NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE FISCAL YEARS ENDED MARCH 31, 2021 AND 2020
NOTE 1 – NATURE OF THE ORGANIZATION AND BUSINESS
Nature of the Business
NaturalShrimp
Incorporated (“NaturalShrimp” or the
“Company”), a Nevada corporation, is a biotechnology
company and has developed proprietary platform technologies that
enables 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. The Company’s initial
production facility is located outside of San Antonio,
Texas.
On
October 16, 2015, the Company formed Natural Aquatic Systems, Inc.
(“NAS”). The purpose of NAS is to formalize the
business relationship between the 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 the
Company’s facility located outside of La Coste,
Texas.
On
December 15, 2020, the Company entered into an Asset Purchase
Agreement (“APA”) between VeroBlue Farms USA, Inc., a
Nevada corporation (“VBF”), VBF Transport, Inc., a
Delaware corporation (“Transport”), and Iowa’s
First, Inc., an Iowa corporation (“Iowa’s First”)
(each a “Seller” and collectively,
“Sellers”). Transport and Iowa’s First were
wholly-owned subsidiaries of VBF. The facility was originally
designed as a farming facility, with the company never beginning
production. The Company’s plan is to begin a modification
process to convert the plant to produce shrimp, which will allow
them to scale faster without having to build new facilities. The
three Iowa facilities contain the tanks and infrastructure that
will be used to support the production of shrimp with the
incorporation of the Company’s patented EC platform
technology.
The
Company has two wholly-owned subsidiaries, NSC and NS Global and
owns 51% of NAS.
Going Concern
The
accompanying consolidated financial statements have been prepared
in conformity with accounting principles generally accepted in the
United States of America (“GAAP”), 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, 2021, the Company
had a net loss available for common stockholders of approximately
$5,921,000. As of March 31, 2021, the Company had an accumulated
deficit of approximately $53,683,000 and a working capital deficit
of approximately $3,614,000. 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 year ended March 31, 2021, the Company received net cash
proceeds of $3,250,000 from the sale of 3,250 Series B Preferred
shares and $6,050,000 from the sale of 6,050 Series D Preferred
shares, as well as $600,000 from the from the issuance of a
convertible debenture. Subsequent to year end the Company raised
$10,000,000 in a sale of shares of common stock, receiving net
proceeds of $9,700,000.
Management believes
that private placements of equity capital 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, 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
be unable to develop its facilities and enter in
production.
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 51 % owned
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, 2021, the Company
had a 607 shares of Series B Preferred shares whose approximately
1,202,000 underlying shares are convertible at the investors’
option at a conversion price based on the lowest market price over
the last 20 trading days, and 6,050 of Series D Preferred shares
whose approximately 60,050,000 underlying shares are convertible at
the investors’ option at a fixed conversion price of $0.10,
which were not included in the calculation of diluted EPS as their
effect would be anti-dilutive. For the year ended March 31, 2020,
the Company had approximately $469,000 in convertible debentures
whose approximately 12,518,000 underlying shares are convertible at
the holders’ option at conversion prices ranging from $0.01
to $0.25 for fixed conversion rates, and 57% - 60% of the defined
trading price for variable conversion rates, and approximately
2,916,000 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.
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 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
as of March 31, 2021 and March 31, 2020.
The
Derivative liabilities are Level 3 fair value
measurements.
The
following is a summary of activity of Level 3 liabilities during
the year ended March 31, 2021 and 2020:
Derivatives
|
|
|
Derivative
liability balance at beginning of period
|
$176,000
|
$157,000
|
Reclass to equity
upon conversion or redemption
|
(205,000)
|
(8,000)
|
Change in fair
value
|
29,000
|
27,000
|
Balance at end of
period
|
$-
|
$176,000
|
At
March 31, 2020, 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 $0.04; a risk-free interest rate of 0.11% and expected
volatility of the Company’s common stock of 229.10%, and the
various estimated reset exercise prices weighted by
probability.
Warrant liability
|
|
|
Warrant liability
balance at beginning of period
|
$90,000
|
$93,000
|
Reclass to equity
upon cancellation or exercise
|
(90,000)
|
-
|
Change in fair
value
|
-
|
(3,000)
|
Balance at end of
period
|
$-
|
$90,000
|
At
March 31, 2020, the fair value of the warrant liability was
estimated using the following weighted-average inputs: the price of
the Company’s common stock of $0.04; a risk-free interest
rate of 0.23% and expected volatility of the Company’s common
stock ranging of 261.85%.
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 as of March 31, 2021 and March 31, 2020.
Concentration of Credit Risk
The
Company maintains cash balances at two financial institutions.
Accounts at this institution are insured by the Federal Deposit
Insurance Corporation (FDIC) up to $250,000. As of March 31, 2021,
and 2020, the Company’s cash balance did not exceed FDIC
coverage.
Fixed Assets
Equipment is
carried at historical value or cost and is depreciated using the
straight-line method over the estimated useful lives of the related
assets. . Estimated useful lives are as follows:
Buildings
|
39
years
|
Machinery
and Equipment
|
7
– 10 years
|
Vehicles
|
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.
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.
Stock-Based Compensation
The
Company accounts for stock-based compensation to employees and
non-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 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
August 2020, the FASB issued ASU 2020-06, Debt - Debt with
Conversion and Other Options (Subtopic 470-
20) and Derivatives and Hedging - Contracts in
Entity’s Own Equity (Subtopic 815-40): Accounting for
Convertible Instruments and Contracts in an Entity’s Own
Equity (“ASU 2020-06”), which simplifies the
accounting for certain financial instruments with characteristics
of liabilities and equity. This ASU (1) simplifies the accounting
for convertible debt instruments and convertible preferred stock by
removing the existing guidance in ASC 470-20, Debt: Debt with
Conversion and Other Options, that requires entities to account for
beneficial conversion features and cash conversion features in
equity, separately from the host convertible debt or preferred
stock; (2) revises the scope exception from derivative accounting
in ASC 815-40 for freestanding financial instruments and embedded
features that are both indexed to the issuer’s own stock and
classified in stockholders’ equity, by removing certain
criteria required for equity classification; and (3) revises the
guidance in ASC 260, Earnings Per Share, to require entities
to calculate diluted earnings per share (EPS) for convertible
instruments by using the if-converted method. In addition, entities
must presume share settlement for purposes of calculating diluted
EPS when an instrument may be settled in cash or shares. For
SEC filers, excluding smaller reporting companies, ASU 2020-06 is
effective for fiscal years beginning after December 15, 2021
including interim periods within those fiscal years. Early adoption
is permitted, but no earlier than fiscal years beginning after
December 15, 2020. For all other entities, ASU 2020-06 is effective
for fiscal years beginning after December 15, 2023, including
interim periods within those fiscal years. Entities should adopt
the guidance as of the beginning of the fiscal year of adoption and
cannot adopt the guidance in an interim reporting period. The
Company is currently evaluating the impact that ASU 2020-06 may
have on its consolidated financial statements and related
disclosures.
