Forward-Looking Statements
This
Annual Report on Form 10-K includes a number of forward-looking
statements that reflect management's current views with respect to
future events and financial performance. Forward-looking statements
are projections in respect of future events or our future financial
performance. In some cases, you can identify forward-looking
statements by terminology such as “may,”
“should,” “expects,” “plans,”
“anticipates,” “believes,”
“estimates.” “predicts,”
“potential” or “continue” or the negative
of these terms or other comparable terminology. Those statements
include statements regarding the intent, belief or current
expectations of us and members of our management team, as well as
the assumptions on which such statements are based. Prospective
investors are cautioned that any such forward-looking statements
are not guarantees of future performance and involve risk and
uncertainties, and that actual results may differ materially from
those contemplated by such forward-looking statement. These
statements are only predictions and involve known and unknown
risks, uncertainties and other factors, including the risks in the
section entitled “Risk Factors” set forth in this
Annual Report on Form 10-K for the year ended March 31, 2019, any
of which may cause our company’s or our industry’s
actual results, levels of activity, performance or achievements to
be materially different from any future results, levels of
activity, performance or achievements expressed or implied by these
forward-looking statements. These risks include, by way of example
and without limitation:
●
our ability to
successfully commercialize our equipment and shrimp farming
operations to produce a market-ready product in a timely manner and
in enough quantity;
●
absence of
contracts with customers or suppliers;
●
our ability to
maintain and develop relationships with customers and
suppliers;
●
our ability to
successfully integrate acquired businesses or new
brands;
●
the impact of
competitive products and pricing;
●
supply constraints
or difficulties;
●
the retention and
availability of key personnel;
●
general economic
and business conditions;
●
substantial doubt
about our ability to continue as a going concern;
●
our need to raise
additional funds in the future;
●
our ability to
successfully recruit and retain qualified personnel in order to
continue our operations;
●
our ability to
successfully implement our business plan;
●
our ability to
successfully acquire, develop or commercialize new products and
equipment;
●
the commercial
success of our products;
●
intellectual
property claims brought by third parties; and
●
the impact of any
industry regulation.
Although we believe
that the expectations reflected in the forward-looking statements
are reasonable, we cannot guarantee future results, levels of
activity, or performance. Except as required by applicable law,
including the securities laws of the United States, we do not
intend to update any of the forward-looking statements to conform
these statements to actual results.
Readers
are urged to carefully review and consider the various disclosures
made by us in this report and in our other reports filed with the
Securities and Exchange Commission (the “SEC”). We
undertake no obligation to update or revise forward-looking
statements to reflect changed assumptions, the occurrence of
unanticipated events or changes in the future operating results
over time except as required by law. We believe that our
assumptions are based upon reasonable data derived from and known
about our business and operations. No assurances are made that
actual results of operations or the results of our future
activities will not differ materially from our
assumptions.
As used
in this Annual Report on Form 10-K and unless otherwise indicated,
the terms “Company,” “we,”
“us,” and “our” refer to NaturalShrimp
Incorporated and the Company’s wholly-owned subsidiaries:
NaturalShrimp Corporation, NaturalShrimp Global, Inc. and Natural
Aquatic Systems, Inc. Unless otherwise specified, all dollar
amounts are expressed in United States dollars.
Corporate History
We were
incorporated in the State of Nevada on July 3, 2008 under the name
“Multiplayer Online Dragon, Inc.” Effective November 5,
2010, we effected an 8 for 1 forward stock split, increasing the
issued and outstanding shares of our common stock from 12,000,000
shares to 96,000,000 shares. On October 29, 2014, we effected a 1
for 10 reverse stock split, decreasing the issued and outstanding
shares of our common stock from 97,000,000 to
9,700,000.
On
November 26, 2014, we entered into an Asset Purchase Agreement (the
“Agreement”) with NaturalShrimp Holdings, Inc. a
Delaware corporation (“NSH”), pursuant to which we
agreed to acquire substantially all of the assets of NSH which
assets consisted primarily of all of the issued and outstanding
shares of capital stock of NaturalShrimp Corporation
(“NSC”), a Delaware corporation, and NaturalShrimp
Global, Inc. (“NS Global”), a Delaware corporation, and
certain real property located outside of San Antonio, Texas (the
“Assets”).
On
January 30, 2015, we consummated the acquisition of the Assets
pursuant to the Agreement. In accordance with the terms of the
Agreement, we issued 75,520,240 shares of our common stock to NSH
as consideration for the Assets. As a result of the transaction,
NSH acquired 88.62% of our issued and outstanding shares of common
stock; NSC and NS Global became our wholly-owned subsidiaries, and
we changed our principal business to a global shrimp farming
company.
In
connection with our receipt of approval from the Financial Industry
Regulatory Authority (“FINRA”), effective March 3,
2015, we amended our Articles of Incorporation to change our name
to “NaturalShrimp Incorporated.”
Business Overview
We are
a biotechnology company and have developed a proprietary technology
that allows us 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. Our system uses technology which
allows us to produce a naturally-grown shrimp “crop”
weekly, and accomplishes this without the use of antibiotics or
toxic chemicals. We have developed several proprietary technology
assets, including a knowledge base that allows us 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. Our initial production facility is located outside of
San Antonio, Texas.
NS
Global, one of our wholly-owned subsidiaries, owns less than 1% of
NaturalShrimp International A.S. in Europe. Our European-based
partner, NaturalShrimp International A.S., Oslo, Norway, is
responsible for the construction cost of its facility and initial
operating capital.
The
first facility built in Spain for NaturalShrimp International A.S.
is GambaNatural de España, S.L. The land for the first
facility was purchased in Medina del Campo, Spain, and construction
of the 75,000 sq. ft. facility was completed in 2016. Medina del
Campo is approximately seventy-five miles northwest of Madrid,
Spain.
On
October 16, 2015, we formed Natural Aquatic Systems, Inc.
(“NAS”). The purpose of the NAS is to formalize the
business relationship between our Company and F&T Water
Solutions LLC for the joint development of certain water
technologies. The technologies shall include, without limitation,
any and all inventions, patents, intellectual property and know-how
dealing with enclosed aquatic production systems worldwide. This
includes construction, operation, and management of enclosed
aquatic production, other than shrimp, facilities throughout the
world, co-developed by both parties at our facility located outside
of La Coste, Texas. On December 25, 2018, we were awarded U.S.
Patent “Recirculating Aquaculture System and Treatment Method
for Aquatic Species” covering all indoor aquatic species that
utilizes proprietary art.
The
Company has three wholly-owned subsidiaries, including NSC, NS
Global and NAS.
Evolution of Technology and Revenue Expectations
Historically,
efforts to raise shrimp in a high-density, closed system at the
commercial level have been met with either modest success or
outright failure through “BioFloc Technology.”
Infectious agents such as parasites, bacteria and viruses are the
most damaging and most difficult to control. Bacterial infection
can in some cases be combated through the use of antibiotics
(although not always), and in general, the use of antibiotics is
considered undesirable and counter to “green”
cultivation practices. Viruses can be even worse, in that they are
immune to antibiotics. Once introduced to a shrimp population,
viruses can wipe out entire farms and shrimp populations, even with
intense probiotic applications.
Our
primary solution against infectious agents is our “Vibrio
Suppression Technology.” We believe this system creates
higher sustainable densities, consistent production, improved
growth and survival rates and improved food conversion without the
use of antibiotics, probiotics or unhealthy anti-microbial
chemicals. Vibrio Suppression Technology helps to exclude and
suppress harmful organisms that usually destroy
“BioFloc” and other enclosed technologies.
In
2001, we began research and development of a high density, natural
aquaculture system that is not dependent on ocean water to provide
quality, fresh shrimp every week, fifty-two weeks a year. Our
initial system was successful, but we determined that it would not
be economically feasible due to high operating costs. Over the next
several years, using the knowledge we gained from developing the
first system, we developed a shrimp production system that
eliminated the high costs associated with the previous system. We
have continued to refine this technology, eliminating bacteria and
other problems that affect enclosed systems, and now have a
successful shrimp growing process. We have produced thousands of
pounds of shrimp over the last few years in order to develop a
design that will consistently produce quality shrimp that grow to a
large size at a specific rate of growth. This included
experimenting with various types of natural live and synthesized
feed supplies before selecting the most appropriate nutritious and
reliable combination. It also included utilizing monitoring and
control automation equipment to minimize labor costs and to provide
the necessary oversight for proper regulation of the shrimp
environment. However, there were further enhancements needed to our
process and technology in order to begin production of shrimp on a
commercially viable scale and to generate revenues.
Our
current system consists of a reception tank where the shrimp are
acclimated, then moved to a larger grow-out tank for the rest of
the twenty-four week cycle. During 2016, we engaged in additional
engineering projects with third parties to further enhance our
indoor production capabilities. For example, through our
relationship with Trane, Inc., a division of Ingersoll-Rand Plc
(“Trane”), Trane has provided a detailed audit to use
data to build and verify the capabilities of then initial Phase 1
prototype of a Trane-proposed three tank system at our La Coste,
Texas facility. The Company contracted F&T Water Solutions and
RGA Labs, Inc. (“RGA Labs”) to complete final
engineering and building of the initial patent-pending modified
Electrocoagulation system for the grow-out, harvesting and
processing of fully mature, antibiotic-free Pacific White Leg
shrimp. The design will present a viable pathway to begin
generating revenue and producing shrimp on a commercially viable
scale. The design is completed and was installed in early June 2018
by RGA Labs. The first post larvae (PL) arrived from the hatchery
at the end of June 2018, and we expect to use the first harvest to
market, sample, and refine production specifications by the third
calendar quarter of 2019.
Overview of Industry
Shrimp
is a well-known and globally-consumed commodity, constituting one
of the most important types of seafood and a staple protein source
for much of the world. According to the USDA Foreign Agricultural
Service, the world consumes approximately 9 billion pounds of
shrimp annually with over 1.7 billion pounds consumed in the United
States alone. Approximately 65% of the global supply of shrimp is
caught by ocean trawlers and the other 35% is produced by open-air
shrimp farms, mostly in developing countries.
Shrimp
boats catch shrimp through the use of large, boat-towed nets. These
nets are quite toxic to the undersea environment as they disturb
and destroy ocean-bottom ecosystems; these nets also catch a
variety of non-shrimp sea life, which is typically killed and
discarded as part of the shrimp harvesting process. Additionally,
the world’s oceans can only supply a finite amount of shrimp
each year, and in fact, single-boat shrimp yields have fallen by
approximately 20% since 2010 and continue to decrease. The
shrimping industry’s answer to this problem has been to
deploy more (and larger) boats that deploy ever-larger nets, which
has in the short-term been successful at maintaining global shrimp
yields. However, this benefit cannot continue forever, as
eventually global demand has the potential of outstripping the
oceans’ ability to maintain the natural ecosystem’s
balance, resulting in a permanent decline in yields. When taken in
light of global population growth and the ever-increasing demand
for nutrient-rich foods such as shrimp, this is clearly an
unsustainable production paradigm.
Shrimp
farming, known in the industry as “aquaculture,” has
ostensibly stepped in to fill this demand/supply imbalance. Shrimp
farming is typically done in open-air lagoons and man-made shrimp
ponds connected to the open ocean. Because these ponds constantly
exchange water with the adjacent sea, the farmers are able to
maintain the water chemistry that allows the shrimp to prosper.
However, this method of cultivating shrimp also carries severe
ecological peril. First of all, most shrimp farming is primarily
conducted in developing countries, where poor shrimp farmers have
little regard for the global ecosystem. Because of this, these
farmers use large quantities of antibiotics and other chemicals
that maximize each farm’s chance of producing a crop, putting
the entire system at risk. For example, a viral infection that
crops up in one farm can spread to all nearby farms, quite
literally wiping out an entire region’s production. In 1999,
the White Spot virus invaded shrimp farms in at least five Latin
American countries: Honduras, Nicaragua, Guatemala, Panama and
Ecuador and in 2013-14 EMS (Early Mortality Syndrome) wiped out
most of the Asia Pacific region and Mexico. Secondly, there is also
a finite amount of coastline that can be used for shrimp production
– eventually shrimp farms that are dependent on the open
ocean will have nowhere to expand. Again, this is an ecologically
damaging and ultimately unsustainable system for producing
shrimp.
In both
the cases, the current method of shrimp production is
unsustainable. As global populations rise and the demand for shrimp
continues to grow, the current system is bound to fall short.
Shrimp trawling cannot continue to increase production without
completely depleting the oceans’ natural shrimp population.
Trends in per-boat yield confirm that this industry has already
crossed the overfishing threshold, putting the global open-ocean
shrimp population in decline. While open-air shrimp aquaculture may
seem to address this problem, it is also an unsustainable system
that destroys coastal ecological systems and produces shrimp with
very high chemical contamination levels. Closed-system shrimp
farming is clearly a superior alternative, but its unique
challenges have prevented it from becoming a widely-available
alternative.
Of the
1.7 billion pounds of shrimp consumed annually in the United
States, over 1.5 billion pounds are imported – much of this
from developing countries’ shrimp farms. These farms are
typically located in developing countries and use high levels of
antibiotics and pesticides that are not allowed under USDA
regulations. As a result, these shrimp farms produce chemical-laden
shrimp in an ecologically unsustainable way.
Unfortunately, most
consumers here in the United States are not aware of the origin of
their store-bought shrimp or that which they consume in
restaurants. This is due to a USDA rule that states that only
bulk-packaged shrimp must state the shrimp’s country of
origin; any “prepared” shrimp, which includes
arrangements sold in grocery stores and seafood markets, as well as
all shrimp served in restaurants, can simply be sold “as
is.” Essentially, this means that most U.S. consumers may be
eating shrimp laden with chemicals and antibiotics. Our product is
free of pesticide chemicals and antibiotics, a fact that we believe
is highly attractive and beneficial in terms of our eventual
marketing success.
Technology
Intensive, Indoor, Closed-System Shrimp Production
Technology
Historically,
efforts to raise shrimp in a high-density, closed system at the
commercial level have been met with either modest success or
outright failure through “BioFloc Technology”.
Infectious agents such as parasites, bacteria and viruses are the
most damaging and most difficult to control. Bacterial infection
can in some cases be combated through the use of antibiotics
(although not always), and in general, the use of antibiotics is
considered undesirable and counter to “green”
cultivation practices. Viruses can be even worse, in that they are
immune to antibiotics. Once introduced to a shrimp population,
viruses can wipe out entire farms and shrimp populations, even with
intense probiotic applications.
Our
primary solution against infectious agents is our “Vibrio
Suppression Technology”. We believe this system creates
higher sustainable densities, consistent production, improved
growth and survival rates and improved food conversion without the
use of antibiotics, probiotics or unhealthy anti-microbial
chemicals. Vibrio Suppression Technology helps to exclude and
suppress harmful organisms that usually destroy
“BioFloc” and other enclosed technologies.
Automated Monitoring and Control System
The
Company’s “Automated Monitoring and Control
System” uses individual tank monitors to automatically
control the feeding, oxygenation, and temperature of each of the
facility tanks independently. In addition, a facility computer
running custom software communicates with each of the controllers
and performs additional data acquisition functions that can report
back to a supervisory computer from anywhere in the world. These
computer-automated water controls optimize the growing conditions
for the shrimp as they mature to harvest size, providing a
disease-resistant production environment.
The
principal theories behind the Company’s system are
characterized as:
●
High-density shrimp
production
These
principles form the foundation for the Company and our potential
distributors so that consumers can be provided with continuous
volumes of live and fresh shrimp at competitive
prices.
