N
OTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JUNE 30, 2018
(Unaudited)
NOTE 1 – NATURE OF THE ORGANIZATION AND BUSINESS
Nature of the Business
NaturalSrimp
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 three months ended June 30, 2018, the Company had a net loss of
approximately $1,097,000. At June 30, 2018, the Company had an
accumulated deficit of approximately $35,110,000 and a working
capital deficit of approximately $6,735,000. 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 three months ended June 30, 2018, the
Company received net cash proceeds of $15,400 from the sale of the
Company’s common stock. The Company also had $515,720 of
their convertible debentures converted into 37,887,704 shares of
their common stock, reducing their current obligations. Subsequent
to June 30, 2018, the Company received $197,500 in net proceeds
from the funding of convertible debentures (See Note 10).
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
Basis of Presentation
The
accompanying unaudited financial information as of and for the
three months ended June 30, 2018 and 2017 has been prepared in
accordance with accounting principles generally accepted in the
U.S. for interim financial information and with the instructions to
Quarterly Report on Form 10-Q and Article 10 of Regulation S-X. In
the opinion of management, such financial information includes all
adjustments (consisting only of normal recurring adjustments)
considered necessary for a fair presentation of our financial
position at such date and the operating results and cash flows for
such periods. Operating results for the three months ended June 30,
2018 are not necessarily indicative of the results that may be
expected for the entire year or for any other subsequent interim
period.
Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted
accounting principles have been omitted pursuant to the rules of
the U.S. Securities and Exchange Commission, or the SEC. These
unaudited financial statements and related notes should be read in
conjunction with our audited financial statements for the year
ended March 31, 2018 included in our Annual Report on Form
10-K filed with the SEC on July 13, 2018.
The
condensed consolidated balance sheet at March 31, 2018 has been
derived from the audited financial statements at that date, but
does not include all of the information and footnotes required by
generally accepted accounting principles in the U.S. for complete
financial statements.
Consolidation
The
consolidated financial statements include the accounts of
NaturalShrimp Incorporated and its wholly-owned subsidiaries,
NaturalShrimp Corporation, NaturalShrimp Global and Natural Aquatic
Systems, Inc. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Use of Estimates
Preparing financial
statements in conformity with accounting principles generally
accepted in the United States of America requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those
estimates.
Basic and Diluted Earnings/Loss per Common Share
Basic
and diluted earnings or loss per share (“EPS”) amounts
in the consolidated financial statements are computed in accordance
with ASC 260 – 10 “
Earnings per Share
”, which
establishes the requirements for presenting EPS. Basic EPS is based
on the weighted average number of common shares outstanding.
Diluted EPS is based on the weighted average number of common
shares outstanding and dilutive common stock equivalents. Basic EPS
is computed by dividing net income or loss available to common
stockholders (numerator) by the weighted average number of common
shares outstanding (denominator) during the period. For the three
months ended June 30, 2018, the Company had approximately
$1,117,000 in principal on convertible debentures whose
approximately 98,689,000 underlying shares are convertible at the
holders’ option at conversion prices ranging from 34% - 61%
of the defined trading price and approximately 18,227,000 warrants
with an exercise price of 50% to 57% of the market price of the
Company’s common stock, which were not included in the
calculation of diluted EPS as their effect would be anti-dilutive.
For the three months ended June 30, 2017, the Company had $330,000
in convertible debentures whose underlying shares were convertible
at the holders’ option at initial fixed conversion prices
ranging from $0.30 to $0.35 and 70,000 warrants with an exercise
price of $0.60, 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 June 30, 2018 and 2017.
The
Derivative liabilities are Level 3 fair value
measurements.
The
following is a summary of activity of Level 3 liabilities during
the three months ended June 30, 2018:
Derivative
liability balance at March 31, 2018
|
$
3,455,000
|
Additions to
derivative liability for new debt
|
882,000
|
Reclass to equity
upon conversion
|
(1,305,000
)
|
Change in fair
value
|
(232,000
)
|
Balance at June 30,
2018
|
$
2,800,000
|
At June
30, 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 $0.02; a risk-free interest rate ranging from 1.93% to
2.33%, and expected volatility of the Company’s common stock
ranging from 248.71% to 321.92%, and the various estimated reset
exercise prices weighted by probability.