As of
March 31, 2021, 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, 2021, through the date which the consolidated
financial statements were issued. Based upon the review, other than
described in Note 15 – 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 – ASSET ACQUISITION
On
December 15, 2020, the Company entered into an Asset Purchase
Agreement (“APA”) between VeroBlue Farms USA, Inc., a
Nevada corporation (“VBF”), VBF Transport, Inc., a
Delaware corporation (“Transport”), and Iowa’s
First, Inc., an Iowa corporation (“Iowa’s First”)
(each a “Seller” and collectively,
“Sellers”). Transport and Iowa’s First were
wholly-owned subsidiaries of VBF. The agreement called for the
Company to purchase all of the tangible assets of VBF, the motor
vehicles of Transport and the real property (together with all
plants, buildings, structures, fixtures, fittings, systems and
other improvements located on such real property) of Iowa’s
First. The consideration was $10,000,000, consisting of $5,000,000
in cash, paid at closing on December 17, 2020, (ii) $3,000,000
payable in 36 months with interest thereon at the rate of 5% per
annuum, interest only payable quarterly on the first day of the
quarter, with the remaining balance to be paid to VBF as a balloon
payment on the maturity date, (“Promissory Note A”),
and (iii) $2,000,000 payable in 48 months with interest thereon at
the rate of 5% per annuum, interest only payable quarterly on the
first day of the quarter, with the remaining balance to be paid to
VBF as a balloon payment on the maturity date (“Promissory
Note B”). The Company also agreed to issue 500,000 shares of
common stock as a finder’s fee, which would be considered as
transaction fees in relation to the asset acquisition, with a fair
value of $136,000 based on the market value of the common stock as
of the closing date of the acquisition (Note 8).
The
facility was originally designed as a farming facility, with the
company never beginning production. The Company’s plan is to
begin a modification process to convert the plant to produce
shrimp, which will allow them to scale faster without having to
build new facilities. The three Iowa facilities contain the tanks
and infrastructure that will be used to support the production of
shrimp with the incorporation of the Company's patented EC platform
technology.
The
Company determined the asset acquisition did not qualify as a
business combination as not only did the Company only acquire
certain listed tangible assets, but VBF did not fall under the
definition of a business in accordance with ASU 2017-01. VBF was an
early-stage company that had not yet generated revenue, and it did
not yet include an input and a substantive process that will afford
the Company the ability to create an output. Additionally, the
acquisition does not include an organized workforce. Instead, the
assets acquired are to be used by the Company as a location in
which to apply their own patented process and create their output,
the production of shrimp.
The
$10,136,000 consideration was allocated to the assets acquired
based on their relative fair value:
Equipment
|
$7,015,000
|
69.2%
|
Vehicles
|
202,000
|
2.0%
|
Buildings
|
2,797,000
|
26.6%
|
Land
|
122,000
|
1.2%
|
|
$10,136,000
|
100%
|
NOTE 4 – FIXED ASSETS
A
summary of the fixed assets as of March 31, 2021 and March 31, 2020
is as follows:
|
|
|
Land
|
$324,293
|
$202,293
|
Buildings
|
4,702,063
|
509,762
|
Machinery and
equipment
|
7,580,873
|
221,987
|
Autos and
trucks
|
213,849
|
19,063
|
|
12,815,178
|
953,105
|
Accumulated
depreciation
|
(584,521)
|
(245,297)
|
Fixed assets,
net
|
$12,236,557
|
$707,808
|
The
fixed assets include the assets purchased in the asset acquisition
on December 15, 2020, in Note 3.
The
consolidated statements of operations reflect depreciation expense
of approximately $346,000 and $100,000 for the years ended March
31, 2021 and 2020, respectively.
On
March 18, 2020, the Company’s research and development plant
in La Coste, Texas was destroyed by a fire. The Company believes
that it was caused by a natural gas leak, but the fire was so
extensive that the cause was undetermined. The majority of the
damage was to their pilot production plant, which destroyed a large
portion of the fixed assets of the Company. The property destroyed
had a net book value of $1,909,495, which was written off and
recognized as Loss due to fire during the year ended March 31,
2020. The Company filed a claim with their insurance company, and
as of June 2, 2020, received all the proceeds, which totaled
$917,210. The Company is currently purchasing replacement fixed
assets and reconstructing their pilot production
plant.
During
January 2020, the Company reclassified approximately $886,000 of
Construction in Process into Machinery and equipment, as the assets
had begun to be put into use. The Company also wrote off certain
fixed assets which were no longer in use, resulting in a net loss
on the disposal of $71,128.
NOTE 5 – SHORT-TERM NOTE AND LINES OF CREDIT
The
Company has a working capital line of credit with Extraco Bank. On
April 30, 2020, the line of credit was renewed with a maturity date
of April 30, 2021 for a balance of $372,675. The line of credit
bears an interest rate of 5.0%, that is compounded monthly and to
be paid with the principal on the maturity date. The line of credit
matures on April 30, 2021 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 $372,675 at both
March 31, 2021 and March 31, 2020. On May 5, 2021, the Company paid
off the line of credit.
The
Company also has an additional line of credit with Extraco Bank for
$200,000, which was renewed with a maturity date of April 30, 2021,
for a balance of $177,778. The lines of credit bear interest at a
rate of 5%, that is compounded monthly and to be paid with the
principal on the maturity date. The line of credit 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
was $177,778 at both March 31, 2021 and March 31, 2020. On April
15, 2021, the line of credit was paid off in full.