Research and Development
In
2001, we began research and development (R&D) of a high
density, natural aquaculture system that is not dependent on ocean
water to provide quality, fresh shrimp every week, fifty-two weeks
per year. Our initial system was successful, but the Company
determined that it would not be economically feasible due to high
operating costs. Over the next several years, using the knowledge
we gained from the first R&D system, we developed a shrimp
production system that eliminated the high costs associated with
the previous system. We have continued to refine this technology,
eliminating bacteria and other problems that affect enclosed
systems and now have a successful shrimp growing
process.
We have
produced thousands of pounds of shrimp over the last few years in
order to develop a design that will consistently produce quality
shrimp that grow to a large size at a specific rate of growth. This
included experimenting with various types of natural live and
synthesized feed supplies before selecting the most appropriate
nutritious and reliable combination. It also included utilizing
monitoring and control automation equipment to minimize labor costs
and to provide the necessary oversight for proper regulation of the
shrimp environment.
After
the implementation of the first R&D facility in La Coste,
Texas, we have also made significant improvements that minimize the
transfer of shrimp, which will reduce shrimp stress and labor
costs. Our current system consists of a reception tank where the
shrimp are acclimated, then moved to a larger grow-out tank for the
rest of the twenty-four week cycle.
On
September 7, 2016, we entered into a Letter of Commitment with
Trane, Inc. (“Trane”), a division of Ingersoll-Rand
Plc, whereby Trane shall proceed with a detailed audit to use data
to verify the capabilities of an initial Phase 1 prototype of a
Trane-proposed three tank system at our La Coste, Texas facility.
The prototype consists of a modified Electrocoagulation (EC) system
for the human grow-out, harvesting and processing of fully mature,
antibiotic-free Pacific White Leg shrimp. Trane was authorized to
proceed with such detailed audit to utilize data for purposes of
verifying the capabilities of the EC system, including the ammonia
and chlorine capture and sequestering and pathogen kill. The
detailed audit delivered (i) a report on the inspection of the
existing infrastructure determining if proper fit, adequate
security, acceptable utility service, environmental protection and
equipment sizing are achievable; (ii) provide firm fixed pricing
for the EC system, electrode selection and supply, waste removal,
ventilation of the off-gassing of the equipment; and (iii) a
formalized plan for commissioning and on-site investigation of
hardware design to simplify build-out of Phase 2 and future phases.
The detailed audit was utilized by RGA Labs to build and install
the initial system in La Coste, Texas pilot plant the first week of
June 2018. Based on the results of the initial system, we intend to
increase shrimp production in our plant in La Coste, Texas by
adding and stocking additional tanks and adding needed filtration
equipment with plans to stock the entire facility by the end of
2019. Five new electrocoagulation systems have been purchased to
update the La Coste plant.
Target Markets and Sales Price
Our
goal is to establish production systems and distribution centers in
metropolitan areas of the United States, as well as international
distribution networks through joint venture partnerships throughout
the world. This should allow the Company to capture a significant
portion of world shrimp sales by offering locally grown,
environmentally “green,” naturally grown, fresh shrimp
at competitive wholesale prices.
The
United States population is approximately 325 million people with
an annual shrimp consumption of 1.7 billion pounds, of which less
than 400 million pounds are domestically produced. According to
IndexMundi.com, the wholesale price for frozen, commodity grade
shrimp has risen 15% since January 2015 (shell-on headless, 26-30
count; which is comparable to our target growth size). With world
shrimp problems, this price is expected to rise more in the next
few years.
We
strive to build a profitable global shrimp production company. We
believe our foundational advantage is that we can deliver fresh,
organically grown, gourmet-grade shrimp, 52 weeks per year to
retail and wholesale buyers in major market areas at competitive,
yet premium prices. By locating regional production and
distribution centers in close proximity to consumer demand, we can
provide a fresh product to customers within 24 hours after harvest,
which is unique in the shrimp industry. We can be the “first
to market” and perhaps “sole weekly provider” of
fresh shrimp and capture as much market share as production
capacity can support.
For
those customers that want a frozen product, we may be able to
provide this in the near future and the product will still be
differentiated as a “naturally grown, sustainable
seafood” that will meet the increasing demand of socially
conscious consumers.
Our
patented technology and eco-friendly, bio-secure production
processes enable the delivery of a chemical and antibiotic free,
locally grown product that lives up to the Company’s mantra:
“Always Fresh, Always Natural,” thereby solving the
issue of “unsafe” imported seafood.
Product Description
Nearly
all of the shrimp consumed today are shipped frozen. Shrimp are
typically frozen from six to twenty-four months before consumption.
Our system is designed to harvest a different tank each week, which
provides for fresh shrimp throughout the year. We strive to create
a niche market of “Always Fresh, Always Natural”
shrimp. As opposed to many of the foreign shrimp farms, we can also
claim that our product is 100% free of antibiotics. The ability to
grow shrimp locally, year round allows us to provide this high-end
product to specialty grocery stores and upscale restaurants
throughout the world. We rotate the stocking and harvesting of our
tanks each week, which allows for weekly shrimp harvests. Our
product is free of all pollutants and is fed only all-natural
feeds.
The
seafood industry lacks a consistent “Source
Verification” method to track seafood products as they move
through countries and customs procedures. With worldwide
overfishing leading to declining shrimp freshness and
sustainability around the world, it is vital for shrimp providers
to be able to realistically identify the source of their product.
We have well-managed, sustainable facilities that are able to track
shrimp from hatchery to plate using environmentally responsible
methods.
Shrimp Growth Period
Our
production system is designed to produce shrimp at a harvest size
of twenty-one to twenty-five shrimp per pound in a period of
twenty-four weeks. The Company currently purchases post-larva
shrimp that are approximately ten days old (PL 10). In the future,
we plan to build our own hatcheries to control the supply of shrimp
to each of our facilities. Our full-scale production systems
include grow-out and nursery tanks, projected to produce fresh
shrimp fifty-two weeks per year.
Distribution and Marketing
We plan
to build these environmentally “green” production
systems near major metropolitan areas of the United States. Today,
we have one pilot production facility in La Coste, Texas (near San
Antonio) and plan to begin construction of a full-scale production
facility in La Coste and plans for Nevada and New York. Over the
next five years, our plan is to increase construction of new
facilities each year. In the fifth year, we plan for a new system
to be completed each month, expanding first into the largest shrimp
consumption markets of the United States.
Because
our system is enclosed and also indoors, it is not affected by
weather or climate and does not depend on ocean proximity. As such,
we believe we will be able to provide, naturally grown,
high-quality, fresh shrimp to major market customers each week.
This will allow distribution companies to leverage their existing
customer relationships by offering an uninterrupted supply of high
quality, fresh and locally grown shrimp. We plan to sell and
distribute the vast majority of our shrimp production through
distributors which have established customers and sufficient
capacity to deliver a fresh product within hours following harvest.
We believe we have the added advantage of being able to market our
shrimp as fresh, natural and locally grown using sustainable,
eco-friendly technology, a key differentiation from all existing
shrimp producers. Furthermore, we believe that our ability to
advertise our product in this manner along with the fact that it is
a locally grown product, provides us with a marketing advantage
over the competition. We expect to utilize distributors that
currently supply fresh seafood to upscale restaurants, country
clubs, specialty super markets and retail stores whose clientele
expect and appreciate fresh, natural products.
Harvesting, Packaging and Shipment
Each
location is projected to include production, harvesting/processing
and a general shipping and receiving area, in addition to
warehousing space for storage of necessary supplies and products
required to grow, harvest, package and otherwise make ready for
delivery, a fresh shrimp crop on a weekly basis to consumers in
each individual market area within 24 hours following
harvest.
The
seafood industry lacks a consistent source verification method to
track seafood products as they move through countries and customs
procedures. With worldwide overfishing leading to declining shrimp
freshness and sustainability around the world, it is vital for
shrimp providers to be able to realistically identify the source of
their product. Our future facilities are expected to be designed to
track shrimp from hatchery to plate using environmentally
responsible methods.
International
We own
one hundred percent of NaturalShrimp Global, Inc. which was formed
to create international partnerships. Each international
partnership is expected to use the Company’s proprietary
technology to penetrate shrimp markets throughout the world
utilizing existing food service distribution channels.
NaturalShrimp Global, Inc., owns a percentage of NaturalShrimp
International A.S. in Oslo, Norway. As our European-based partner,
NaturalShrimp International A.S. is responsible for the
construction cost of their facility and initial operating
capital.
The
first facility built in Spain for NaturalShrimp International A.S.
is GambaNatural de España, S.L. The land for the first
facility was purchased in Medina del Campo, Spain and construction
of the 75,000 sq. ft. facility was completed in 2016. Medina del
Campo is approximately seventy-five miles northwest of Madrid,
Spain.
Go to Market Strategy and Execution
Our
strategy is to develop regional production and distribution centers
near major metropolitan areas throughout the United States and
internationally. Today, we have 53,000 sq. ft. of R&D
facilities, which includes, a pilot production system,
greenhouse/reservoirs and utility buildings in La Coste, TX (near
San Antonio). We intend to begin construction of a new
free-standing facility with the next generation shrimp production
system in place on the property in 2019.
The
reasoning behind building additional shrimp production systems in
La Coste is availability of trained production personnel, our
research and development team, and an opportunity to develop the
footprint and model for additional facilities. Our current plan is
to develop six regional production and distribution centers near
major markets in 2019, adding one system per month in a selected
production center, depending on market demand.
We have
sold product to restaurants at $12.00 per pound and to retail
consumers at $16.50 to $21.00 per pound, depending on size, which
helps to validate our pricing strategy. Additionally, from 2011 to
2013, we had two successful North Texas test markets which
distributed thousands of pounds of fresh product to customers
within 24 hours following harvest. The fresh product was priced
from $8.40 to $12.00 per pound wholesale, heads on, net price to
the Company.
Current Systems and Expansion
The
pilot plant is located in La Coste, Texas and is being retrofitted
with new patent-pending technology that the Company has been
developing with Trane’s engineering audit and F&T Water
Solutions, and RGA Labs. This facility, when completely retrofitted
with the new technology, is projected to produce approximately
6,000 pounds every month. The next facility in La Coste will be
substantially larger than the current system. The target yield of
shrimp for the new facility will be approximately 6,000 pounds per
week. Both facilities combined are projected to produce over 7,000
pounds of shrimp per week in La Coste. By staging the stocking and
harvests from tank to tank, it enables us to produce weekly and
therefore deliver fresh shrimp every week.
After
the completion of the next system in La Coste, our long-term plan
is to build additional production systems in Las Vegas, and New
York. These locations are targeted to begin construction in fiscal
2020, and the funding for these plans is projected to come from
joint venture agreements with strategic partners. These cities are
not surrounded by commercial shrimp production, and we believe
there will be a high demand for fresh shrimp in all of these
locations. In addition, the Company will continue to use the land
it owns in La Coste to build as many systems as the Texas market
demands.
Competition
There
are a number of companies conducting research and development
projects in their attempt to develop closed-system technologies in
the U.S., some with reported production and sales. Florida Organic
Aquaculture uses a Bio-Floc Raceway System to intensify shrimp
growth, while Marvesta Shrimp Farms’ tanks in water from the
Atlantic to use in their indoor system. Since these are
privately-held companies, it is not possible to know, with
certainty, their state of technical development, production
capacity, need for water exchange, location requirements, financial
status and other matters. To the best of our knowledge, none are
producing significant quantities of shrimp relative to their local
markets, and such fresh shrimp sales are likely confined to an area
near the production facility.
Additionally, any
new competitor would face significant barriers for entry into the
market and would likely need years of research and development to
develop the proprietary technology necessary to produce similar
shrimp at a commercially viable level. We believe our technology
and business model sets us apart from any current competition. It
is possible that additional competitors will arise in the future,
but with the size and growth of the worldwide shrimp market, many
competitors could co-exist and thrive in the fresh shrimp
industry.
Intellectual Property
We
intend to take appropriate steps to protect our intellectual
property. We have registered the trademark
“NATURALSHRIMP” which has been approved and was
published in the Official Gazette on June 5, 2012. On December 25,
2018, we were awarded U.S. Patent “Recirculating Aquaculture
System and Treatment Method for Aquatic Species” covering all
indoor aquatic species that utilizes proprietary art. There are
potential technical processes for which the Company may be able to
file a patent. However, there are no assurances that such
applications, if filed, would be issued and no right of enforcement
is granted to a patent application. Therefore, the Company has
filed a provisional patent with the U.S. Patent Office and plans to
use a variety of other methods, including copyright registrations
as appropriate, trade secret protection, and confidentiality and
non-compete agreements to protect its intellectual property
portfolio.
Source and Availability of Raw Materials
Raw
materials are received in a timely manner from established
suppliers. Currently, we buy our feed from Zeigler, a leading
producer of aquatic feed. Post larvae (“PL”) shrimp are
purchased from American Penaeid, Inc. (API) in Florida and Global
Blue Technologies in Texas.
There
have not been any issues regarding the availability of our raw
materials. We have favorable contacts and past business dealings
with other major shrimp feed producers if current suppliers are not
available.
Government Approvals and Regulations
We are
subject to government regulation and require certain licenses. The
following list includes regulations to which we are subject and/or
the permits and licenses we currently hold:
●
Texas Parks and
Wildlife Department (TPWD) - “Exotic species permit” to
raise exotic shrimp (non-native to Texas). The La Coste facility is
north of the coastal shrimp exclusion zone (east and south of H-35,
where it intersects Hwy 21 down to Laredo) and therefore outside of
TPWD’s major area of concern for exotic shrimp. Currently
Active - Expires December 31, 2019.
●
Texas Department of
Agriculture (TDA) - “Aquaculture License” for
aquaculture production facilities. License to “operate a fish
farm or cultured fish processing plant.” Currently Active
– Expires June 30, 2020.
●
Texas Commission on
Environmental Quality (TCEQ) - Regulates facility wastewater
discharge. According to the TCEQ permit classification system, we
are rated Level 1 – Recirculation system with no discharge.
Currently Active – No expiration.
●
San Antonio River
Authority - No permit required, but has some authority over any
effluent water that could impact surface and ground
waters.
●
OSHA - No permit
required but has right to inspect facility.
●
HACCP (Hazard
Analysis and Critical Control Point) - Not needed unless we process
shrimp on site. Training and preparation of HACCP plans remain to
be completed. There are multiple HACCP plans listed at
http://seafood.ucdavis.edu/haccp/Plans.htm and other web sites that
can be used as examples.
●
Texas Department of
State Health Services - Food manufacturer license #
1011080.
●
Aquaculture
Certification Council (ACC) and Best Aquaculture Practices (BAP) -
Provide shrimp production certification for shrimp marketing
purposes to mainly well-established vendors. ACC and BAP
certifications require extensive record keeping. No license is
required at this time.
We are
subject to certain regulations regarding the need for field
employees to be certified. We strictly adhere to these regulations.
The cost of certification is an accepted part of expenses.
Regulations may change and become a cost burden, but compliance and
safety are our main concern.
Market Advantages and Corporate Drivers
The
following are what we consider to be our advantages in the
marketplace:
●
Early-mover
Advantage: Commercialized technology in a large growing market with
no significant competition yet identified. Most are early stage
start-ups or early stage companies with limited production and
distribution.
●
Farm-to-Market:
This has significant advantages including reduced transportation
costs and a product that is more attractive to local
consumers.
●
Bio-secured
Building: Our process is a re-circulating, highly-filtered water
technology in an indoor-regulated environment. External pathogens
are excluded.
●
Eco-friendly
“Green” Technology: Our closed-loop, re-circulating
system has no ocean water exchange requirements, does not use
chemical or antibiotics and therefore is sustainable, eco-friendly,
environmentally sound and produces a superior quality shrimp that
is totally natural.
