reform Law..
The
Company reviewed all income tax positions taken or that we expect
to be taken for all open years and determined that our income tax
positions are appropriately stated and supported for all open
years. The Company is subject to U.S. federal income tax
examinations by tax authorities for years after 2012 due to
unexpired net operating loss carryforwards originating in and
subsequent to that year. The Company may be subject to income tax
examinations for the various taxing authorities which vary by
jurisdiction.
NOTE 10 – CONCENTRATION OF CREDIT RISK
The
Company maintains cash balances at one financial institution.
Accounts at this institution are insured by the Federal Deposit
Insurance Corporation (FDIC) up to $250,000. As of March 31, 2018,
and 2017, the Company’s cash balance did not exceed FDIC
coverage.
NOTE 11 – COMMITMENTS AND CONTINGENCIES
Executive Employment Agreements – Bill Williams and Gerald
Easterling
On
April 1, 2015, the Company entered into employment agreements with
each of Bill G. Williams, as the Company’s Chief Executive
Officer, and Gerald Easterling as the Company’s President,
effective as of April 1, 2015 (the “Employment
Agreements”).
The
Employment Agreements are each terminable at will and each provide
for a base annual salary of $96,000. In addition, the Employment
Agreements each provide that the employee is entitled, at the sole
and absolute discretion of the Company’s Board of Directors,
to receive performance bonuses. Each employee will also be entitled
to certain benefits including health insurance and monthly
allowances for cell phone and automobile expenses.
Each
Employment Agreement provides that in the event employee is
terminated without cause or resigns for good reason (each as
defined in their Employment Agreements), the employee will receive,
as severance the employee’s base salary for a period of 60
months following the date of termination. In the event of a change
of control of the Company, the employee may elect to terminate the
Employment Agreement within 30 days thereafter and upon such
termination would receive a lump sum payment equal to 500% of the
employee’s base salary.
Each
Employment Agreement contains certain restrictive covenants
relating to non-competition, non-solicitation of customers and
non-solicitation of employees for a period of one year following
termination of the employee’s Employment
Agreement.
NOTE 12 – SUBSEQUENT EVENTS
Subsequent to year
end, the Company has converted approximately $485,000 of their
outstanding convertible debt as of March 31, 2018 and approximately
$31,000 of accrued interest, into 37,887,704 shares of the
Company’s common stock.
On
April 10, 2018, the Company entered into two 10% convertible notes
in the aggregate principal amount of $110,000, convertible into
shares of common stock of the Company, with maturity dates of April
10, 2019. The interest upon an event of default, as defined in the
note, is 24% per annum. Each note was in the face amount of
$55,000, with $2,750 for legal fees deducted upon funding. The
first of the notes was paid for by the buyer in cash upon closing,
with the other note ("Back-End note") initially paid for by the
issuance of an offsetting $55,000 secured promissory note issued to
the Company by the buyer (“Buyer Note”). The Buyer Note
is due on December 12, 2018. The notes are convertible at 57% of
the lowest closing bid price for the last 20 days. The Back-End
note is not convertible until the buyer has settled the Buyer Notes
in a cash payment. The conversion feature meets the definition of a
derivative and therefore requires bifurcation and will be accounted
for as a derivative liability.
During
the first 180 days the convertible redeemable note is in effect,
the Company may redeem the note at amounts ranging from 130% to
145% of the principal and accrued interest balance, based on the
redemption date’s passage of time ranging from 60 days to 180
days from the date of issuance of the debenture
On
April 12, 2018, the Company sold 200,000 shares of its common stock
at $0.077 per share, for a total financing of $15,400.
On
April 27, 2018, the Company entered into a convertible note for the
principal amount of $53,000 for a purchase price of $50,000,
convertible into shares of common stock of the Company, which
matures on January 27, 2019. The note bears interest at 12% for the
first 180 days, which increases to 18% after 180 days, and 24% upon
an event of default. The note is convertible on the date beginning
180 days after issuance of the note, at the lowest of 60% of the
lowest trading price for the last 20 days prior to the issuance
date of this note, or 60% of the lowest trading price for the last
20 days prior to conversion. In the event of a "DTC chill", the
conversion rate is adjusted to 40% of the market price. Per the
agreement, the Company is required at all times to have authorized
and reserved ten times the number of shares that is actually
issuable upon full conversion of the note. The conversion feature
meets the definition of a derivative and therefore requires
bifurcation and will be accounted for as a derivative
liability.
On June
5, 2018, the Company entered into a convertible note for the
principal amount of $125,000 for a purchase price of $118,800,
convertible on the date beginning 180 days after issuance of the
note, into shares of common stock of the Company, which matures on
June 5, 2019. The note bears interest at 12%, which increases to
18% upon an event of default, as defined in the agreement. The note
is convertible at 60% of the lowest trading price for the last 20
days prior to conversion, with the discount increased 5% in the
event the Company does not have sufficient shares authorized and
outstanding to issue the shares upon conversion request. Per the
agreement, the Company is required at all times to have authorized
and reserved four times the number of shares that is actually
issuable upon full conversion of the note. The conversion feature
meets the definition of a derivative and therefore requires
bifurcation and will be accounted for as a derivative
liability.
During
the first 180 days the convertible redeemable note is in effect,
the Company may redeem the note at amounts ranging from 135% to
145% of the principal and accrued interest balance, based on the
redemption date’s passage of time ranging from 90 days to 180
days from the date of issuance of the debenture. After 180 days,
the note is redeemable, with the holders prior written consent, at
150% of the principal and accrued interest balance.
On
July 11, 2018, the Company received the funding for the Buyer Note
issued in connection with the second note under the December 20,
2017 8% convertible redeemable note, for cash proceeds of
$74,000.