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 29.15% as of March 31,
2021. The line of credit is unsecured. The balance of the line of
credit was $9,580 at both March 31, 2021 and March 31,
2020.
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 13.25% as of March 31, 2021.
The line of credit is secured by assets of the Company’s
subsidiaries. The balance of the line of credit is $10,237 as of
March 31, 2021 and March 31, 2020.
NOTE 6 – BANK LOANS
On
April 10, 2020, the Company obtained a Paycheck Protection Program
(“PPP”) loan in the amount of $103,200 pursuant to the
Coronavirus Aid, Relief, and Economic Security Act (the
“CARES Act”). Interest on the loan is at the rate of 1%
per year, and all loan payments are deferred for nine months, at
which time the balance is payable in 18 monthly installments if not
forgiven in accordance with the CARES Act and the terms of the
promissory note executed by the Company in connection with the
loan. The promissory note
contains events of default and other provisions customary for a
loan of this type. As required, the Company has used the PPP
loan proceeds for payroll, healthcare benefits, and utilities.
The program provides that
the use of PPP Loan amount shall be limited to certain qualifying
expenses and may be partially or wholly forgiven in accordance with
the requirements set forth in the CARES Act. On April 16, 2021, the
Company filed for the forgiveness of the PPP loan and was approved
for forgiveness of such loan on April 26, 2021.
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. On January 10, 2020, the loan was
modified, with certain terms amended. The modified note is for the
principal balance of $222,736, with initial monthly payments of
$1,730 through February 1, 2037, when all unpaid principal and
interest will be due and payable. The loan has an initial yearly
rate of interest of 5.75%, which may change beginning on February
1, 2023 and each 36 months thereafter, to the Wall Street Journal
Prime Rate plus 1%, but never below 4.25%. The monthly payments may
change on the same dates as the interest changes. The Company is
also allowed to make payments against the principal at any time.
The balance of the CNB Note is $214,852 as of March 31, 2021,
$8,725 of which was in current liabilities, and $222,736 as of
March 31, 2020, of which $8,904 was in current
liabilities.
On
November 3, 2015, the Company entered into a short-term note
agreement with Community National Bank for a total value of
$50,000, with a maturity date of December 15, 2017. 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 note is guaranteed by an
officer and director. The balance of the note as of March 31, 2021
and March 31, 2020 was $3,124 and $12,005,
respectively.
Maturities on Bank
loans are as follows:
Years
ended:
|
|
March 31,
2022
|
$115,049
|
March 31,
2023
|
9,240
|
March 31,
2024
|
9,786
|
March 31,
2025
|
10,364
|
March 31,
2026
|
10,975
|
Thereafter
|
165,762
|
|
$321,176
|
NOTE 7 – CONVERTIBLE DEBENTURES
February 26, 2021 Debenture
On
February 26, 2021, the Company entered into a convertible note for
the principal amount of $720,000, with an original issue discount
of $120,000, convertible into shares of common stock of the
Company. The note bears interest of 12% and is due six months from
the date of issuance. The note is convertible from the date of
issuance, at a fixed conversion rate of $0.36. The conversion rate
shall change to $0.10 upon the event of default. 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
$164,000 beneficial conversion feature to recognize, which will be
amortized over the term of the note using the effective interest
method. The amortization of the beneficial conversion feature was
$27,273 and the original issuance discount was $20,000, for the
year ended March 31, 2021. In April 2021 the Company paid off
approximately $422,000 of the convertible note.
April 17, 2019 Debenture
On
April 17, 2019, the Company entered into a 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. The
maturity date has been extended until September 1, 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.
There was not any amortization expense recognized during the three
and year ended March 31, 2021, as the beneficial conversion feature was
fully amortized as of December 31, 2019. The amortization
expense recognized during the three and nine months ended December
31, 2019 amounted to approximately $20,000. On September 14, 2020,
the outstanding balance of $110,000 was converted into 1,014,001
shares of common stock of the Company, at a conversion rate of
$0.124.
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 matured on December 20, 2018. 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 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. The conversion feature meets the definition of
a derivative and therefore required bifurcation and was accounted
for as a derivative liability.
During
the year ended March 31, 2019, the holder converted $120,171 of
principal and $2,21 of accrued interest into 17,870,962 shares of
common stock of the Company, with $6,711 of principal remaining
outstanding.
On
November 12, 2019, the holder converted the remaining principal and
accrued interest balance into 179,984 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 decrease in the fair value of $2,000
recognized, with the fair value of the derivative liability related
to the converted portion, of $8,000 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
$0.11; a risk-free interest rate of 1.59% and expected volatility
of the Company’s common stock, of 98.46%, 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 note is 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. 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. During the year ended
March 31, 2019, the holder converted $57,164 of principal into
9,291,354 shares of common stock of the Company.
On May
5, 2020, the remaining outstanding balance of $29,057 was converted
into 2,039,069 shares of common stock of the Company, at a
conversion rate of $0.014. As a result of the conversion the
derivative liability related to the debenture was remeasured
immediately prior to the conversions with an overall increase in
the fair value of $8,000 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 dates of conversion of $0.03; a risk-free interest rate of
0.13% and expected volatility of the Company’s common stock,
of 158.29%, 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 original issuance discount
(OID) of $10,250, which matures on March 14, 2019. The interest
rate increases to a default rate of 24% for events as set forth in
the agreement On January 25, 2019 the outstanding principal of
$101,550, plus an additional $81,970 of default principal and
$13,695 in accrued interest of the note, resulting in a new balance
of $197,215, was purchased from the noteholder by a third party,
who extended the maturity date.
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.
During
the first quarter of the fiscal year ending March 31, 2021, the
outstanding balance was converted into 35,887,170 shares of common
stock of the Company, at a conversion rate of $0.006. As a result
of the conversion the derivative liability related to the debenture
was remeasured immediately prior to the conversions with an overall
increase in the fair value of $21,000 recognized, with the fair
value of the derivative liability related to the converted portion,
of $175,000 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 $0.03; a
risk-free interest rate of 0.13% and expected volatility of the
Company’s common stock, of 158.29%, and the various estimated
reset exercise prices weighted by probability.