●
Availability of
Weekly Fresh Shrimp: Assures consumers of optimal freshness, taste,
and texture of product which will command premium
prices.
●
Sustainability: Our
naturally grown product does not deplete wild supplies, has no
by-catch kill of marine life, does not damage sensitive ecological
environments and avoids potential risks of imported
seafood.
Subsidiaries
The
Company has three wholly-owned subsidiaries including NaturalShrimp
Corporation, NaturalShrimp Global, Inc. and Natural Aquatic
Systems, Inc.
Employees
As of
March 31, 2019, we had 5 full-time employees. We intend to hire
additional staff and to engage consultants in general
administration on an as-needed basis. We also may engage experts in
general business to advise us in various capacities. None of our
employees are subject to a collective bargaining agreement, and we
believe that our relationship with our employees is
good.
You
should carefully consider the risks described below together with
all of the other information included in our public filings before
making an investment decision with regard to our securities. The
statements contained in or incorporated into this document that are
not historic facts are forward-looking statements that are subject
to risks and uncertainties that could cause actual results to
differ materially from those set forth in or implied by
forward-looking statements. If any of the following events
described in these risk factors actually occur, our business,
financial condition or results of operations could be harmed. In
that case, the trading price of our common stock could decline, and
you may lose all or part of your investment. Moreover, additional
risks not presently known to us or that we currently deem less
significant also may impact our business, financial condition or
results of operations, perhaps materially. For additional
information regarding risk factors, see Item 1 –
“Forward-Looking Statements.”
Risks Related to Our Business and Industry
The
market for our product may be limited, and as a result our business
may be adversely affected.
The
feasibility of marketing our product has been assumed to this point
and there can be no assurance that such assumptions are correct. It
is possible that the costs of development and implementation of our
shrimp production technology may be too expensive to market our
shrimp at a competitive price. It is likewise possible that
competing technologies will be introduced into the marketplace
before or after the introduction of our product to the market,
which may affect our ability to market our product at a competitive
price.
Furthermore, there
can be no assurance that the prices we determine to charge for our
product will be commercially acceptable or that the prices that may
be dictated by the market will be sufficient to provide to us
sufficient revenues to profitably operate and provide a financial
return to our investors.
Our
business and operations are affected by the volatility of prices
for shrimp.
Our
business, prospects, revenues, profitability and future growth are
highly dependent upon the prices of and demand for shrimp. Our
ability to borrow and to obtain additional capital on attractive
terms is also substantially dependent upon shrimp prices. These
prices have been and are likely to continue to be extremely
volatile for seasonal, cyclical and other reasons. Any substantial
or extended decline in the price of shrimp will have a material
adverse effect on our financing capacity and our prospects for
commencing and sustaining any economic commercial production. In
addition, increased availability of imported shrimp can affect our
business by lowering commodity prices. This could reduce the value
of inventories, held both by us and by our customers, and cause
many of our customers to reduce their orders for new products until
they can dispose of their higher cost inventories.
Market
demand for our products may decrease.
We face
competition from other producers of seafood as well as from other
protein sources, such as pork, beef and poultry. The bases on which
we expect to compete include, but may not be limited
to:
●
brand
identification; and
Demand
for our products will be affected by our competitors’
promotional spending. We may be unable to compete successfully on
any or all of these bases in the future, which may have a material
adverse effect on our revenues and results of
operations.
Moreover, although
historically the logistics and perishability of seafood has led to
regionalized competition, the market for fresh and frozen seafood
is becoming increasingly globalized as a result of improved
delivery logistics and improved preservation of the products.
Increased competition, consolidation, and overcapacity may lead to
lower product pricing of competing products that could reduce
demand for our products and have a material adverse effect on our
revenues and results of operations.
Competition and
unforeseen limited sources of supplies in the industry may result
in occasional spot shortages of equipment, supplies and materials.
In particular, we may experience possible unavailability of
post-larvae and materials and services used in our shrimp
production facilities. Such unavailability could result in
increased costs and delays to our operations. If we cannot find the
products, equipment, supplies and materials that we need on a
timely basis, we may have to suspend our production plans until we
find the products, equipment and materials that we
need.
If
we lose our key management and technical personnel, our business
may be adversely affected.
In
carrying out our operations, we will rely upon a small group of key
management and technical personnel including our Chief Executive
Officer, Chairman of the Board and President and Chief Financial
Officer. We do not currently maintain any key man insurance. An
unexpected partial or total loss of the services of these key
individuals could be detrimental to our business.
Our
expansion plans for our shrimp production facilities reflects our
current intent and is subject to change.
Our
current plans regarding expansion of our shrimp production
facilities are subject to change. Whether we ultimately undertake
our expansion plans will depend on the following factors, among
others:
●
availability and
cost of capital;
●
current and future
shrimp prices;
●
costs and
availability of post-larvae shrimp, equipment, supplies and
personnel necessary to conduct these operations;
●
success or failure
of system design and activities in similar areas;
●
changes in the
estimates of the costs to complete production facilities;
and
●
decisions of
operators and future joint venture partners.
We will
continue to gather data about our production facilities, and it is
possible that additional information may cause us to alter our
schedule or determine that a certain facility should not be pursued
at all.
Our
product is subject to regulatory approvals and if we fail to obtain
such approvals, our business may be adversely
affected.
Most of
the jurisdictions in which we operate will require us to obtain a
license for each facility owned and operate in that jurisdiction.
We have obtained and currently hold a license to own and operate
each of our facilities where a license is required. In order to
maintain the licenses, we have to operate our current farms and, if
we pursue acquisitions or construction of new farms, we will need
to obtain additional licenses to operate those farms, where
required. We are also exposed to dilution of the value of our
licenses where a government issues new licenses to fish farmers
other than us, thereby reducing the current value of our fish
farming licenses. Governments may change the way licenses are
distributed or otherwise dilute or invalidate our licenses. If we
are unable to maintain or obtain new fish farming licenses or if
new licensing regulations dilute the value of our licenses, this
may have a material adverse effect on our business.
It is
possible that regulatory authorities could make changes in
regulatory rules and policies and we would not be able to market or
commercialize our product in the intended manner and/or the changes
could adversely impact the realization of our technology or market
potential.
Failure
to ensure food safety and compliance with food safety standards
could result in serious adverse consequences for us.
As our
end products are for human consumption, food safety issues (both
actual and perceived) may have a negative impact on the reputation
of and demand for our products. In addition to the need to comply
with relevant food safety regulations, it is of critical importance
that our products are safe and perceived as safe and healthy in all
relevant markets.
Our
products may be subject to contamination by food-borne pathogens,
such as Listeria monocytogenes, Clostridia, Salmonella and E. Coli
or contaminants. These pathogens and substances are found in the
environment; therefore, there is a risk that one or more of these
organisms and pathogens can be introduced into our products as a
result of improper handling, poor processing hygiene or
cross-contamination by us, the ultimate consumer or any
intermediary. We have little, if any, control over handling
procedures once we ship our products for distribution. Furthermore,
we may not be able to prevent contamination of our shrimp by
pollutants such as polychlorinated biphenyls, or PCBs, dioxins or
heavy metals.
An
inadvertent shipment of contaminated products may be a violation of
law and may lead to product liability claims, product recalls
(which may not entirely mitigate the risk of product liability
claims), increased scrutiny and penalties, including injunctive
relief and plant closings, by regulatory agencies, and adverse
publicity.
Increased quality
demands from authorities in the future relating to food safety may
have a material adverse effect on our business, financial
condition, results of operations or cash flow. Legislation and
guidelines with tougher requirements are expected and may imply
higher costs for the food industry. In particular, the ability to
trace products through all stages of development, certification and
documentation is becoming increasingly required under food safety
regulations. Further, limitations on additives and use of medical
products in the farmed shrimp industry may be imposed, which could
result in higher costs for us.
The
food industry, in general, experiences high levels of customer
awareness with respect to food safety and product quality,
information and traceability. We may fail to meet new and exacting
customer requirements, which could reduce demand for our
products.
Our
success is dependent upon our ability to commercialize our shrimp
production technology.
We
began monthly stocking of post larvae in March of 2019 to commence
commercial sales by the end of 2019. Prior to March 2019, we had
been engaged principally in the research and development of our
technology. Therefore, we have a limited operating history upon
which an evaluation of our prospects can be made. Our prospects
must be considered in light of the risk, uncertainties, expenses,
delays and difficulties associated with the establishment of a new
business in the evolving food industry, as well as those risks
encountered in the shift from development to commercialization of
new technology and products or services based upon such
technology.
We have
developed our first commercial system that employs our technology
but additional work is required to incorporate that technology into
a system capable of accommodating thousands of customers, which is
the minimum capability we believe is necessary to compete in the
marketplace.
Our
shrimp production technology may not operate as
intended.
Although we have
successfully tested our technology, our approach, which is still
fairly new in the industry, may not operate as intended or may be
subject to other factors that we have not yet considered. These may
include the impact of new pathogens or other biological risks, low
oxygen levels, algal blooms, fluctuating seawater temperatures,
predation or escapes. Any of the foregoing may result in physical
deformities to our shrimp or affect our ability to increase shrimp
production, which may have a material adverse effect on our
operations.
Our
success is dependent upon our ability to protect our intellectual
property.
Our
success will depend in part on our ability to obtain and enforce
protection for our intellectual property in the United States and
other countries. It is possible that our intellectual property
protection could fail. It is possible that the claims for patents
or other intellectual property protections could be denied or
invalidated or that our protections will not be sufficiently broad
to protect our technology. It is also possible that our
intellectual property will not provide protection against
competitive products, or will not otherwise be commercially
viable.
Our
commercial success will depend in part on our ability to
commercialize our shrimp production without infringing on patents
or proprietary rights of others. We cannot guarantee that other
companies or individuals have not or will not independently develop
substantially equivalent proprietary rights or that other parties
have not or will not be issued patents that may prevent the sale of
our products or require licensing and the payment of significant
fees or royalties in order for us to be able to carry on our
business.
As
the owner of real estate, we are subject to risks under
environmental laws, the cost of compliance with which and any
violation of which could materially adversely affect
us.
Our
operating expenses could be higher than anticipated due to the cost
of complying with existing and future laws and regulations. Various
environmental laws may impose liability on the current or prior
owner or operator of real property for removal or remediation of
hazardous or toxic substances. Current or prior owners or operators
may also be liable for government fines and damages for injuries to
persons, natural resources and adjacent property. These
environmental laws often impose liability whether or not the owner
or operator knew of, or was responsible for, the presence or
disposal of the hazardous or toxic substances. The cost of
complying with environmental laws could materially adversely affect
our results of operations, and such costs could exceed the value of
our facility. In addition, the presence of hazardous or toxic
substances, or the failure to properly manage, dispose of or
remediate such substances, may adversely affect our ability to use,
sell or rent our property or to borrow using our property as
collateral which, in turn, could reduce our revenue and our
financing ability. We have not engaged independent environmental
consultants to assess the likelihood of any environmental
contamination or liabilities and have not obtained a Phase I
environmental assessment on our property. However, even if we did
obtain a Phase I environmental assessment report, such reports are
limited in scope and may not reveal all existing material
environmental contamination.
Risks Related to Financing Our Business
Our
independent registered public accounting firm has issued its audit
opinion on our consolidated financial statements appearing in our
annual report on Form 10-K, including an explanatory paragraph as
to substantial doubt with the respect to our ability to continue as
a going concern.
The accompanying
consolidated financial statements have been prepared in conformity
with accounting principles generally accepted in the United States
of America, assuming we 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, 2019, we had a net loss of approximately $7,211,000. At
March 31, 2019, we had an accumulated deficit of approximately
$41,223,000 and a working capital deficit of approximately
$3,773,000. These factors raise substantial doubt about our ability
to continue as a going concern, within one year from the issuance
date of this filing. Our ability to continue as a going concern is
dependent on our ability to raise the required additional capital
or debt financing to meet short and long-term operating
requirements. We 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 we raise
additional funds through the issuance of equity or convertible debt
securities, the percentage ownership of our 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, we may not be able to take advantage of prospective business
endeavors or opportunities, which could significantly and
materially restrict our operations. If we are unable to obtain the
necessary capital, we may have to cease operations.
Expansion
of our operations will require significant capital expenditures for
which we may be unable to obtain sufficient financing.
Our
need for additional capital may adversely affect our financial
condition. We have no sustained history of earnings and have
operated at a loss since we commenced business. We have relied, and
continue to rely, on external sources of financing to meet our
capital requirements, to continue developing our proprietary
technology, to build our production facilities, and to otherwise
implement our corporate development and investment
strategies.
We plan
to obtain the future funding that we will need through the debt and
equity markets but there can be no assurance that we will be able
to obtain additional funding when it is required. If we fail to
obtain the funding that we need when it is required, we may have to
forego or delay potentially valuable opportunities to build shrimp
production facilities or default on existing funding commitments to
third parties. Our limited operating history may make it difficult
to obtain future financing.
Our
ability to generate positive cash flows is uncertain.
To
develop and expand our business, we will need to make significant
up-front investments in our manufacturing capacity and incur
research and development, sales and marketing and general and
administrative expenses. In addition, our growth will require a
significant investment in working capital. Our business will
require significant amounts of working capital to meet our
production requirements and support our growth.
We
cannot provide any assurance that we will be able to raise the
capital necessary to meet these requirements. If adequate funds are
not available or are not available on satisfactory terms, we may be
required to significantly curtail our operations and may not be
able to fund our current production requirements - let alone fund
expansion, take advantage of unanticipated acquisition
opportunities, develop or enhance our products, or respond to
competitive pressures. Any failure to obtain such additional
financing could have a material adverse effect on our business,
results of operations and financial condition.
We have a history of operating losses, anticipate future losses and
may never be profitable.
We
have experienced significant operating losses in each period since
we began investing resources in our production of shrimp. These
losses have resulted principally from research and development,
sales and marketing, and general and administrative expenses
associated with the development of our business. During the year
ended March 31, 2019, we recorded a net loss applicable to common
shareholders of $7,210,581, or $0.04 per share, as compared with
$5,285,089, or $0.05 per share, of the corresponding period in
2018. We expect to continue to incur operating losses until we
reach sufficient commercial scale of our product to cover our
operating costs. We cannot be certain when, if ever, we will become
profitable. Even if we were to become profitable, we might not be
able to sustain such profitability on a quarterly or annual
basis.
Because
we may never have net income from our operations, our business may
fail.
We have
no history of revenues and profitability from operations. There can
be no assurance that we will ever operate profitably. Our success
is significantly dependent on uncertain events, including
successful development of our technology, establishing satisfactory
manufacturing arrangements and processes, and distributing and
selling our products.
Before
receiving revenues from sales to customers of our products, we
anticipate that we will incur increased operating expenses without
realizing any revenues. We therefore expect to incur significant
losses. If we are unable to generate significant revenues from
sales of our products, we will not be able to earn profits or
continue operations. We can provide no assurance that we will
generate any revenues or ever achieve profitability. If we are
unsuccessful in addressing these risks, our business will fail and
investors may lose all of their investment in our
Company.
We
need to raise additional funds and such funds may not be available
on acceptable terms or at all.
We may
consider issuing additional debt or equity securities in the future
to fund our business plan, for potential acquisitions or
investments, or for general corporate purposes. If we issue equity
or convertible debt securities to raise additional funds, our
existing stockholders may experience dilution, and the new equity
or debt securities may have rights, preferences and privileges
senior to those of our existing stockholders. If we incur
additional debt, it may increase our leverage relative to our
earnings or to our equity capitalization, requiring us to pay
additional interest expenses. We may not be able to obtain
financing on favorable terms, or at all, in which case, we may not
be able to develop or enhance our products, execute our business
plan, take advantage of future opportunities or respond to
competitive pressures.