March 1, 2019 Debenture
On
March 1, 2019, the Company entered into a 10% convertible
promissory note for $168,000, with an OID of $18,000, for a
purchase price of $150,000, which originally matured on November 1,
2019. The maturity date was extended to September 1, 2020, with the
noteholders waiving the default penalties through December 31,
2020. In the event of default, as set forth in the agreement, the
outstanding principal balance increases to 150%. 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 was amortized over the term
of the note using the effective interest method. and fully
amortized during the year ended March 31, 2020. On December 21, 2020, the
outstanding balance of $168,000 and accrued interest of $30,847 was
converted into 795,387 shares of common stock of the Company, at a
conversion rate of $0.25.
NOTE 8 – NOTES PAYABLE
On
December 15, 2020, in connection with the asset acquisition with
VBF (Note 3), the Company entered into two notes payable with a
third party. The first note, Promissory Note A, is for principal of
$3,000,000, which is payable in 36 months with interest thereon at
the rate of 5% per annum, interest only payable quarterly on the
first day of the quarter, with the remaining balance to be paid to
VBF as a balloon payment on the maturity date. Promissory Note B,
is for principal of $2,000,000, which is payable in 48 months with
interest thereon at the rate of 5% per annum, interest only payable
quarterly on the first day of the quarter, with the remaining
balance to be paid to VBF as a balloon payment on the maturity
date.
On July
15, 2020, the Company issued a promissory note to Ms. Williams in
the amount of $383,604 to settle the amounts that had been
recognized per the separation agreement with the late Mr. Bill
Williams dated August 15, 2019 (Note 14) for his portion of the
related party notes and related accrued interest discussed above,
and accrued compensation and allowances. The note bears interest at
one percent per annum and calls for monthly payments of $8,000
until the balance is paid in full. The balance as of March 31, 2021
was $311,604, with $96,000 classified in current liabilities on the
consolidated balance sheet.
NOTE 9 – STOCKHOLDERS’ DEFICIT
Preferred Stock
As of
March 31, 2021 and March 31, 2020, the Company had 200,000,000
shares of preferred stock authorized with a par value of $0.0001.
Of this amount, 5,000,000 shares of Series A preferred stock are
authorized and outstanding, 5,000 shares Series B preferred stock
are authorized and 607 and 2,250 outstanding, and 20,000 shares
Series D preferred stock are authorized and 6,050 and zero
outstanding, respectively.
Series B
On
September 5, 2019, the Board authorized the issuance of 5,000
preferred shares to be designated as Series B Preferred Stock
(“Series B PS”). The Series B PS have a par value of
$0.0001, a stated value of $1,200 and no voting rights. The Series
B PS include 10% cumulative dividends, payable quarterly. Upon the
dissolution, liquidation or winding up of the Company, the holders
of Series B PS shall be entitled to receive out of the assets of
the Company an amount equal to the stated value, plus any accrued
and unpaid dividends and any other fees or liquidated damages then
due and owing for each share of Series B PS before any payment or
distribution shall be made to the holders of any Junior securities.
The Series B PS are redeemable at the Company's option, at
percentages ranging from 120% to 135% for the first 180 days, based
on the passage of time. The Series B are also redeemable at the
holder’s option, upon the occurrence of a triggering event
which includes a change of control, bankruptcy, and the inability
to deliver Series B PS requested under conversion notices. The
triggering redemption amount is at the greater of (i) 135% of the
stated value or (ii) the product of the volume-weighted average
price (“VWAP”) on the day proceeding the triggering
event multiplied by the stated value divided by the conversion
price. As the redemption feature at the holder’s option is
contingent on a future triggering event, the Series B PS is
considered contingently redeemable, and as such the preferred
shares are classified in equity until such time as a triggering
event occurs, at which time they will be classified as
mezzanine.
The
Series B PS is convertible, at the discounted market price which is
defined as the lowest VWAP over last 20 days. The conversion price
is adjustable based on several situations, including future
dilutive issuances. As the Series B PS does not have a redemption
date and is perpetual preferred stock, it is considered to be an
equity host instrument and as such the conversion feature is not
required to be bifurcated as it is clearly and closely related to
the equity host instrument.
Series B Preferred Equity Offering
On
September 17, 2019, the Company entered into a Securities Purchase
Agreement (“SPA”) with GHS Investments LLC, a Nevada
limited liability company (“GHS”) for the purchase of
up to 5,000 shares of Series B PS at a stated value of $1,200 per
share, or for a total net proceeds of $5,000,000 in the event the
entire 5,000 shares of Series B PS are purchased. During the year
ended March 31, 2021 the Company received $3,250,000 for the
issuance of 3,250 Series B PS. The intrinsic value of the
beneficial conversion option on several of the tranches was
calculated at a total of $1,335,000, which was fully amortized upon
issuance, as the Series B PS is immediately convertible into common
stock. During the year ended March 31, 2021, the Company has
converted 5,008 Series B PS which includes 115 Series B PS
dividends-in-kind into 113,517,030 shares of the Company’s
common stock.
During
the year ended March 31, 2020, the Company issued 2,250 Series B
Preferred Shares in various tranches of the SPA, totaling
$2,250,000. The intrinsic value of the beneficial conversion option
on several of the tranches was calculated at a total of $475,000,
which was fully amortized upon issuance, as the Series B PS is
immediately convertible into common stock.
Series D Preferred Stock
On
December 16, 2020, the Board authorized the issuance of 20,000
preferred shares to be designated as Series D Preferred Stock
(“Series D PS”). The Series D PS have a par value of
$0.0001, a stated value of $1,200 and will vote together with the
common stock on an as-converted basis. In addition, as further
described in the Series D Designation, as long as any of the shares
of Series D Preferred Stock are outstanding, the Company will not
take certain corporate actions without the affirmative vote at a
meeting (or the written consent with or without a meeting) of the
majority of the shares of Series D Preferred Stock then
outstanding. Each holder of Series D Preferred Stock shall be
entitled to receive, with respect to each share of Series D
Preferred Stock then outstanding and held by such holder, dividends
at the rate of twelve percent (12%) per annum (the “Preferred
Dividends”). Dividends may be paid in cash or in shares of
Preferred Stock at the discretion of the Company.
The
Series D PS are convertible into Common Stock at the election of
the holder of the Series D PS at any time following five days after
a qualified offering (defined as an offering of common stock for an
aggregate price of at least $10,000,000 resulting in the listing
for trading of the Common Stock on the NYSE American, the Nasdaq
Capital Market, the Nasdaq Global Market, the Nasdaq Global Select
Market or the New York Stock Exchange) at a 35% discount to the
offering price, or, if a qualified offering has not occurred, at a
price of $0.10 per share, subject to adjustment based on several
situations, including future dilutive issuances and a Fundamental
Transaction.
The
Series D PS shall be redeemed by the Corporation on the date that
is no later than one calendar year from the date of its issuance.
The Series D PS are also redeemable at the Company's option, at
percentages ranging from 115% to 125% for the first 180 days, based
on the passage of time. The Company shall redeem the Series D PS in
cash upon a three business days prior notice to the holder or the
holder may convert the Series D PS within such three business days
period prior to redemption. Additionally, the holder shall have the
right to either redeem for cash or convert the Preferred Stock into
Common Stock within three business days following the consummation
of a qualified offering. The Series D PS are also redeemable at the
holder’s option, upon the occurrence of a triggering event
which includes a change of control, bankruptcy, and the inability
to deliver shares of common stock requested under conversion
notices. The triggering redemption amount is 150% of the stated
value.
Upon
the dissolution, liquidation or winding up of the Company, whether
voluntary or involuntary, the holders of Series D PS shall be
entitled to receive out of the assets of the Company an amount
equal to the stated value, plus any accrued and unpaid dividends
and any other fees or liquidated damages then due and owing for
each share of Series D PS before any payment or distribution shall
be made to the holders of any Junior securities.
As the
Series D PS has a conditional redemption date, as it is
convertible, it is classified in mezzanine and, it is considered to
be a debt host instrument. The conversion price, unless and until
there is a qualified offering, is a fixed price and as such the
conversion feature is not required to be bifurcated and accounted
for as a derivative liability. The Company will analyze the
conversion feature under ASC 470-20, “Debt with conversion
and other options”, at each issuance date and based on the
market price of the common stock of the Company on the commitment
date as compared to the conversion price, determine if there is a
beneficial conversion feature to recognize.
The
Series D Designation are subject to certain Registration Rights,
whereby if the Corporation does not complete a market listing to
the NYSE American, the Nasdaq Capital Market, the Nasdaq Global
Market, the Nasdaq Global Select Market or the New York Stock
Exchange (or any successors to any of the foregoing) within one
hundred twenty (120) calendar days from the issuance of the Series
D Preferred Stock, the Company will, within ten (10) calendar days,
file a registration statement covering the shares of Common Stock
underlying the Series D Preferred Shares. Additionally, the Company
will include the shares of Common Stock underlying the Series D
Preferred Shares in any registration statement which is being filed
by the Corporation’s existing investment banker, provided,
that said registration statement is not yet effective with the SEC
and provided that the Company receives the prior written approval
of said investment banker. There is no penalty provision associated
with not registering the underlying shares of common
stock...
Series D Preferred Equity Offering
On
December 18, 2020, the Company entered into securities purchase
agreements (the “Purchase Agreement”) with GHS
Investments LLC, Platinum Point Capital LLC and BHP Capital NY
(collectively, the “Purchaser”) , whereby, at the
closing, each Purchaser agreed to purchase from the Company, up to
5,000 shares of the Company’s Series D PS, par value $0.0001
per share, at a purchase price of $1,000 per share of Series D
Preferred Stock. The aggregate purchase price per Purchaser for the
Series D PS is $5,000,000. With a stated value of $6,000,000 for
the purchased Series D PS, there is a discount of $1,000,000 to be
accreted over the period until the redemption of the Series D PS.
In connection with the sale of the Series D Preferred Stock, the
Purchasers were granted 6,000,000 shares of the Company’s
common stock, par value $0.0001 (the “Commitment
Shares”), which have a fair value of $1,616,250 based on the
market price of the common shares of $0.27 on the date of the
Series D PS purchase.
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 dates of
funding as compared to the conversion price, determined there was a
$8,471,000, capped at $5,000,000 based on the purchase price of the
Series D PS, beneficial conversion feature to recognize, which will
be amortized over the term of the note using the effective interest
method.
On
January 8 and 10, 2021, the Company entered into additional
securities purchase agreements with the Purchaser, for 1,050 shares
of Series D PS, at an aggregate purchase price of $1,050,000. With
a stated value of $1,250,000 for the purchased Series D PS, there
is a discount of $250,000 to be accreted over the period until the
redemption of the Series D PS.
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 dates of
funding as compared to the conversion price, determined there was a
$3,022,000, capped at $1,050,000 based on the purchase price of the
Series D PS, beneficial conversion feature to recognize, which will
be amortized over the term of the note using the effective interest
method.
The
amortization of the beneficial conversion feature recognized during
the year ended March 31, 2021 amounted to approximately $1,721,000.
The accretion of the redemption for the year ended March 31, 2021
was $302,500.
Common Stock
For
shares of common stock issued upon conversion of outstanding
convertible debentures see Note 7.
Equity Financing Agreement 2019
On
August 23, 2019, the Company entered into a new Equity Financing
Agreement (“Equity Financing Agreement”) and
Registration Rights Agreement (“Registration Rights
Agreement”) with GHS. Under the terms of the Equity Financing
Agreement, GHS agreed to provide the Company with up to $11,000,000
upon effectiveness of a registration statement on Form S-1 (the
“Registration Statement”) filed with the U.S.
Securities and Exchange Commission (the
“Commission”).
Following
effectiveness of the Registration Statement, the Company shall have
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 $500,000. 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 4.99% 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 $11,000,000 worth of Common Stock under the terms of
the Equity Financing Agreement.
The
Registration Rights Agreement provides that the Company shall (i)
use its best efforts to file with the Commission the Registration
Statement within 30 days of the date of the Registration Rights
Agreement; and (ii) have the Registration Statement declared
effective by the Commission within 30 days after the date the
Registration Statement is filed with the Commission, but in no
event more than 90 days after the Registration Statement is filed.