Our
margins fluctuate which leads to further uncertainty in our
profitability model.
While
we will have the potential ability to negotiate prices that benefit
our clients and affect our profitability as it garners market-share
and increases our book of business, margins in the aquaculture
business are fluid, and our margins vary based upon production
volume and the customer. This may lead to continued uncertainty in
margins from quarter to quarter.
Risks Related to Doing Business in Foreign Countries
Our
operations in foreign countries are subject to political, economic,
legal and regulatory risks.
The
following aspects of political, economic, legal and regulatory
systems in foreign countries create uncertainty with respect to
many of the legal and business decisions that we make:
●
cancellation or
renegotiation of contracts due to uncertain enforcement and
recognition procedures of judicial decisions;
●
disadvantages of
competing against companies from countries that are not subject to
U.S. laws and regulations, including the Foreign Corrupt Practices
Act;
●
changes in foreign
laws or regulations that adversely impact our
business;
●
uncertainty
regarding tariffs that may be imposed against certain international
countries from time-to-time;
●
changes in tax laws
that adversely impact our business, including, but not limited to,
increases in the tax rates and retroactive tax claims;
●
royalty and license
fee increases;
●
expropriation or
nationalization of property;
●
foreign exchange
controls;
●
import and export
regulations;
●
changes in
environmental controls;
●
risks of loss due
to civil strife, acts of war and insurrection; and
●
other risks arising
out of foreign governmental sovereignty over the areas in which our
operations are conducted.
Consequently, our
development and production activities in foreign countries may be
substantially affected by factors beyond our control, any of which
could materially adversely affect our business, prospects,
financial position and results of operations. Furthermore, in the
event of a dispute arising from our operations in other countries,
we may be subject to the exclusive jurisdiction of courts outside
the United States or may not be successful in subjecting non-U.S.
persons or entities to the jurisdiction of the courts in the United
States, which could adversely affect the outcome of a
dispute.
The
cost of complying with governmental regulations in foreign
countries may adversely affect our business
operations.
We may
be subject to various governmental regulations in foreign
countries. These regulations may change depending on prevailing
political or economic conditions. In order to comply with these
regulations, we believe that we may be required to obtain permits
for producing shrimp and file reports concerning our operations.
These regulations affect how we carry on our business, and in order
to comply with them, we may incur increased costs and delay certain
activities pending receipt of requisite permits and approvals. If
we fail to comply with applicable regulations and requirements, we
may become subject to enforcement actions, including orders issued
by regulatory or judicial authorities requiring us to cease or
curtail our operations, or take corrective measures involving
capital expenditures, installation of additional equipment or
remedial actions. We may be required to compensate third parties
for loss or damage suffered by reason of our activities, and may
face civil or criminal fines or penalties imposed for violations of
applicable laws or regulations. Amendments to current laws,
regulations and permits governing our operations and activities
could affect us in a materially adverse way and could force us to
increase expenditures or abandon or delay the development of shrimp
production facilities.
Our
international operations will involve the use of foreign
currencies, which will subject us to exchange rate fluctuations and
other currency risks.
Currently, we have
no revenues from international operations. In the future, however,
any revenues and related expenses of our international operations
will likely be generally denominated in local currencies, which
will subject us to exchange rate fluctuations between such local
currencies and the U.S. dollar. These exchange rate fluctuations
will subject us to currency translation risk with respect to the
reported results of our international operations, as well as to
other risks sometimes associated with international operations. In
the future, we could experience fluctuations in financial results
from our operations outside of the United States, and there can be
no assurance we will be able, contractually or otherwise, to reduce
the currency risks associated with our international
operations.
Our
insurance coverage may be inadequate to cover all significant risk
exposures.
We will
be exposed to liabilities that are unique to the products we
provide. While we intend to maintain insurance for certain risks,
the amount of our insurance coverage may not be adequate to cover
all claims or liabilities, and we may be forced to bear substantial
costs resulting from risks and uncertainties of our business. It is
also not possible to obtain insurance to protect against all
operational risks and liabilities. The failure to obtain adequate
insurance coverage on terms favorable to us, or at all, could have
a material adverse effect on our business, financial condition and
results of operations. We do not have any business interruption
insurance. Any business disruption or natural disaster could result
in substantial costs and diversion of resources.
Risks Related to Ownership of our Common Stock
We
have limited capitalization and may require financing, which may
not be available.
We have
limited capitalization, which increases our vulnerability to
general adverse economic and industry conditions, limits our
flexibility in planning for or reacting to changes in our business
and industry and may place us at a competitive disadvantage to
competitors with sufficient or excess capitalization. If we are
unable to obtain sufficient financing on satisfactory terms and
conditions, we will be forced to curtail or abandon our plans or
operations. Our ability to obtain financing will depend upon a
number of factors, many of which are beyond our
control.
The
trading of our common stock may have liquidity
fluctuations.
Although our common
stock is listed for quotation on the OTCQB, under the symbol
“SHMP”, and the trading volume of our stock has
recently increased significantly, such liquidity may not continue
to be sustainable. As a result, any trading price of our common
stock may not be an accurate indicator of the valuation of our
common stock. Any trading in our shares could have a significant
effect on our stock price. If the public market for our common
stock declines, then investors may not be able to resell the shares
of our common stock that they have purchased and may lose all of
their investment. No assurance can be given that an active market
will continue or that a stockholder will be able to liquidate their
shares of common stock without considerable delay, if at all.
Furthermore, our stock price may be impacted by factors that are
unrelated or disproportionate to our operating performance. These
market fluctuations, as well as general economic, political and
market conditions, such as recessions, interest rates or
international currency fluctuations may adversely affect the market
price and liquidity of our common stock.
Our
stock price may be volatile.
The
market price of our common stock is likely to be highly volatile
and could fluctuate widely in price in response to various factors,
many of which are beyond our control, including the
following:
●
our stock being
held by a small number of persons whose sales (or lack of sales)
could result in positive or negative pricing pressure on the market
price for our common stock;
●
actual or
anticipated variations in our quarterly operating
results;
●
changes in our
earnings estimates;
●
our ability to
obtain adequate working capital financing;
●
changes in market
valuations of similar companies;
●
publication (or
lack of publication) of research reports about us;
●
changes in
applicable laws or regulations, court rulings, enforcement and
legal actions;
●
loss of any
strategic relationships;
●
additions or
departures of key management personnel;
●
actions by our
stockholders (including transactions in our shares);
●
speculation in the
press or investment community;
●
increases in market
interest rates, which may increase our cost of
capital;
●
changes in our
industry;
●
competitive pricing
pressures;
●
our ability to
execute our business plan; and
●
economic and other
external factors.
In
addition, the securities markets have from time to time experienced
significant price and volume fluctuations that are unrelated to the
operating performance of particular companies. These market
fluctuations may also materially and adversely affect the market
price of our common stock.
Our existing stockholders may experience significant dilution from
the sale of our common stock pursuant to the GHS financing
agreement.
The
sale of our common stock to GHS Investments LLC in accordance with
the Financing Agreement we entered into with GHS on August 21, 2018
may have a dilutive impact on our shareholders. As a result, the
market price of our common stock could decline. In addition, the
lower our stock price is at the time we exercise our put options,
the more shares of our common stock we will have to issue to GHS in
order to exercise a put under the Financing Agreement. If our stock
price decreases, then our existing shareholders would experience
greater dilution for any given dollar amount raised through the
offering.
The
perceived risk of dilution may cause our stockholders to sell their
shares, which may cause a decline in the price of our common stock.
Moreover, the perceived risk of dilution and the resulting downward
pressure on our stock price could encourage investors to engage in
short sales of our common stock. By increasing the number of shares
offered for sale, material amounts of short selling could further
contribute to progressive price declines in our common
stock.
Our
stock is categorized as a penny stock. Trading of our stock may be
restricted by the SEC’s penny stock regulations which may
limit a stockholder’s ability to buy and sell our
stock.
Our
stock is categorized as a “penny stock”, as that term
is defined in SEC Rule 3a51-1, which generally provides that
“penny stock”, is any equity security that has a market
price (as defined) less than US$5.00 per share, subject to certain
exceptions. Our securities are covered by the penny stock rules,
including Rule 15g-9, which impose additional sales practice
requirements on broker-dealers who sell to persons other than
established customers and accredited investors. The penny stock
rules require a broker-dealer, prior to a transaction in a penny
stock not otherwise exempt from the rules, to deliver a
standardized risk disclosure document in a form prepared by the SEC
which provides information about penny stocks and the nature and
level of risks in the penny stock market. The broker-dealer also
must provide the customer with current bid and offer quotations for
the penny stock, the compensation of the broker-dealer and its
salesperson in the transaction and monthly account statements
showing the market value of each penny stock held in the
customer’s account. The bid and offer quotations, and the
broker-dealer and salesperson compensation information, must be
given to the customer orally or in writing prior to effecting the
transaction and must be given to the customer in writing before or
with the customer’s confirmation. In addition, the penny
stock rules require that prior to a transaction in a penny stock
not otherwise exempt from these rules, the broker-dealer must make
a special written determination that the penny stock is a suitable
investment for the purchaser and receive the purchaser’s
written agreement to the transaction. These disclosure requirements
may have the effect of reducing the level of trading activity in
the secondary market for the stock that is subject to these penny
stock rules. Consequently, these penny stock rules may affect the
ability of broker-dealers to trade our securities and reduces the
number of potential investors. We believe that the penny stock
rules discourage investor interest in and limit the marketability
of our common stock.
According to SEC
Release No. 34-29093, the market for “penny stocks” has
suffered in recent years from patterns of fraud and abuse. Such
patterns include: (1) control of the market for the security by one
or a few broker-dealers that are often related to the promoter or
issuer; (2) manipulation of prices through prearranged matching of
purchases and sales and false and misleading press releases; (3)
boiler room practices involving high-pressure sales tactics and
unrealistic price projections by inexperienced sales persons; (4)
excessive and undisclosed bid-ask differential and markups by
selling broker-dealers; and (5) the wholesale dumping of the same
securities by promoters and broker-dealers after prices have been
manipulated to a desired level, along with the resulting inevitable
collapse of those prices and with consequent investor losses. The
occurrence of these patterns or practices could increase the future
volatility of our share price.
FINRA
sales practice requirements may also limit a stockholder’s
ability to buy and sell our stock.
In
addition to the “penny stock” rules described above,
FINRA has adopted rules that require that in recommending an
investment to a customer, a broker-dealer must have reasonable
grounds for believing that the investment is suitable for that
customer. Prior to recommending speculative low-priced securities
to their non-institutional customers, broker-dealers must make
reasonable efforts to obtain information about the customer’s
financial status, tax status, investment objectives and other
information. Under interpretations of these rules, FINRA believes
that there is a high probability that speculative low-priced
securities will not be suitable for at least some customers. The
FINRA requirements make it more difficult for broker-dealers to
recommend that their customers buy our common stock, which may
limit your ability to buy and sell our stock and have an adverse
effect on the market for our shares.
To
date, we have not paid any cash dividends and no cash dividends
will be paid in the foreseeable future.
We do
not anticipate paying cash dividends on our common stock in the
foreseeable future and we may not have sufficient funds legally
available to pay dividends. Even if the funds are legally available
for distribution, we may nevertheless decide not to pay any
dividends. We presently intend to retain all earnings for our
operations.
The
existence of indemnification rights to our directors, officers and
employees may result in substantial expenditures by our Company and
may discourage lawsuits against our directors, officers and
employees.
Our
bylaws contain indemnification provisions for our directors,
officers and employees, and we have entered into indemnification
agreements with our officer and directors. The foregoing
indemnification obligations could result in us incurring
substantial expenditures to cover the cost of settlement or damage
awards against directors and officers, which we may be unable to
recoup. These provisions and resultant costs may also discourage us
from bringing a lawsuit against directors and officers for breaches
of their fiduciary duties, and may similarly discourage the filing
of derivative litigation by our stockholders against our directors
and officers even though such actions, if successful, might
otherwise benefit us and our stockholders.
If
we fail to develop or maintain an effective system of internal
controls, we may not be able to accurately report our financial
results or prevent financial fraud. As a result, current and
potential stockholders could lose confidence in our financial
reporting.
We are
subject to the risk that sometime in the future, our independent
registered public accounting firm could communicate to the board of
directors that we have deficiencies in our internal control
structure that they consider to be “significant
deficiencies.” A “significant deficiency” is
defined as a deficiency, or a combination of deficiencies, in
internal controls over financial reporting such that there is more
than a remote likelihood that a material misstatement of the
entity’s financial statements will not be prevented or
detected by the entity’s internal controls.
Effective internal
controls are necessary for us to provide reliable financial reports
and effectively prevent fraud. If we cannot provide reliable
financial reports or prevent fraud, we could be subject to
regulatory action or other litigation and our operating results
could be harmed. We are required to document and test our internal
control procedures to satisfy the requirements of Section 404 of
the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley
Act” or “SOX”), which requires our management to
annually assess the effectiveness of our internal control over
financial reporting.
We
currently are not an “accelerated filer” as defined in
Rule 12b-2 under the Securities Exchange Act of 1934, as amended.
Section 404 of the Sarbanes-Oxley Act of 2002 (“Section
404”) requires us to include an internal control report with
our Annual Report on Form 10-K. That report must include
management’s assessment of the effectiveness of our internal
control over financial reporting as of the end of the fiscal year.
This report must also include disclosure of any material weaknesses
in internal control over financial reporting that we have
identified. As of March 31, 2019, the management of the Company
assessed the effectiveness of the Company’s internal control
over financial reporting based on the criteria for effective
internal control over financial reporting established in Internal
Control - Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission
(“COSO”) and SEC guidance on conducting such
assessments. Management concluded, during the fiscal year ended
March 31, 2019, that the Company’s internal controls and
procedures were not effective to detect the inappropriate
application of U.S. GAAP rules. Management realized there were
deficiencies in the design or operation of the Company’s
internal control that adversely affected the Company’s
internal controls which management considers to be material
weaknesses. A material weakness in the effectiveness of our
internal controls over financial reporting could result in an
increased chance of fraud and the loss of customers, reduce our
ability to obtain financing and require additional expenditures to
comply with these requirements, each of which could have a material
adverse effect on our business, results of operations and financial
condition. For additional information, see Item 9A – Controls
and Procedures.
Our
intended business, operations and accounting are expected to be
substantially more complex than they have been in the past. It may
be time consuming, difficult and costly for us to develop and
implement the internal controls and reporting procedures required
by the Sarbanes-Oxley Act. We may need to hire additional financial
reporting, internal controls and other finance personnel in order
to develop and implement appropriate internal controls and
reporting procedures. If we are unable to comply with the internal
controls requirements of the Sarbanes-Oxley Act, then we may not be
able to obtain the independent accountant certifications required
by such act, which may preclude us from keeping our filings with
the SEC current.
If we
are unable to maintain the adequacy of our internal controls, as
those standards are modified, supplemented, or amended from time to
time, we may not be able to ensure that we can conclude on an
ongoing basis that we have effective internal control over
financial reporting in accordance with Section 404. Failure to
achieve and maintain an effective internal control environment
could cause us to face regulatory action and cause investors to
lose confidence in our reported financial information, either of
which could adversely affect the value of our common
stock.
As
a public company, we will incur significant increased operating
costs and our management will be required to devote substantial
time to new compliance initiatives.
Although our
management has significant experience in the food industry, it has
only limited experience operating the Company as a public company.