The Registration Statement was filed on October 8, 2019 and as of
this filing has not yet been deemed effective.
Common Shares Issued to Consultants
In
connection with the VBF asset acquisition (Note 3), the Company
agreed to issue 500,000 shares of common stock as a finder’s
fee, with a fair value of $135,000 based on the market value of the
common stock of $0.27 as of December 15, 2020, the closing date of
the acquisition. The shares have not yet been issued, and have been
recognized in the accompanying consolidated financial statements as
Stock Payable as of March 31, 2021.
On
August 24, 2020, the Company issued 1,500,000 shares of common
stock to a consultant per an agreement entered into on June 25,
2020. The agreement has a six-month term, and therefore the fair
value of $67,500, based on the market value of $0.045 on the grant
date, will be recognized over the term of the agreement, with
$67,500 expensed during the year ended March 31, 2021. On December
25, 2020, the Company renewed the agreement for an additional six
months. As consideration for the agreement the Company issued
1,500,000 shares of common stock to the consultant. The agreement
has a six-month term, and therefore the fair value of $616,500,
based on the market value of $0.041 on the grant date, is
recognized in Prepaid expense to be amortized over the six-month
term. As of the year end March 31, 2021, $308,250 remained in
Prepaid expense with $308,250 recognized in consulting expense for
the year end March 31, 2021.
On June
12, 2020, the Company issued 1,250,000 shares of common stock to a
consultant, with the fair value of $61,250 based on the market
price of $0.049 on the date issued and which was recognized as
professional services upon grant.
NOTE 10 – OPTIONS AND WARRANTS
The
Company has not granted any options since inception.
The
Company granted warrants in connection with various convertible
debentures in previous periods. As of March 31, 2020, there are
2,917,000 (after adjustment) remaining warrants to purchase shares
of common stock outstanding, classified as a warrant liability,
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. The remaining outstanding warrants were cancelled in
connection with the legal settlement with Vista Capital
Investments, LLC, on April 9, 2020. See discussion in Note 11. The
related warrant liability was revalued upon cancellation on April
9, 2020, resulting in no change to the fair value of the warrant
liability and the $90,000 fair value was reclassified to
equity.
NOTE 11 – RELATED PARTY TRANSACTIONS
Accrued Payroll – Related Parties
Included in other
accrued expenses on the accompanying consolidated balance sheet is
approximately $35,000 and $84,000 owing to the President of the
Company as of March 31, 2021 and March 31, 2020, respectively, and
approximately $154,000 and $175,000, owing to a key employee (which
includes $50,000 in both fiscal years, from consulting services
prior to his employment) as of March 31, 2021 and March 31, 2020.
These amounts include both accrued payroll and accrued allowances
and expenses.
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, 2021 and
March 31, 2020 the outstanding balance is approximately $735,000.
As of March 31, 2021 and March 31, 2020, accrued interest payable
was approximately $66,000 and $51,000, respectively.
Shareholder Notes
The
Company has entered into several working capital notes payable to
multiple shareholders of NSH and Bill Williams, a former officer
and director, and a shareholder of the Company, for a total of
$486,500. The notes are unsecured and bear interest at 8%. These
notes had stock issued in lieu of interest and have no set monthly
payment or maturity date. The balance of these notes was $356,404
as of March 31, 2021 and $426,404 as of March 31, 2020,
respectively, and is classified as a current liability on the
consolidated balance sheets. As of March 31, 2021 and March 31,
2020, accrued interest payable was approximately $120,000 and
$240,000, respectively.
Shareholders
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 as of March
31, 2021 and March 31, 2020 was $54,647 and is classified as a
current liability on the consolidated balance sheets.
NOTE 12 – 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, 2021
and 2020 consist of the following:
|
|
|
Federal Tax
statutory rate
|
21.00%
|
21.00%
|
Permanent
differences
|
3.46%
|
3.52%
|
Valuation
allowance
|
(24.46)%
|
(24.52)%
|
Effective
rate
|
0.00%
|
0.00%
|
Significant
components of the Company’s deferred tax assets as of March
31, 2021 and 2020 are summarized below.
|
|
|
Deferred tax
assets:
|
|
|
Net operating loss
carryforwards
|
$3,429,000
|
$1,970,000
|
Other
|
-
|
5,000
|
Total deferred tax
asset
|
3,429,000
|
1,975,000
|
Valuation
allowance
|
(3,429,000)
|
(1,975,000))
|
|
$-
|
$-
|
As of
March 31, 2021, the Company had approximately $16,300,000 of
federal net operating loss carry forwards. These carry forwards are
allowed to be carried forward indefinitely and are to be limited to
80% of the taxable income. 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
$1,454,000 and $562,000 in the year ended March 31, 2021 and 2020,
respectively.
The
Company reviewed all income tax positions taken or that they expect
to be taken for all open years and determined that the 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 13 – LEASE
On June
24, 2019, the Company entered into a service and equipment lease
agreement for water treatment services, consumables and equipment.
The lease term is for five years, with a renewal option of an
additional five years, with a monthly lease payment of $5,000. The
Company analyzed the classification of the lease under ASC 842, and
as it did not meet any of the criteria for a financing lease it has
been classified as an operating lease. The Company determined the
Right of Use asset and Lease liability values at inception
calculated at the present value of all future lease payments for
the lease term, using an incremental borrowing rate of 5%. The
Lease Liability will be expensed each month, on a straight-line
basis, over the life of the lease. As of March 31, 2021 and March
31, 2020, the lease is on hold while the Company waits for new
equipment to be delivered and installed. As the lease is on hold
there has been no lease expense or amortization of the Right of Use
asset for the years ended March 31, 2021.
NOTE 14 – COMMITMENTS AND CONTINGENCIES
Executive Employment Agreements –Gerald
Easterling
On
April 1, 2015, the Company entered into an employment agreement
with Gerald Easterling at the time as the Company’s
President, effective as of April 1, 2015 (the “Employment
Agreement”).