To operate effectively, we will be required to continue to
implement changes in certain aspects of our business and develop,
manage and train management level and other employees to comply
with on-going public company requirements. Failure to take such
actions, or delay in the implementation thereof, could have a
material adverse effect on our business, financial condition and
results of operations.
The
Sarbanes-Oxley Act, as well as rules subsequently implemented by
the SEC, imposes various requirements on public companies,
including requiring establishment and maintenance of effective
disclosure and financial controls and changes in corporate
governance practices. Our management and other personnel will need
to devote a substantial amount of time to these new compliance
initiatives. Moreover, these rules and regulations will increase
our legal and financial compliance costs and will make some
activities more time-consuming and costly.
ITEM 1B.
U
NRESOLVED STAFF
COMMENTS
Not
Applicable.
Our
principal offices are located at 5080 Spectrum Drive, Suite 1000,
Addison, TX, where we pay $550 per month under an operating lease
that expires on July 31, 2019. The Company expects to renew this
lease for the foreseeable future
Effective August 1, 2019, the Company has signed a
1 year lease for offices located at 15150 Preston Rd., Suite 300,
Dallas, TX 75248, where we will pay $650 per
month
.
We also
own a pilot-production facility at 833 County Road 583, Medina, TX,
which consists of a 32,760 square foot production facility on 37
acres.
We own
no other properties.
Our
registered agent is Business Filings Incorporated, located at 701
S. Carson Street, Suite 200, Carson City, Nevada
89701.
ITEM 3. LEGAL
P
ROCEEDINGS
Other
than described below, we know of no material proceedings in which
any of our directors, officers or affiliates, or any registered or
beneficial stockholder is a party adverse to our company or our
subsidiaries or has a material interest adverse to our company or
our subsidiaries. To our knowledge, there is no action, suit,
proceeding, inquiry or investigation before or by any court, public
board, government agency, self-regulatory organization or body
pending or, to the knowledge of the executive officers of our
Company, threatened against or affecting our Company or our common
stock, in which an adverse decision could have a material adverse
effect.
On
April 30, 2019, a complaint was filed against the Company in the
U.S. District Court in Dallas, Texas alleging that the Company
breached a provision in a common stock purchase warrant (the
“Vista Warrant”) issued by the Company to Vista Capital
Investments, LLC (“Vista”). Vista alleges that the
Company failed to issue certain shares of the Company’s
common stock as was required under the terms of the Vista Warrant.
Vista is currently seeking money damages in the approximate amount
of $7,000,000, which the Company believes is unwarranted and
excessive, as well as costs and reimbursement of expenses. As of
the date hereof, no hearing has been scheduled, but the Company is
vigorously defending itself against these claims, preparing a
counter-claim against Vista and taking such other appropriate
action, in addition to seeking for other costs and relief as may be
appropriate.
ITEM 4. MINE SAFETY
D
ISCLOSURES
Not
applicable.
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, 2019, the Company had a net loss of
approximately $7,211,000. At March 31, 2019, the Company had an
accumulated deficit of approximately $41,223,000 and a working
capital deficit of approximately $3,773,000. 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 2019 fiscal year, the Company received net
cash proceeds of approximately $1,125,000 from the issuance of
convertible debentures (including amount received on notes
receivable which were issued as collateralization for back end
notes), approximately $465,000 from issuance of the Company’s
common stock through an equity financing agreement and $15,000 from
the sale of the Company’s common stock. Subsequent to March
31, 2019, the Company received $100,000 in net proceeds from one
convertible debentures, and $1,500,000 from the issuance of
approximately 11,483,000 common shares under the equity financing
agreement. (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 shares of common stock
outstanding. Diluted EPS is based on the weighted average number of
shares of common stock 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 shares of common stock outstanding (denominator)
during the period.
For
the year ended March 31, 2019, the Company had approximately
$1,097,000 in convertible debentures whose approximately 66,376,000
underlying shares are convertible at the holders’ option at
conversion prices ranging from $0.01 to $0.30 for fixed conversion
rates, and 34% - 60% of the defined trading price for variable
conversion rates and approximately 444,000 warrants with an
exercise price of 45% 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, 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 45% 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.
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, 2019 and 2018.
The
Derivative liabilities are Level 3 fair value
measurements.
The
following is a summary of activity of Level 3 liabilities during
the years ended March 31, 2019 and 2018:
Derivatives
|
|
|
Derivative
liability balance at beginning of period
|
$
3,455,000
|
$
218,000
|
Additions to
derivative liability for new debt
|
2,090,000
|
2,213,000
|
Reclass to equity
upon conversion or redemption
|
(4,068,500
)
|
(576,000
)
|
Change in fair
value
|
(1,319,500
)
|
1,600,000
|
Balance at end of
period
|
$
157,000
|
$
3,455,000
|
At
March 31, 2019, 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 $0.21; a risk-free interest rate ranging from 2.41% to
2.63%, and expected volatility of the Company’s common stock
ranging from 335.68% to 478.31%, and the various estimated reset
exercise prices weighted by probability.
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.
Warrant liability
|
|
|
Warrant liability
balance at beginning of period
|
$
277,000
|
$
28,000
|
Additions to
warrant liability for new warrants
|
-
|
493,000
|
Reclass to equity
upon exercise
|
(231,000
)
|
-
|
Change in fair
value
|
47,000
|
(244,000
)
|
Balance at end of
period
|
$
93,000
|
$
277,000
|
At March 31, 2019,
the fair value of the warrant liability was estimated using the
following weighted-average inputs: the price of the Company’s
common stock of $0.21; a risk-free interest rate of 2.21%, and
expected volatility of the Company’s common stock ranging of
285.32%.
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 2.22% to
2.56%, and expected volatility of the Company’s common stock
of 358.6%.
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, 2019 and 2018.
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 $30,000 and $71,000 for the years ended March 31,
2019 and 2018, 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, and the 2019 fiscal year for the
Company. 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 Long-lived Assets and Long-lived Assets
The
Company will periodically evaluate the carrying value of long-lived
assets to be held and used when events and circumstances warrant
such a review and at least annually. The carrying value of a
long-lived 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 long-lived asset. Fair value is determined
primarily using the anticipated cash flows discounted at a rate
commensurate with the risk involved. Losses on long-lived 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
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). The Company
adopted ASU 2016-02 on January 1, 2019, and the adoption did not
have a material impact on the Company’s financial position or
results of operations.
In May
2014, the FASB issued Accounting Standards Update ("ASU") No.
2014-09, Revenue from Contracts with Customers: Topic 606, or ASU
2014-09. ASU 2014-09 establishes the principles for recognizing
revenue and develops a common revenue standard for U.S. GAAP. The
standard outlines a single comprehensive model for entities to use
in accounting for revenue arising from contracts with customers and
supersedes most current revenue recognition guidance, including
industry-specific guidance. In applying the new revenue recognition
model to contracts with customers, an entity: (1) identifies the
contract(s) with a customer; (2) identifies the performance
obligations in the contract(s); (3) determines the transaction
price; (4) allocates the transaction price to the performance
obligations in the contract(s); and (5) recognizes revenue when (or
as) the entity satisfies a performance obligation. The accounting
standards update applies to all contracts with customers except
those that are within the scope of other topics in the FASB
Accounting Standards Codification. The accounting standards update
also requires significantly expanded quantitative and qualitative
disclosures regarding the nature, amount, timing and uncertainty of
revenue and cash flows arising from contracts with customers. The
Company adopted Topic 606 as of April 1, 2018, using the modified
retrospective transition method. Under the modified retrospective
method, the Company would recognize the cumulative effect of
initially applying the standard as an adjustment to opening
retained earnings at the date of initial application; however, the
Company did not have any material adjustment as of the date of the
adoption and adoption had no impact on the Company's consolidated
balance sheet, results of operations, equity or cash flows as of
the adoption date. The comparative periods have not been
restated.
During
the year ended March 31, 2019, 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, 2019, 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 had a stated interest rate of 5.25%,
maturity date of December 15, 2017 and had an initial interest only
payment on February 3, 2016. On July 18, 2018, the short-term note
was replaced by a promissory note for the outstanding balance of
$25,298, which bears interest at 8% with a maturity date of July
18, 2021. The short-term note is guaranteed by an officer and
director. The balance of the line of credit at both March 31, 2019
and 2018 was $20,193 and $25,298, respectively.
The
Company also has a working capital line of credit with Extraco
Bank. On April 30, 2019, the Company renewed the line of credit for
$372,675. 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, 2020 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, 2019 and March 31, 2018,
respectively, included in non-current liabilities. On April 12,
2019, prior to the renewal, the Company paid $100,000 on the
loan.
The
Company also has additional lines of credit with Extraco Bank for
$100,000 and $200,000, which were renewed on January 19, 2019 and
April 30, 2019, respectively, with maturity dates of January 19,
2020 and April 30, 2020, respectively. The $200,000 line of credit
is included in non-current liabilities as of March 31, 2019 and
March 31, 2018, with an outstanding balance of $178,778. The lines
of credit bear an interest rate of 6.5% and 5%, respectively, 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 $276,958 at both March 31, 2019 and March
31, 2018.
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 31.4% as of March 31,
2019. The line of credit is unsecured. The balance of the line of
credit was $9,580 at both March 31, 2019 and March 31,
2018.
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 15.50% as of March 31, 2019.
The line of credit is secured by assets of the Company’s
subsidiaries. The balance of the line of credit is $10,237 at March
31, 2019 and March 31, 2018.
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. The balance of the CNB Note is $228,759 at March 31, 2019
and $236,413 at March 31, 2018, $7,497 of which was in current
liabilities.
NOTE 5 – CONVERTIBLE DEBENTURES
January 2017 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
debenture is 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 shares of common
stock 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 2017 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 $150,000 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 shares of common stock of the
Company 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 shares of common stock of the Company to the
debenture holder. The fair value of the fee shares was calculated
as $26,625, based on the market value of the shares of common stock
of the Company 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 2017 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
“July Debentures”). 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 shares of common stock of the Company, 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 shares of common stock 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 shares of common stock 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.
During
April 2018, in three separate conversions, the remainder of the
first closing was fully converted into 1,225,627 shares of common
stock of the Company. As a result of the conversions the derivative
liability was remeasured immediately prior to the conversions with
an overall decrease of $25,000 recognized, with the fair value of
the derivative liability related to the converted portion, of
$66,000 being reclassified to equity. The key valuation assumptions
used consist, in part, of the price of the Company’s common
stock on the date of conversion, of $0.07 to $0.09; a risk-free
interest rate of 1.73% to 1.87% and expected volatility of the
Company’s common stock, of 248.71%, and the various estimated
reset exercise prices weighted by probability.
During
May and June 2018, in two separate conversions, the remainder of
the second closing was fully converted into 2,810,725 shares of
common stock of the Company. As a result of the conversions the
derivative liability was remeasured immediately prior to the
conversions with an overall decrease of $25,000 recognized, with
the fair value of the derivative liability related to the converted
portion of $67,000 being reclassified to equity. The key valuation
assumptions used consist, in part, of the price of the
Company’s common stock on the date of conversion, of $0.03 to
$0.04; a risk-free interest rate of 1.91% to 1.93% and expected
volatility of the Company’s common stock, of 248.71%, and the
various estimated reset exercise prices weighted by
probability.
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. Due to the conversion features on specified notes
containing variable conversion prices with no stated floor the
warrants were required to be 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. The Company issued 6,719,925 shares of their common
stock on July 17, 2018, upon cashless exercise of the warrants
granted in connection with the first closing of the July Debenture,
and on August 28, 2018, 4,494,347 shares were issued upon cashless
exercise of the warrants granted in connection with the second
closing. As a result of the exercise, the fair value of the
warrants at the date of exercise were reclassed into equity. The
Company estimated the fair value of the warrants using the Black
Scholes pricing model. The key valuation assumptions used consist,
in part, of the price of the Company’s common stock of $0.02
at both exercise dates; a risk-free interest rate of 2.73 and 2.77%
and expected volatility of the Company’s common stock, of
351.29 and 342.70%, resulting in an aggregate fair value of
$150,000.
August 2017 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. The new holder issued a waiver as to
the maturity date of the note and a technical default
provision.
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.
During
April through June 2018, in a number of separate conversions, the
August debenture was fully converted into 8,332,582 shares of
common stock of the Company. As a result of the conversions the
derivative liability was remeasured immediately prior to the
conversions with an overall decrease of $112,000 recognized, with
the fair value of the derivative liability related to the converted
portion, of $316,000 being reclassified to equity. The key
valuation assumptions used consist, in part, of the price of the
Company’s common stock on the date of conversion, of $0.09 to
$0.02; a risk-free interest rate of 1.72% to 1.94% and expected
volatility of the Company’s common stock of 248.71% to
375.93%, and the various estimated reset exercise prices weighted
by probability.
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 shares of common stock of the Company 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 January 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
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 shares of common stock of the Company 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.
During
May 2018, the second closing was fully converted into 5,072,216
shares of common stock of the Company. As a result of the
conversion the derivative liability was remeasured immediately
prior to the conversions with an overall decrease of $42,000
recognized, with the fair value of the derivative liability related
to the converted portion, of $196,000 being reclassified to equity.
The key valuation assumptions used consist, in part, of the price
of the Company’s common stock on the date of conversion, of
$0.03; a risk-free interest rate of 1.87% and expected volatility
of the Company’s common stock, of 248.71%, and the various
estimated reset exercise prices weighted by
probability.
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.
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. Due to the
conversion features on specified notes containing variable
conversion prices with no stated floor, , the warrants were
required to be 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.
During
April and June 2018, in three separate conversions, $85,000 of the
note was converted into 9,200,600 shares of common stock of the
Company. As a result of the conversions in the first quarter of
2019, the derivative liability was remeasured immediately prior to
the conversions with an overall decrease of $124,000 recognized,
with the fair value of the derivative liability related to the
converted portion, of $263,000 being reclassified to equity. The
key valuation assumptions used consist, in part, of the price of
the Company’s common stock on the date of conversion, of
$0.03 to $0.10; a risk-free interest rate of 1.73% to 1.94% and
expected volatility of the Company’s common stock, of 248.71%
to 375.93%, and the various estimated reset exercise prices
weighted by probability.
During
July and September 2018, in two separate conversions, an additional
$20,654 of principal and $3,700 accrued interest of the note was
converted into 5,436,049 shares of common stock of the Company. As
a result of the conversions in the second quarter of 2019, the
derivative liability was remeasured immediately prior to the
conversions with an overall decrease of $82,000 recognized, with
the fair value of the derivative liability related to the converted
portion, of $61,000 being reclassified to equity. The key valuation
assumptions used consist, in part, of the price of the
Company’s common stock on the date of conversion, $0.01; a
risk-free interest rate of 2.00% and expected volatility of the
Company’s common stock, of 248.71%, and the various estimated
reset exercise prices weighted by probability..
During
the third fiscal quarter of 2019, in five separate conversions, the
remaining principal was fully converted, along with $1,475 accrued
interest of the note into 27,186,186 shares of common stock of the
Company. As a result of the conversions in the third quarter of
2019, the derivative liability was remeasured immediately prior to
the conversions with an overall increase of $15,000 recognized,
with the fair value of the derivative liability related to the
converted portion, of $131,000 being reclassified to equity. The
key valuation assumptions used consist, in part, of the price of
the Company’s common stock on the dates of conversion, of
$0.01 and $0.02; a risk-free interest rate of 2.36% to 2.41% and
expected volatility of the Company’s common stock, of 193.06%
to 448.43%, and the various estimated reset exercise prices
weighted by probability.
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.
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.
On
March 20, 2018, the holder converted $32,500 of the September 12,
2017 debentures into 1,031,746 shares of common stock 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.
During
April 2018, in two separate conversions, the remainder of the
debenture was fully converted into 2,611,164 shares of common stock
of the Company. As a result of the conversions the derivative
liability was remeasured immediately prior to the conversions with
an overall decrease of $43,000 recognized, with the fair value of
the derivative liability related to the converted portion, of
$206,000 being reclassified to equity. The key valuation
assumptions used consist, in part, of the price of the
Company’s common stock on the date of conversion, of $0.06 to
$0.08; a risk-free interest rate of 1.73% to 1.82% and expected
volatility of the Company’s common stock, of 375.93%, and the
various estimated reset exercise prices weighted by
probability
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.
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.
During
April and May 2018, in a number of separate conversions,
approximately $43,000 of the debenture plus accrued interest was
converted into 3,800,000 shares of common stock of the Company. As
a result of the conversions the derivative liability was remeasured
immediately prior to the conversions with an overall decrease of
$50,000 recognized, with the fair value of the derivative liability
related to the converted portion, of $85,000 being reclassified to
equity. The key valuation assumptions used consist, in part, of the
price of the Company’s common stock on the date of
conversion, of $0.03 to $0.05; a risk-free interest rate of 1.80%
to 1.91% and expected volatility of the Company’s common
stock of 248.71% to 375.93%, and the various estimated reset
exercise prices weighted by probability.
During
the second quarter of fiscal 2019, in a number of separate
conversions, the remainder of the debenture plus accrued interest
was fully converted into 4,517,493 shares of common stock of the
Company. As a result of the conversions the derivative liability
was remeasured immediately prior to the conversions with an overall
decrease in the fair value of $15,000 recognized, with the fair
value of the remaining derivative liability of $31,000 being
reclassified to equity. The key valuation assumptions used consist,
in part, of the price of the Company’s common stock on the
date of conversion, of $0.02; a risk-free interest rate of 2.02% to
2.14% and expected volatility of the Company’s common stock
of 193.06 % to 248.71%, and the various estimated reset exercise
prices weighted by probability.
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 was cancelled
on May 15, 2018, based on the trading volume of the Company stock,
per the terms of the debenture. The note is 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.
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.
During
May and June 2018, in three separate conversions, the first
debenture was fully converted into 4,834,790 shares of common stock
of the Company. As a result of the conversions the derivative
liability was remeasured immediately prior to the conversions with
an overall decrease of $47,000 recognized, with the fair value of
the derivative liability related to the converted portion, of
$106,000 being reclassified to equity. The key valuation
assumptions used consist, in part, of the price of the
Company’s common stock on the date of conversion, of $0.03 to
$0.04; a risk-free interest rate of 2.08% to 2.14% and expected
volatility of the Company’s common stock, of 321.92%, and the
various estimated reset exercise prices weighted by
probability.
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 was settled on July 11, 2018, for a
purchase price of $74,000, net of fees. The Buyer Note is included
in Notes Receivable in the accompanying financial statements as of
March 31, 2018.
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.
On
August 7, 2018, the holder converted $25,000 of the December 20,
2017 debentures and $1,178 of accrued interest into 4,363,013
shares of common stock of the Company. As a result of the
conversions the derivative liability was remeasured immediately
prior to the conversions with an overall decrease in the fair value
of $260,000 recognized, with the fair value of the derivative
liability related to the converted portion, of $36,000 being
reclassified to equity. The key valuation assumptions used consist,
in part, of the price of the Company’s common stock on the
date of conversion, of $0.02; a risk-free interest rate of 2.06%
and expected volatility of the Company’s common stock, of
248.71%, and the various estimated reset exercise prices weighted
by probability.
During
the third fiscal quarter of 2019, in four separate conversions, the
holder converted $86,000 of the December 20, 2017 debentures and
approximately $6,000 of accrued interest into 27,288,948 shares of
common stock of the Company. As a result of the conversions the
derivative liability was remeasured immediately prior to the
conversions with an overall increase in the fair value of $91,000
recognized, with the fair value of the derivative liability related
to the converted portion, of $145,000 being reclassified to equity.
The key valuation assumptions used consist, in part, of the price
of the Company’s common stock on the dates of conversion,
ranging from $0.01 to $0.02; a risk-free interest rate ranging from
2.31% to 2.41% and expected volatility of the Company’s
common stock, ranging from 193.06% to 448.43%, and the various
estimated reset exercise prices weighted by
probability.
On
December 31, 2018, the remaining outstanding principal for the
December 20, 2017 notes were settled by payment from another
lender.
January 29, 2018 Debenture
On
January 29, 2018, 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 conversion
feature meets the definition of a derivative and therefore requires
bifurcation and will be accounted for as a derivative
liability.
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.
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 note was
redeemed on July 27, 2018, for approximately $123,000, with the
approximately $40,000 redemption amount being recognized as
financing costs. Upon redemption, the fair value of the related
derivative liability was remeasured immediately prior to the
redemption with an overall decrease in the fair value of $90,000
recognized, and the derivative liability fair value of $119,000
reclassed to equity. The key valuation assumptions used consist, in
part, of the price of the Company’s common stock on the date
of redemption, of $0.01; a risk-free interest rate of 1.93% and
expected volatility of the Company’s common stock, of
248.71%, and the various estimated reset exercise prices weighted
by probability.
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. On August 24, 2018
the outstanding principal and $2,304 in accrued interest of the
second note was purchased from the noteholder by a third party, for
$71,000. The additional $25,696 represents the redemption amount
owing to the original noteholder and increases the principal amount
due to the new noteholder and was recognized as financing
cost.
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.
During
the second fiscal quarter of 2019, in two separate conversions, the
holder converted $29,464 of principal into 4,500,000 shares of
common stock of the Company. As a result of the conversions the
derivative liability related to the second debenture was remeasured
immediately prior to the conversions with an overall decrease in
the fair value of $63,000 recognized, with the fair value of the
derivative liability related to the converted portion, of $30,000
being reclassified to equity. The key valuation assumptions used
consist, in part, of the price of the Company’s common stock
on the date of conversion, of $0.01; a risk-free interest rate of
2.33% to 2.37% and expected volatility of the Company’s
common stock, of 223.20%, and the various estimated reset exercise
prices weighted by probability.
On
November 26, 2018, the holder converted $16,168 of principal into
4,732,902 shares of common stock of the Company. As a result of the
conversion the derivative liability related to the second debenture
was remeasured immediately prior to the conversion with an overall
increase in the fair value of $7,000 recognized, with the fair
value of the derivative liability related to the converted portion,
of $28,000 being reclassified to equity. The key valuation
assumptions used consist, in part, of the price of the
Company’s common stock on the date of conversion, of $0.01; a
risk-free interest rate of 2.41% and expected volatility of the
Company’s common stock, of 448.43%, and the various estimated
reset exercise prices weighted by probability.
On
February 6, 2019, the holder converted the remaining principal
balance of approximately $27,000 and accrued interest into
2,542,702 shares of common stock of the Company. As a result of the
conversion the derivative liability related to the second debenture
was remeasured immediately prior to the conversion with an overall
decrease in the fair value of $12,000 recognized, with the fair
value of the derivative liability related to the converted portion,
of $33,000 being reclassified to equity. The key valuation
assumptions used consist, in part, of the price of the
Company’s common stock on the date of conversion, of $0.28; a
risk-free interest rate of 2.31% and expected volatility of the
Company’s common stock, of 478.31%, and the various estimated
reset exercise prices weighted by probability.
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.
During
the first 180 days the convertible redeemable note is in effect,
the Company may redeem the note at amounts ranging from 125% to
150% of the principal and accrued interest balance, based on the
redemption date’s passage of time ranging from the issuance
to 180 days from the date of issuance of the debenture. On
September 20, 2018 the outstanding principal and $5,040 in accrued
interest of the note was purchased from the noteholder by a third
party, for $126,882. The additional $37,842 represents the
redemption amount owing to the original noteholder and increases
the principal amount due to the new noteholder and was recognized
as financing cost.
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 shares of
common stock of the Company 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 shares of common stock of the
Company issued) was immediately expensed as financing
costs.
During
the third fiscal quarter of 2019, in two separate conversions, the
holder converted $91,592 of principal into 16,870,962 shares of
common stock of the Company. As a result of the conversions the
derivative liability related to the debenture was remeasured
immediately prior to the conversions with an overall increase in
the fair value of $27,000 recognized, with the fair value of the
derivative liability related to the converted portion, of $163,000
being reclassified to equity. The key valuation assumptions used
consist, in part, of the price of the Company’s common stock
on the dates of conversion, of $0.01 and $0.02; a risk-free
interest rate of 2.40% to 2.45% and expected volatility of the
Company’s common stock, of 448.43%, and the various estimated
reset exercise prices weighted by probability.
During
the fourth quarter of 2019 on two separate occasions, the holder
converted $46,759 of principal and $7,142 of accrued interest into
5,670,707 shares of common stock of the Company. As a result of the
conversion the derivative liability related to the first debenture
was remeasured immediately prior to the conversion with an overall
increase in the fair value of $17,000 recognized, with the fair
value of the derivative liability related to the converted portion,
of $65,000 being reclassified to equity. The key valuation
assumptions used consist, in part, of the price of the
Company’s common stock on the date of conversion, of $0.45
and $0.03; a risk-free interest rate ranging from 2.41% to 2.45%
and expected volatility of the Company’s common stock, of
478.31%, and the various estimated reset exercise prices weighted
by probability.
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.
During
the first 180 days the convertible redeemable note is in effect,
the Company may redeem the note at amounts ranging from 125% to
150% of the principal and accrued interest balance, based on the
redemption date’s passage of time ranging from the issuance
to 180 days from the date of issuance of the debenture. On
September 20, 2018 the outstanding principal and $2,352 in accrued
interest of the note was purchased from the noteholder by a third
party, for $62,326. The additional $20,775 represents the
redemption amount owing to the original noteholder and increases
the principal amount due to the new noteholder and was recognized
as financing cost.
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 shares of
common stock of the Company 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 shares of common stock of the
Company issued) was immediately expensed as financing
costs.
On
December 6, 2018, the holder converted $20,160 of principal into
6,000,000 shares of common stock of the Company. As a result of the
conversion the derivative liability related to the debenture was
remeasured immediately prior to the conversion with an overall
increase in the fair value of $14,000 recognized, with the fair
value of the derivative liability related to the converted portion,
of $36,000 being reclassified to equity. The key valuation
assumptions used consist, in part, of the price of the
Company’s common stock on the date of conversion, of $0.02; a
risk-free interest rate of 2.41% and expected volatility of the
Company’s common stock, of 448.43%, and the various estimated
reset exercise prices weighted by probability.
During
the fourth quarter of 2019, on two separate occasions, the holder
converted the remaining principal balance of $43,488 and $1,127 of
accrued interest into 4,921,835 shares of common stock of the
Company. As a result of the conversion the derivative liability
related to the first debenture was remeasured immediately prior to
the conversion with an overall increase in the fair value of
$20,000 recognized, with the fair value of the derivative liability
related to the converted portion, of $95,000 being reclassified to
equity. The key valuation assumptions used consist, in part, of the
price of the Company’s common stock on the date of
conversion, of $0.02 and $0.40; a risk-free interest rate of 2.36%
and 2.41% and expected volatility of the Company’s common
stock, of 448.43% and $478.31%, and the various estimated reset
exercise prices weighted by probability.
April 10, 2018 Debenture
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 interest
rate increases to 24% upon an event of default, as set forth in the
agreement, including a cross default to all other outstanding
notes, and if the debenture is not paid at maturity the principal
due increases by 10%. If the Company loses its bid price the
principal outstanding on the debenture increases by 20%, and if the
Company’s common stock is delisted, the principal increases
by 50%. An event of default also occurs if the Company’s
common stock has a closing bid price of less than $0.03 per share
for at least five consecutive days, or the aggregate dollar trading
volume of the Company’s common stock is less than $20,000 in
any five consecutive days. The Company’s common stock closing
bid price fell below $0.03 on June 18, 2018 and continued for over
five consecutive days, and the Company is therefore in default on
the note. The Company has obtained a waiver from the holder on this
technical default. Due to the default the holder cancelled the
Back-End and Buyer notes as of September 30, 2018. Upon
cancellation the remaining unamortized debt discount of $27,500 was
immediately expensed. Also, as a result of the cancellation, the
fair value of the derivative liability related to the Back-End note
was remeasured with a decrease in the fair value of $128,000
recognized, and the fair value of the derivative liability related
to the note of $91,500 being reclassified to equity. The key
valuation assumptions used consist, in part, of the price of the
Company’s common stock on the date of conversion, of $0.01; a
risk-free interest rate of 2.36% and expected volatility of the
Company’s common stock, of 223.20%, and the various estimated
reset exercise prices weighted by probability.
The notes are
convertible into shares of the Company’s common stock at a
price per share equal to 57% of the lowest closing bid price for
the last 20 days. The discount is increased an additional 10%, to
47%, upon a “DTC chill”. The Company has not maintained
the required share reservation under the terms of the note
agreement. 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.
The
Company estimated the aggregate fair value of the conversion
feature derivatives embedded in the two convertible debentures at
issuance at $348,000, 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 2.09% 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 $243,500 was
immediately expensed as financing costs.
During
the third fiscal quarter of 2019, in four separate conversions, the
note was fully converted into 18,832,713 shares of common stock of
the Company. As a result of the conversions the derivative
liability related to the debenture was remeasured immediately prior
to the conversions with an overall decrease in the fair value of
$5,500 recognized, with the fair value of the derivative liability
related to the converted portion, of $86,000 being reclassified to
equity. The key valuation assumptions used consist, in part, of the
price of the Company’s common stock on the dates of
conversion, of $0.02; a risk-free interest rate of 2.28% to 2.39%
and expected volatility of the Company’s common stock, of
193.06% to 448.43%, and the various estimated reset exercise prices
weighted by probability.
As of
September 30, 2018, the Back End note and the related
collateralized note receivable were cancelled, as per the terms of
the note, and the Company’s stock price fell below $0.03.
Upon cancellation, the related derivative was reclassed to equity,
and the remaining unamortized debt discount was immediately
expensed.
April 27, 2018 Debenture
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%. The
interest rate increases to 24% upon an event of default, as set
forth in the agreement, including a cross default to all other
outstanding notes. Additionally, in the majority of events of
default, except for the non-payment of the note upon maturity, the
note becomes immediately due and payable at an amount at 150% of
the principal plus accrued interest due.
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 rate is adjusted based on various situations regarding
the ability to deliver the shares of common stock, such as in the
event of a "DTC chill" or the Company ceases to be a reporting
company. 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.
The
Company estimated the aggregate fair value of the conversion
feature derivatives embedded in the debenture at issuance at
$159,000, 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 2.24% 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 $109,000 was immediately expensed as financing
costs.
During
the third fiscal quarter of 2019, in two separate conversions, the
holder converted $35,000 of principal into 13,246,753 shares of
common stock of the Company. As a result of the conversions the
derivative liability related to the debenture was remeasured
immediately prior to the conversions with an overall increase in
the fair value of $13,000 recognized, with the fair value of the
derivative liability related to the converted portion, of $79,000
being reclassified to equity. The key valuation assumptions used
consist, in part, of the price of the Company’s common stock
on the dates of conversion, of $0.01 to $0.02; a risk-free interest
rate of 2.34% to 2.43% and expected volatility of the
Company’s common stock, of 193.06% to 448.43%, and the
various estimated reset exercise prices weighted by
probability.
June 5, 2018 Debenture
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. The
conversion price is adjusted upon a future dilutive issuance, to
the lower of the conversion price or a 25% discount to the
aggregate per share common share price. 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 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 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 holder’s prior written
consent, at 150% of the principal and accrued interest balance.