The
Employment Agreement is terminable at will and each provide for a
base annual salary of $96,000. In addition, the Employment
Agreement provides that the employee is entitled, at the sole and
absolute discretion of the Company’s Board of Directors, to
receive performance bonuses. Mr. Easterling will also be entitled
to certain benefits including health insurance and monthly
allowances for cell phone and automobile expenses.
The
Employment Agreement provides that in the event the employee is
terminated without cause or resigns for good reason (as defined in
their Employment Agreement), 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.
The
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.
On
August 15, 2019, the late Mr. Bill Williams resigned from his
position as Chairman of the Board and Chief Executive Officer of
the Company, effective August 31, 2019. Mr. Easterling replaced him
as the Chief Executive Officer of the Company. On July 15, 2020,
the Company issued a promissory note to Ms. Williams in the amount
of $383,604 to settle the amounts agreed to in the separation
agreement for accrued compensation and debt (see Note
9).
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 alleged that the
Company failed to issue certain shares of the Company’s
Common Stock as was required under the terms of the Warrant. Vista
sought money damages in the approximate amount of $7,000,000, as
well as costs and reimbursement of expenses.
On
April 9, 2020, the Company, Vista and David Clark
(“Clark”), a principal of Vista, (the
“Parties”) entered into a Settlement Agreement and
Release (the “Settlement Agreement”) whereby the
Company shall (i) pay to Vista the sum of $75,000, which the
Company wired on April 10, 2020, and (ii) issue to Vista 17,500,000
shares of the Company’s Common Stock (the “Settlement
Shares”). For a period of time equal to 90-days from the date
of the settlement, or July 8, 2020, the Company shall have the
right, but not the obligation, to purchase back from Vista
8,750,000 of the Settlement Shares at a price equal to the greater
of (i) the volume weighted-average trading price of the
Company’s common shares over the five preceding trading days
prior to the date of the delivery of the Company’s written
notice of such repurchase or (ii) $0.02 per share. On May 18, 2020,
the Company received $50,000 as consideration for waiving the
purchase option on the Settlement Shares, thereby allowing Vista to
retain all of the Settlement Shares. The Vista warrants outstanding
were also cancelled as part of the Settlement Agreement. The
$75,000, as well as the fair market value of the 17,500,000 common
shares, which is $560,000 based on the market value of the
Company’s common stock on the settlement date of $0.32, was
accrued in Accrued expenses on the accompanying March 31, 2020
Balance Sheet and recognized as Loss on Warrant settlement in the
fourth quarter of the year ending March 31, 2020.
RGA Labs, Inc.
On
February 18, 2020, RGA Labs, Inc. (“RGA”) filed suit
against the Company in the Illinois Circuit Court (23rd District)
alleging that the Company owed RGA money pursuant to a written
contract for the design and manufacture of certain water treatment
equipment commissioned by the Company. The Company disputed the
allegations and has counterclaimed against RGA for additional costs
and expenses incurred by the Company in correcting, repairing and
retro-fitting the equipment to enable it to work in the
Company’s facilities. As a result of RGA’s failure to
respond to written discovery served by the Company and failure of
RGA to satisfy requirements imposed by an order compelling
response, the court issued an order prohibiting RGA from
introducing any evidence at the time of trial other than the
original agreement between RGA and the Company. Further, the Court
sustained the Company’s objection to RGA’s written
discovery obviating the Company’s obligation to respond. The
parties are required to mediate the case prior to trial which
mediation has not been scheduled at this time.
Gary Shover
A
shareholder of NaturalShrimp Holdings, Inc. (“NSH”),
Gary Shover, filed suit against the Company on August 11, 2020 in
the Northern District of Texas, Dallas Division, alleging breach of
contract for the Company’s failure to exchange common shares
of the Company for shares Mr. Shover owns in NSH. The Company has
filed its answer to the complaint and is seeking to settle the
matter with Mr. Shover with the approval of the Federal District
Court. A settlement stipulation has been prepared and approved by
the parties and has been filed with the Court along with a proposed
order. After a conference call between counsel for the parties,
counsel for the Company agreed to amend the stipulation, motion to
approve stipulation and the declarations filed in support of the
motion to provide a more detailed statement of fact to assist the
court in its determination, although as of the date of this filing,
the Company is not aware of the date of such
determination.
NOTE 15 – SUBSEQUENT EVENTS
Subsequent to the
year end, the Company has converted 262 Series B PS into 3,144,000
shares of the Company’s common stock.
Series E Preferred Stock
On
April 14, 2021, the Board authorized the issuance of 10,000 shares
of the Company’s Series E Preferred Stock. The shares of
Series E Preferred Stock have a stated value of $1,200 per share
and are convertible into shares of common stock at the election of
the holder of the Series E Preferred Stock at any time at a price
of $0.35 per share, subject to adjustment (the “Conversion
Price”). The Series E Preferred Stock is convertible into
that number of shares of common stock determined by dividing the
Series E Stated Value (plus any and all other amounts which may be
owing in connection therewith) by the Conversion Price, subject to
certain beneficial ownership limitations. Each holder of Series E
Preferred Stock shall be entitled to receive, with respect to each
share of Series E Preferred Stock then outstanding and held by such
holder, dividends at the rate of twelve percent (12%) per annum,
payable quarterly. The Series D PS are also redeemable at the
Company's option, at percentages ranging from 115% to 125% for the
first 180 days, based on the passage of time. The holders of Series
E Preferred Stock rank senior to the Common Stock and Common Stock
Equivalents (as defined in the Series E Designation) with respect
to payment of dividends and rights upon liquidation and will vote
together with the holders of the Common Stock on an as-converted
basis, subject to beneficial ownership limitations, on each matter
submitted to a vote of holders of Common Stock (whether at a
meeting of shareholders or by written consent). Upon any
liquidation, dissolution or winding-up of the Company, the holders
shall be entitled to receive out of the assets of the Company an
amount equal to the stated value, plus any accrued and unpaid
dividends and any other fees or liquidated damages then due and
owing for each share of Preferred Stock, before any distribution or
payment shall be made to the holders of any Junior Securities, and
if the assets of the Corporation shall be insufficient to pay in
full such amounts, then the entire assets to be distributed to the
holders shall be ratably distributed among the holders in
accordance with the respective amounts that would be payable on
such shares if all amounts payable thereon were paid in
full.