During the fourth quarter of 2019, effective as of December 6,
2018, the outstanding principal and accrued interest of the note
was purchased from the noteholder by a third party, and replaced
with a new convertible debenture with a new principal balance of
$210,460 (disclosed below). The additional $85,460 was recognized
as financing cost.
The
Company estimated the aggregate fair value of the conversion
feature derivatives embedded in the debenture at issuance at
$375,000, 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 $0.04 at issuance date; a risk-free interest rate of 2.32% and
expected volatility of the Company’s common stock, of
292.85%, 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 $256.200 was immediately expensed as financing
costs.
July 27, 2018 Debenture
On July 27, 2018,
the Company entered into two 10% convertible notes in the aggregate
principal amount of $186,000, convertible into shares of common
stock of the Company, with maturity dates of July 27, 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 $93,000, with $3,000
OID, for a purchase price of $90,000. 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 $93,000 secured promissory note issued to the Company
by the buyer (“Buyer Note”). The Buyer Note is due on
December 12, 2018. The Back-End note was funded on January 22,
2019, and as it was past the maturity date the Company and the
noteholder agreed to the Company returning $43,000 of the payment
and the remaining $50,000 principal balance being converted. The
interest rate increases to 24% upon an event of default, as set
forth in the agreement, including a cross default to all other
outstanding notes, and if the debenture is not paid at maturity the
principal due increases by 10%. If the Company loses its bid price
the principal outstanding on the debenture increases by 20%, and if
the Company’s common stock is delisted, the principal
increases by 50%. Per the agreement, the Company is required at all
times to have authorized and reserved 16,900,000 shares of common
stock of the Company. 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
notes are convertible into shares of the Company’s common
stock at a price per share equal to 60% of the lowest closing bid
price for the last 20 days. The discount is increased an additional
10%, to 50%, upon a “DTC chill". 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 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 the debenture. During the fourth
quarter of 2019, effective as of December 31, 2018 the outstanding
principal and accrued interest of the note was purchased from the
noteholder by a third party, and replaced with a new convertible
debenture for $135,910 (disclosed below). The additional $42,910
represents the redemption amount owing to the original noteholder
and increases the principal amount due to the new noteholder and
was recognized as financing cost.
The
Company estimated the aggregate fair value of the conversion
feature derivatives embedded in the debenture at issuance at
$374,000, 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 $0.01 at issuance date; a risk-free interest rate of 2.43% and
expected volatility of the Company’s common stock, of
292.85%, 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 $194,000 was immediately expensed as financing
costs.
On
January 28, 2019, the holder converted the $50,000 of principal of
the back end note into 6,561,679 shares of common stock of the
Company. As a result of the conversion and the repayment of $43,000
of the principal balance to the noteholder, the derivative
liability related to the back-end debenture was remeasured
immediately prior to the conversion with an overall increase in the
fair value of $20,000 recognized, with the fair value of the
derivative liability related to the converted portion, of $180,000
being reclassified to equity. The key valuation assumptions used
consist, in part, of the price of the Company’s common stock
on the date of conversion, of $0.08; a risk-free interest rate of
2.39% and expected volatility of the Company’s common stock,
of 374.79%, and the various estimated reset exercise prices
weighted by probability.
August 24, 2018 Debenture
On
August 24, 2018, the Company entered into a 10% convertible note in
the principal amount of $55,000, convertible into shares of common
stock of the Company, which matures August 24, 2019. The interest
rate increases to 24% per annum upon an event of default, as set
forth in the agreement, including a cross default to all other
outstanding notes, and if the debenture is not paid at maturity the
principal due increases by 10%. If the Company loses its bid price
the principal outstanding on the debenture increases by 20%, and if
the Company’s common stock is delisted, the principal
increases by 50%.
The
notes are convertible into shares of the Company’s common
stock at a price per share equal to 57% of the lowest closing bid
price for the last 20 days. The discount is increased an additional
10%, to 47%, upon a “DTC chill". 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 January 10,
2019 the outstanding principal of $55,000 and accrued interest of
$1,974 was purchased from the noteholder by a third party, for
$82,612. The additional $25,638 represents the redemption amount
owing to the original noteholder and increases the principal amount
due to the new noteholder and was recognized as financing
cost.
The
Company estimated the aggregate fair value of the conversion
feature derivatives embedded in the debenture at issuance at
$375,000, 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 $0.02 at issuance date; a risk-free interest rate of 2.44% and
expected volatility of the Company’s common stock, of
295.23%, 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 $95,750 was immediately expensed as financing
costs.
During
the fourth fiscal quarter of 2019, in three separate conversions,
the holder converted $57,164 of principal into 9,291,354 shares of
common stock of the Company. As a result of the conversions the
derivative liability related to the debenture was remeasured
immediately prior to the conversions with an overall increase in
the fair value of $65,000 recognized, with the fair value of the
derivative liability related to the converted portion, of $171,000
being reclassified to equity. The key valuation assumptions used
consist, in part, of the price of the Company’s common stock
on the dates of conversion, of $0.28 to $0.40; a risk-free interest
rate of 2.36% to 2.41% and expected volatility of the
Company’s common stock, of 343.98% to 374.79%, and the
various estimated reset exercise prices weighted by
probability.
September 14, 2018 Debenture
On
September 14, 2018, the Company entered into a 12% convertible
promissory note for $112,500, with an OID of $10,250, which matures
on March 14, 2019. There is a right of prepayment in the first 180
days, but there is no right to repay after 180 days. Per the
agreement, the Company is required at all times to have authorized
and reserved three 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 interest rate increases to a
default rate of 24% for events as set forth in the agreement,
including if the market capitalization is below $5 million, or
there are any dilutive issuances. There is also a cross default
provision to all other notes. In the event of default, the
outstanding principal balance increases to 150%, and if the Company
fails to maintain the required authorized share reserve, the
outstanding principal increases to 200%. Additionally, If the
Company enters into a 3(a)(9) or 3(a)(10) issuance of shares there
are liquidation damages of 25% of principal, not to be below
$15,000. The Company must also obtain the noteholder's written
consent before issuing any new debt. Additionally, if the note is
not repaid by the maturity date the principal balance increases by
$15,000. The market capitalization is below $5 million and
therefore the note was in default, however, the holder has issued a
waiver to the Company on this default provision.
The
note is convertible into shares of the Company’s common stock
at a variable conversion rate that is equal to the lesser of 60% of
the lowest trading price for the last 20 days prior to the 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 10% adjustments to the
conversion price for events set forth in the agreement, including
if the conversion price is less than $0.01, 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 three 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.
Additionally, in
connection with the debenture the Company also issued 3,000,000
shares of common stock of the Company as a commitment fee. The fair
value of the commitment shares was calculated as $34,500, based on
the market value of the shares of common stock at the closing date
of $0.012, 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 but are not required to be returned
if there is an event of default.
The
Company estimated the aggregate fair value of the conversion
feature derivatives embedded in the debenture at issuance at
$189,000, 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 $0.01 at issuance date; a risk-free interest rate of 2.33% and
expected volatility of the Company’s common stock, of
224.70%, 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 $121,000 was immediately expensed as financing
costs.
On
December 13, 2018 the holder converted $11,200 of principal into
4,000,000 shares of common stock of the Company. As a result of the
conversion the derivative liability related to the first debenture
was remeasured immediately prior to the conversion with an overall
increase in the fair value of $26,000 recognized, with the fair
value of the derivative liability related to the converted portion,
of $20,000 being reclassified to equity. The key valuation
assumptions used consist, in part, of the price of the
Company’s common stock on the date of conversion, of $0.02; a
risk-free interest rate of 2.43% and expected volatility of the
Company’s common stock of 448.43% , and the various estimated
reset exercise prices weighted by probability.
On
January 25, 2019 the outstanding principal of $101,550, plus an
additional $56,375 of default principal and $13,695 in accrued
interest of the note was purchased from the noteholder by a third
party. The additional $70,070 representing the default principal
and accrued interest which increased the principal amount due to
the new noteholder has been recognized as financing
cost.
October 30, 2018 Debenture
On
October 30, 2018, the Company entered into an 8% convertible
promissory note for $113,300, with an OID of $10,300, which matures
on October 30, 2019. During the first 180 days the convertible
redeemable note is in effect, the Company may redeem the note at a
prepayment percentage of 123% of the outstanding principal and
accrued interest. 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 interest rate increases to a default rate of 24% for events as
set forth in the agreement. In the event of default, the
outstanding principal balance increases to 150%, and if the Company
fails to maintain the required authorized share reserve or is
unable to issue the requested shares upon a conversion notice, the
outstanding principal increases to 200%.
The
note is convertible after 180 days at a variable conversion rate
that is 75% of the average of the lowest two trading prices over
the 15 days prior to conversion. 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 debenture at issuance at
$173,000, 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 $0.01 at issuance date; a risk-free interest rate of 2.66% and
expected volatility of the Company’s common stock, of
294.17%, 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 $73,000 was immediately expensed as financing
costs.
December 6, 2018 Debenture
On December 6,
2018, the Company entered into an 10% convertible promissory note
for $210,460, which matures on September 6, 2019. During the first
180 days the convertible redeemable note is in effect, the Company
may redeem the note at a prepayment percentage of 120% to 130% of
the outstanding principal and accrued interest based on the
redemption date’s passage of time ranging from 60 days to 180
days from the date of issuance of the debenture. Per the agreement,
the Company is required at all times to have authorized and
reserved three times the number of shares that is actually issuable
upon full conversion of the note. In the event of default, as set
forth in the agreement, the outstanding principal balance increases
to 150%. In addition to standard events of default, an event of
default occurs if the common stock of the Company shall lose the
“bid” price for its Common Stock, on trading markets,
including the OTCBB, OTCQB or an equivalent replacement exchange.
If the Company enters into a 3(a)(9) or 3(a)(10) issuance of shares
there are liquidation damages of 25% of principal, not to be below
$15,000. The Company must also obtain the noteholder's written
consent before issuing any new debt. The note is convertible at a
fixed conversion price of $0.01. If an event of default occurs, the
fixed conversion price is extinguished and replaced by a variable
conversion rate that is 70% of the lowest trading prices during the
20 days prior to conversion. The fixed conversion price shall reset
upon any future dilutive issuance of shares, options or convertible
securities. The conversion feature at issuance meets the definition
of conventional convertible debt and therefore qualifies for the
scope exception in Accounting Standards Codification
(“ASC”) 815-10-15-74(a) and would not be bifurcated and
accounted for separately as a derivative liability. The Company
analyzed the conversion feature under ASC 470-20, “Debt with
conversion and other options”, and based on the market price
of the common stock of the Company on the date of funding as
compared to the conversion price, determined there was a $136,799
beneficial conversion feature to recognize, which will be amortized
over the term of the note using the effective interest method. The
amortization expense recognized during the year ended March
31
, 2019
amounted to approximately $46,000.
December 31, 2018 Debenture
On December 31,
2018, the Company entered into an 10% convertible promissory note
for $135,910, which matures on September 30, 2019. During the first
180 days the convertible redeemable note is in effect, the Company
may redeem the note at a prepayment percentage of 120% to 130% of
the outstanding principal and accrued interest based on the
redemption date’s passage of time ranging from 60 days to 180
days from the date of issuance of the debenture. Per the agreement,
the Company is required at all times to have authorized and
reserved three times the number of shares that is actually issuable
upon full conversion of the note. In the event of default, as set
forth in the agreement, the outstanding principal balance increases
to 150%. In addition to standard events of default, an event of
default occurs if the common stock of the Company shall lose the
“bid” price for its Common Stock, on trading markets,
including the OTCBB, OTCQB or an equivalent replacement exchange.
If the Company enters into a 3(a)(9) or 3(a)(10) issuance of shares
there are liquidation damages of 25% of principal, not to be below
$15,000. The Company must also obtain the noteholder’s
written consent before issuing any new debt. The note is
convertible at a fixed conversion price of $0.01. If an event of
default occurs, the fixed conversion price is extinguished and
replaced by a variable conversion rate that is 70% of the lowest
trading prices during the 20 days prior to conversion. The fixed
conversion price shall reset upon any future dilutive issuance of
shares, options or convertible securities. The conversion feature
at issuance meets the definition of conventional convertible debt
and therefore qualifies for the scope exception in Accounting
Standards Codification (“ASC”) 815-10-15-74(a) and
would not be bifurcated and accounted for separately as a
derivative liability. The Company analyzed the conversion feature
under ASC 470-20, “Debt with conversion and other
options”, and based on the market price of the common stock
of the Company on the date of funding as compared to the conversion
price, determined there was a $88,342 beneficial conversion feature
to recognize, which will be amortized over the term of the note
using the effective interest method. The amortization expense
recognized during the year ended March 31
, 2019 amounted to
approximately $29,000.
January 16, 2019 Debenture
On
January 16, 2019, the Company entered into an 10% convertible
promissory note for $205,436, with an OID of $18,686, for a
purchase price of $186,750, which matures on October 16, 2019.
During the first 180 days the convertible redeemable note is in
effect, the Company may redeem the note at a prepayment percentage
of 120% to 130% of the outstanding principal and accrued interest
based on the redemption date’s passage of time ranging from
60 days to 180 days from the date of issuance of the debenture. Per
the agreement, the Company is required at all times to have
authorized and reserved three times the number of shares that is
actually issuable upon full conversion of the note. In the event of
default, as set forth in the agreement, the outstanding principal
balance increases to 150%. In addition to standard events of
default, an event of default occurs if the common stock of the
Company shall lose the "bid" price for its Common Stock, on trading
markets, including the OTCBB, OTCQB or an equivalent replacement
exchange. If the Company enters into a 3(a)(9) or 3(a)(10) issuance
of shares there are liquidation damages of 25% of principal, not to
be below $15,000. The Company must also obtain the noteholder's
written consent before issuing any new debt. The note is
convertible at a fixed conversion price of $0.01. If an event of
default occurs, the fixed conversion price is extinguished and
replaced by a variable conversion rate that is 70% of the lowest
trading prices during the 20 days prior to conversion. The fixed
conversion price shall reset upon any future dilutive issuance of
shares, options or convertible securities. The conversion feature
at issuance meets the definition of conventional convertible debt
and therefore qualifies for the scope exception in Accounting
Standards Codification (“ASC”) 815-10-15-74(a) and
would not be bifurcated and accounted for separately as a
derivative liability. The Company analyzed the conversion feature
under ASC 470-20, “Debt with conversion and other
options”, and based on the market price of the common stock
of the Company on the date of funding as compared to the conversion
price, determined there was a $176,675 beneficial conversion
feature to recognize, which will be amortized over the term of the
note using the effective interest method. The amortization expense
recognized during the year ended March 31
, 2019 amounted to
approximately $59,000.
February 4, 2019 Debenture
On
February 4, 2019, the Company entered into an 10% convertible
promissory note for $85.500, with an OID of $7,500, for a purchase
price of $75,000, which matures on November 4, 2019. During the
first 180 days the convertible redeemable note is in effect, the
Company may redeem the note at a prepayment percentage of 120% to
130% of the outstanding principal and accrued interest based on the
redemption date’s passage of time ranging from 60 days to 180
days from the date of issuance of the debenture. Per the agreement,
the Company is required at all times to have authorized and
reserved three times the number of shares that is actually issuable
upon full conversion of the note. In the event of default, as set
forth in the agreement, the outstanding principal balance increases
to 150%. In addition to standard events of default, an event of
default occurs if the common stock of the Company shall lose the
"bid" price for its Common Stock, on trading markets, including the
OTCBB, OTCQB or an equivalent replacement exchange. If the Company
enters into a 3 (a)(9) or 3(a)(10) issuance of shares there are
liquidation damages of 25% of principal, not to be below $15,000.