Securities Purchase Agreement
On
April 14, 2021, the Company entered into a securities purchase
agreement (the “Purchase Agreement”) with an accredited
investor (the “Purchaser”), for the offering (the
“Offering”) of (i) $5,000,000 worth of common stock
(“Shares”), par value $0.0001 per share, of the Company
(“Common Stock”); at a per share purchase price of
$0.55 per Share (ii) common stock purchase warrants
(“Warrants”) to purchase up to an aggregate of
10,000,000 shares of Common Stock, which are exercisable for a
period of five years after issuance at an initial exercise price of
$0.75 per share, subject to certain adjustments, as provided in the
Warrants; and (iii) 1,000,000 shares of Common Stock (the
“Commitment Shares”). Pursuant to the Purchase
Agreement, on April 15, 2021, the Company received net proceeds of
$4,732,123 from the Purchaser.
Further, pursuant
to the terms of the Purchase Agreement, from the date thereof until
the date that is the twelve-month anniversary of the closing of the
Offering, upon any issuance by the Company or any of its
subsidiaries of Common Stock or Common Stock Equivalents for cash
consideration, indebtedness or a combination of units thereof (a
“Subsequent Financing”), each Purchaser shall have the
right to participate in up to an amount of the Subsequent Financing
equal to 100% of the Subsequent Financing on the same terms,
conditions and price provided for in the Subsequent
Financing.
Pursuant to the
Purchase Agreement, on May 5, 2021, the Purchaser purchased an
additional 15,454,456 shares of common stock at a per share
purchase price of $0.55 per share (the “Second
Closing”), for net proceeds of approximately
$8,245,000.
Additionally, on
May 20, 2021, the Purchaser purchased an additional 2,727,272
shares of common stock at a price per share of $0.55 per share
(“Third Closing”), for net proceeds of approximately
$1,455,000.
Share Exchange Agreement
On
April 14, 2021, the Company, entered into a share exchange
agreement (the “Exchange Agreement”) with a holder of
the Series D Preferred Stock, whereby, at the closing of the
Offering, the Holder has agreed to exchange an aggregate of 3,600
shares of the Company’s Series D Preferred Stock, par value
$0.0001 per share (the “Series D Preferred Stock”) into
approximately 3,739.63 shares of the Company’s Series E
Convertible Preferred stock, par value $0.0001 (the “Series E
Preferred Stock”). In connection with the Exchange Agreement,
the Company has filed a Certificate of Designation of Preferences
of the Series E Convertible Preferred Stock with the State of
Nevada. The exchange was completed on April 15, 2021.
In
addition, in relation to the Offering, on April 15, 2021, the
Company redeemed the remaining 2,450 of the Series D PS for
$3,513,504
NAS Securities Purchase Agreement
On May
19, 2021, the Company entered into a Securities Purchase Agreement
(the “SPA”) with F&T Water Solutions, LLC
(“F&T”), for the shares of Natural Aquatic Systems,
Inc., a Texas corporation (“NAS”). Prior to entering
into the SPA, the Company owned fifty-one percent (51%) and F&T
owned forty-nine percent (49%) of the issued and outstanding shares
of common stock of NAS. Upon the closing of the SPA, the Company
purchased the 980,000 shares of NAS’ common stock owned by
F&T for a purchase price of $1,000,000 in cash and issued
3,960,396 shares of the Company’s common stock at a market
value of $0.505 per share, for a total fair value of $2,000,000,
for a total acquisition price of $3,000,000. The Company paid the
cash purchase price on May 20, 2021 and the purchase of the NAS
shares closed on May 25, 2021. After the SPA, NAS is a 100% owned
subsidiary of the Company.
Patents Purchase Agreement
On May
19, 2021, the Company entered into a Patents Purchase Agreement
(the “Patents Agreement”) with F&T. The Company and
F&T had previously jointly developed and patented a water
treatment technology used or useful in growing aquatic species in
re-circulating and enclosed environments (the “Patent”)
with each party owning a fifty percent (50%) interest. Upon the
closing of the Patents Agreement, the Company would purchase
F&T’s interest in the Patent, F&T’s 100%
interest in a second patent associated with the first Patent issued
to F&T in March 2018, and all other intellectual property
rights owned by F&T for a purchase price of $2,000,000 in cash
and issued 9,900,990 shares of the Company’s common stock
with a market value of $0.505 per share for a total fair value of
$5,000,000, for a total acquisition price of $7,000,000. The
Company paid the cash purchase price on May 20, 2021 and the
closing of the Patents Agreement took place on May 25,
2021.
Leak-Out Agreements
In
connection with the issuance of a total of 13,861,386 shares of the
Company’s common stock pursuant to the SPA and the Patents
Agreement (the “Shares”), the Company and F&T, on
May 19, 2021, entered into two separate leak-out agreements (the
“Leak-Out Agreements”). Pursuant to the Leak-Out
Agreements, F&T agreed that it would not sell or transfer the
Shares for six months following the closing of the SPA and Patents
Agreement and that, following these six months, each shareholder of
F&T who was issued a portion of the Shares could sell up to
one-sixth of their portion of the Shares every thirty-day period
occurring thereafter for the next six months. Following the
one-year anniversary of the closings, there will be no further
restrictions regarding the sale or transfer of the
Shares.
GHS Purchase Agreement
On June 28, 2021, the Company entered into a
securities purchase agreement with GHS (the “June GHS
Purchase Agreement”) for the offering of up to (i) $3,000,000
worth of common stock of the Company at a per share purchase price
of $0.40 and (ii) $11,000 worth of prefunded common stock purchase
warrants to purchase an aggregate of up to 1,100,000 shares of
common stock, which are exercisable upon issuance and shall not
expire prior to exercise, and are subject to certain adjustments,
as provided in the warrants. Pursuant to the June GHS Purchase
Agreement, on June 28, 2021, GHS purchased 7,500,000 shares of
common stock and 1,100,000 shares of common stock underlying the
prefunded warrants, for an aggregate purchase price of $3,011,000,
less offering expenses of $90,330, for net proceeds of
$2,909,670.