The Company must also obtain the noteholder's written consent
before issuing any new debt. The note is convertible at a fixed
conversion price of $0.01. If an event of default occurs, the fixed
conversion price is extinguished and replaced by a variable
conversion rate that is 70% of the lowest trading prices during the
20 days prior to conversion. The fixed conversion price shall reset
upon any future dilutive issuance of shares, options or convertible
securities. The conversion feature at issuance meets the definition
of conventional convertible debt and therefore qualifies for the
scope exception in ASC 815-10-15-74(a) and would not be bifurcated
and accounted for separately as a derivative liability. The Company
analyzed the conversion feature under ASC 470-20, “Debt with
conversion and other options”, and based on the market price
of the common stock of the Company on the date of funding as
compared to the conversion price, determined there was a $85,500
beneficial conversion feature to recognize, which will be amortized
over the term of the note using the effective interest method. The
amortization expense recognized during the year ended March 31,
2019 amounted to approximately $28,000.
March 1, 2019 Debenture
On
March 1, 2019, the Company entered into an 10% convertible
promissory note for $168,000, with an OID of $18,000, for a
purchase price of $150,000, which matures on November 1, 2019.
During the first 180 days the convertible redeemable note is in
effect, the Company may redeem the note at a prepayment percentage
of 100% to 130% of the outstanding principal and accrued interest
based on the redemption date’s passage of time ranging from
60 days to 180 days from the date of issuance of the debenture. Per
the agreement, the Company is required at all times to have
authorized and reserved three times the number of shares that is
actually issuable upon full conversion of the note. In the event of
default, as set forth in the agreement, the outstanding principal
balance increases to 150%. In addition to standard events of
default, an event of default occurs if the common stock of the
Company shall lose the "bid" price for its Common Stock, on trading
markets, including the OTCBB, OTCQB or an equivalent replacement
exchange. If the Company enters into a 3(a)(9) or 3(a)(10) issuance
of shares there are liquidation damages of 25% of principal, not to
be below $15,000. The Company must also obtain the noteholder's
written consent before issuing any new debt. The note is
convertible at a fixed conversion price of $0.25. If an event of
default occurs, the fixed conversion price is extinguished and
replaced by a variable conversion rate that is 70% of the lowest
trading prices during the 20 days prior to conversion. The fixed
conversion price shall reset upon any future dilutive issuance of
shares, options or convertible securities. The conversion feature
at issuance meets the definition of conventional convertible debt
and therefore qualifies for the scope exception in ASC
815-10-15-74(a) and would not be bifurcated and accounted for
separately as a derivative liability. The Company analyzed the
conversion feature under ASC 470-20, “Debt with conversion
and other options”, and based on the market price of the
common stock of the Company on the date of funding as compared to
the conversion price, determined there was a $134,000 beneficial
conversion feature to recognize, which will be amortized over the
term of the note using the effective interest method. The
amortization expense recognized during the year ended March 31,
2019 amounted to approximately $28,000.
The
derivative liability arising from all of the above discussed
debentures was revalued at March 31, 2019, resulting in an increase
of the fair value of the derivative liability of $1,319,500,
including upon conversions, for the year ended March 31, 2019. 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 derivatives revalued at March 31, 2018, resulted
in an increase of the fair value of the derivative liability of
$1,616,000, including upon conversions, 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, 2019, resulting in an
increase to the fair value of the warrant liability of $47,000 for
the year ended March 31, 2019. The key valuation assumptions used
consists, in part, of the price of the Company’s common stock
of $0.21; a risk-free interest rate ranging of 2.21%, and expected
volatility of the Company’s common stock ranging of 285.32%,
and the various estimated reset exercise prices weighted by
probability. The warrant liability was remeasured as of 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%.
NOTE 6 – STOCKHOLDERS’ DEFICIT
Preferred Stock
As
of March 31, 2019 and 2018, the Company had 200,000,000 preferred
stock authorized with a par value of $0.0001.
On August 15, 2018,
the Company authorized 5,000,000 of their Preferred Stock to be
designated as Series A Convertible Preferred Stock (“Series A
PS”), with a par value of $0.0001. The Series A PS shall have
60 to 1 voting rights such that each share shall vote as to 60
shares of common stock. The Series A PS holders shall not be
entitled to receive dividends, if and when declared by the Board.
Upon the dissolution, liquidation or winding up of the Company, the
holders of Series A PS shall be entitled to receive out of the
assets of the Company the sum of $0.00l per share before any
payment or distribution shall be made on the common stock, or any
other class of capital stock of the Company ranking junior to the
Series A PS. The Series A PS is convertible, after two years from
the date of issuance, with the consent of a majority of the Series
A PS holders, into the same number of shares of common stock of the
Company as are outstanding at the time.
On
August 21, 2018, the NaturalShrimp Holdings,
Inc.(“NSH”) shareholders exchanged 75,000,000 of the
shares of common stock of the Company which they held, into
5,000,000 newly issued Series A PS. The shares of common stock were
returned to the treasury and cancelled. The Series A PS do not have
any redemption feature and are therefore classified in permanent
equity. The conversion feature was evaluated, and as at the
commitment date the fair value of the shares of common stock
exchanged was greater than the fair value of the shares into which
they would be converted, it was determined there was no beneficial
aspect to the conversion feature.
Common Stock
On
September 20, 2018, the Company increased their authorized common
shares to 900,000,000.
For
shares of common stock issued upon conversion of outstanding
convertible debentures see Note 5.
On
April 12, 2018, the Company sold 220,000 shares of its common stock
at $0.077 per share, for a total financing of $15,400.
On
February 14, 2019, the Company issued 225,000 shares of its common
stock to the original noteholder of the March 20, 2018 convertible
debenture. The fair value of the shares of $72,450 based on the
market price of $0.32 on the date of issuance, have been recognized
as a financing cost.
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
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, was recognized over the term
of the agreement, with $220,000 expensed in the year ending March
31, 2018.
The
Company issued 6,719,925 shares of their common stock on July 17,
2018, upon cashless exercise of the warrants granted in connection
with the first closing of the July Debenture, and on August 28,
2018, 4,494,347 shares were issued upon cashless exercise of the
warrants granted in connection with the second closing. (Note
7)
The
Company issued 10,000,000 and 6,093,683 shares of their common
stock on January 11, 2019 and February 8, 2019, respectively, upon
cashless exercise of the warrants granted in connection with the
September 11, 2017 Debenture (Note 7).
Equity Financing Agreement
On
August 21, 2018, the Company entered into an Equity Financing
Agreement (“Equity Financing Agreement”) and
Registration Rights Agreement (“Registration Rights
Agreement”) with GHS Investments LLC, a Nevada limited
liability company (“GHS”). Under the terms of the
Equity Financing Agreement, GHS agreed to provide the Company with
up to $7,000,000 upon effectiveness of a registration statement on
Form S-1 (the “Registration Statement”) filed with the
U.S. Securities and Exchange Commission (the
“Commission”). The Registration Statement was filed and
deemed effective on September 19, 2018.
Following
effectiveness of the Registration Statement, the Company has the
discretion to deliver puts to GHS and GHS will be obligated to
purchase shares of the Company’s common stock, par value
$0.0001 per share (the “Common Stock”) based on the
investment amount specified in each put notice. The maximum amount
that the Company shall be entitled to put to GHS in each put notice
shall not exceed two hundred percent (200%) of the average daily
trading dollar volume of the Company’s Common Stock during
the ten (10) trading days preceding the put, so long as such amount
does not exceed $300,000. Pursuant to the Equity Financing
Agreement, GHS and its affiliates will not be permitted to
purchase, and the Company may not put shares of the Company’s
Common Stock to GHS that would result in GHS’s beneficial
ownership equaling more than 9.99% of the Company’s
outstanding Common Stock. The price of each put share shall be
equal to eighty percent (80%) of the Market Price (as defined in
the Equity Financing Agreement). Puts may be delivered by the
Company to GHS until the earlier of thirty-six (36) months after
the effectiveness of the Registration Statement or the date on
which GHS has purchased an aggregate of $7,000,000 worth of Common
Stock under the terms of the Equity Financing Agreement.
Additionally, in accordance with the Equity Financing Agreement,
the Company shall issue GHS a promissory note in the principal
amount of $15,000 to offset transaction costs (the
“Note”). The Note bears interest at the rate of 8% per
annum, is not convertible and is due 180 days from the issuance
date of the Note.
On
October 3, 2018, the Company put to GHS for the issuance of
2,814,682 shares of common stock, at $0.0088, for a total of
$24,769. On October 22, 2018, the Company put to GHS for the
issuance of 3,525,917 shares of common stock, at $0.0048, for a
total of $16,924. On November 13, 2018, the Company put to GHS for
the issuance of 6,779,397 shares of common stock, at $0.0046, for a
total of $31,456. On December 10, 2018, the Company put to GHS for
the issuance of 6,880,004 shares of common stock, at $0.0133, for a
total of $91,366. On March 25, 2019, the Company put to GHS for the
issuance of 2,131,894 shares of common stock, at $0.141, for a
total of $300,000.
NOTE 7 – OPTIONS AND WARRANTS
The
Company has not granted any options since inception.
The
Company has granted approximately 424,000 warrants (prior to
adjustments based on subsequent dilutive issuances) in connection
with convertible debentures (Note 5).
The
Company issued 10,000,000 and 6,093,683 shares of their common
stock on January 11, 2019 and February 8, 2019, respectively, upon
cashless exercise of the warrants granted in connection with the
September 11, 2017 Debenture. The Company issued approximately
13,078,000 additional shares upon the cashless exercise, and as
such, based on the fair value of the common shares of the Company,
recognized a loss on exercise of approximately
$3,745,000.
The
Company issued 6,719,925 and 4,494,347 shares of their common stock
on July 17, 2018 and August 28, 2018, respectively, with a fair
value of $150,000, upon cashless exercise of the warrants granted
in connection with the July 31, 2017 Debenture.
In the
year ended March 31, 2018, 323,333 (after adjustment) common shares
of the Company were exercised, with a fair value of $67,000 upon
exercise.
As of
March 31, 2019, there are 444,000 (after adjustment) remaining
warrants outstanding, which expire on January 31, 2022, with an
exercise price of 45% of the market value of the common shares of
the Company on the date of exercise.
NOTE 8 – RELATED PARTY TRANSACTIONS
Accrued Payroll – Related Parties
Included
in other accrued expenses on the accompanying consolidated balance
sheet as of March 31, 2019 is approximately $217,000 owing to the
Chief Executive Officer of the Company, approximately $69,000 owing
to the President of the Company, and approximately $96,000, owing
to a key employee.
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
as of March 31, 2019 and March 31, 2018.
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%. As of March 31, 2019 and
March 31, 2018 the outstanding balance is approximately
$736,000.
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,
2019 and 2018 was $426,404 and $426,404, respectively, and is
classified as a current liability on the consolidated balance
sheets. At March 31, 2019 and 2018, accrued interest payable was
$241,032 and $206,920, 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,
2019 and 2018 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, 2019 and 2018, 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,
2019 and 2018 was $104,647 and is classified as a current liability
on the consolidated balance sheets.
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, 2019
and 2018 consist of the following:
|
|
|
Federal Tax
statutory rate
|
21.00
%
|
34.00
%
|
Permanent
differences
|
10.23
%
|
7.86
%
|
Valuation
allowance
|
(31.23
)%
|
(41.86
)%
|
Effective
rate
|
0.00
%
|
0.00
%
|
Significant
components of the Company’s deferred tax assets as of March
31, 2019 and 2018 are summarized below. The calculations presented
below at March 31, 2019 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
|
$
1,126,000
|
$
637,000
|
Deferred tax
benefit
|
287,000
|
408,000
|
Total deferred tax
asset
|
1,413,000
|
1,045,000
|
Valuation
allowance
|
(1,413,000
)
|
(1,045,000
)
|
|
$
-
|
$
-
|
As of
March 31, 2019, the Company had approximately $5,645,000 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, the Company’s ability to utilize
their 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
$368,000 in the year ended March 31, 2019.
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, 2019,
and 2018, 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.
Vista Capital Investments, LLC
On
April 30, 2019, a complaint was filed against the Company in the
U.S. District Court in Dallas, Texas alleging that the Company
breached a provision in a common stock purchase warrant (the
“Vista Warrant”) issued by the Company to Vista Capital
Investments, LLC (“Vista”). Vista alleges that the
Company failed to issue certain shares of the Company’s
common stock as was required under the terms of the Vista Warrant.
Vista is currently seeking money damages in the approximate amount
of $7,000,000, which the Company believes is unwarranted and
excessive, as well as costs and reimbursement of expenses. As of
the date hereof, no hearing has been scheduled, but the Company is
vigorously defending itself against these claims, preparing a
counter-claim against Vista and taking such other appropriate
action, in addition to seeking for other costs and relief as may be
appropriate.
NOTE 12 – SUBSEQUENT EVENTS
Subsequent to year
end, the Company has converted approximately $19,000 of their
outstanding convertible debt as of March 31, 2019 and approximately
$11,000 of accrued interest, into 3,000,000 shares of the
Company’s common stock.
On
April 9, 2019, the Company put to GHS for the issuance of 2,118,645
shares of common stock, at $0.14, for a total of $300,000. On April
23, 2019, the Company put to GHS for the issuance of 2,071,824
shares of common stock, at $0.14, for a total of $300,000. On May
6, 2019, the Company put to GHS for the issuance of 2,192,983
shares of common stock, at $0.14, for a total of $300,000. On May
21, 2019, the Company put to GHS for the issuance of 2,038,044
shares of common stock, at $0.15, for a total of $300,000. On May
31, 2019, the Company put to GHS for the issuance of 3,061,225
shares of common stock, at $0.10, for a total of
$300,000.
On
April 17, 2019, the Company entered into an 10% convertible
promissory note for $110,000, with an OID of $10,000, for a
purchase price of $100,000, which matures on January 23, 2020.
During the first 180 days the convertible redeemable note is in
effect, the Company may redeem the note at a prepayment percentage
of 120% to 130% of the outstanding principal and accrued interest
based on the redemption date’s passage of time ranging from
60 days to 180 days from the date of issuance of the debenture. Per
the agreement, the Company is required at all times to have
authorized and reserved three times the number of shares that is
actually issuable upon full conversion of the note. In the event of
default, as set forth in the agreement, the outstanding principal
balance increases to 150%. In addition to standard events of
default, an event of default occurs if the common stock of the
Company shall lose the "bid" price for its Common Stock, on trading
markets, including the OTCBB, OTCQB or an equivalent replacement
exchange. If the Company enters into a 3 (a)(9) or 3(a)(10)
issuance of shares there are liquidation damages of 25% of
principal, not to be below $15,000. The Company must also obtain
the noteholder's written consent before issuing any new debt. The
note is convertible at a fixed conversion price of $0.124. If an
event of default occurs, the fixed conversion price is extinguished
and replaced by a variable conversion rate that is 70% of the
lowest trading prices during the 20 days prior to conversion. The
fixed conversion price shall reset upon any future dilutive
issuance of shares, options or convertible securities. The
conversion feature at issuance meets the definition of conventional
convertible debt and therefore qualifies for the scope exception in
ASC 815-10-15-74(a) and would not be bifurcated and accounted for
separately as a derivative liability. The Company analyzed the
conversion feature under ASC 470-20, “Debt with conversion
and other options”, and based on the market price of the
common stock of the Company on the date of funding as compared to
the conversion price, determined there was an approximately $59,000
beneficial conversion feature to recognize, which will be amortized
over the term of the note using the effective interest
method.