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 $18,000 for both the three months ended June 30,
2018 and 2017, respectively.
Commitments and Contingencies
Certain
conditions may exist as of the date the consolidated financial
statements are issued, which may result in a loss to the Company
but which will only be resolved when one or more future events
occur or fail to occur. The Company’s management and its
legal counsel assess such contingent liabilities, and such
assessment inherently involves an exercise of judgment. In
assessing loss contingencies related to legal proceedings that are
pending against the Company or unasserted claims that may result in
such proceedings, the Company’s legal counsel evaluates the
perceived merits of any legal proceedings or unasserted claims as
well as the perceived merits of the amount of relief sought or
expected to be sought therein.
If the
assessment of a contingency indicates that it is probable that a
material loss has been incurred and the amount of the liability can
be estimated, then the estimated liability would be accrued in the
Company’s consolidated financial statements. If the
assessment indicates that a potentially material loss contingency
is not probable, but is reasonably possible, or is probable but
cannot be estimated, then the nature of the contingent liability,
together with an estimate of the range of possible loss if
determinable and material, would be disclosed.
Loss
contingencies considered remote are generally not disclosed unless
they involve guarantees, in which case the nature of the guarantee
would be disclosed.
Recently Issued Accounting Standards
In May
2014, the Financial Accounting Standards Board (“FASB”)
issued Accounting Standards Update (“ASU”) No. 2014-09,
“Revenue from Contracts with Customers,” which requires
an entity to recognize the amount of revenue to which it expects to
be entitled for the transfer of promised goods or services to
customers. ASU 2014-09 will replace most existing revenue
recognition guidance in U.S. GAAP when it becomes effective. The
new standard is effective for annual reporting periods for public
business entities beginning after December 15, 2017, including
interim periods within that reporting period. The new standard
permits the use of either the retrospective or cumulative effect
transition method. The Company adopted ASU 2014-09 in the three
months ended June 30, 2018, and as there have not been any
significant revenues to date, the adoption did not have a material
impact on the Company’s financial position or results of
operations, and no transition method was necessary upon
adoption.
In
February 2016, the FASB issued ASU No. 2016-02,
Leases
(Topic 842) The standard
requires all leases that have a term of over 12 months to be
recognized on the balance sheet with the liability for lease
payments and the corresponding right-of-use asset initially
measured at the present value of amounts expected to be paid over
the term. Recognition of the costs of these leases on the income
statement will be dependent upon their classification as either an
operating or a financing lease. Costs of an operating lease will
continue to be recognized as a single operating expense on a
straight-line basis over the lease term. Costs for a financing
lease will be disaggregated and recognized as both an operating
expense (for the amortization of the right-of-use asset) and
interest expense (for interest on the lease liability). This
standard will be effective for our interim and annual periods
beginning January 1, 2019, and must be applied on a modified
retrospective basis to leases existing at, or entered into after,
the beginning of the earliest comparative period presented in the
financial statements. Early adoption is permitted. We are currently
evaluating the timing of adoption and the potential impact of this
standard on our financial position, but we do not expect it to have
a material impact on our results of operations.
During
the three months ended June 30, 2018, there were several new
accounting pronouncements issued by the Financial Accounting
Standards Board. Each of these pronouncements, as applicable, has
been or will be adopted by the Company. Management does not believe
the adoption of any of these accounting pronouncements has had or
will have a material impact on the Company’s consolidated
financial statements.
Management’s Evaluation of Subsequent Events
The
Company evaluates events that have occurred after the balance sheet
date of June 30, 2018, through the date which the consolidated
financial statements were issued. Based upon the review, other than
described in Note 10 – Subsequent Events, the Company did not
identify any recognized or non-recognized subsequent events that
would have required adjustment or disclosure in the consolidated
financial statements.
NOTE 3 – SHORT-TERM NOTE AND LINES OF CREDIT
On
November 3, 2015, the Company entered into a short-term note
agreement with Community National Bank for a total value of
$50,000. The short-term note has a stated interest rate of 5.25%,
maturity date of December 15, 2017 and had an initial interest only
payment on February 3, 2016. The short-term note is guaranteed by
an officer and director. The balance of the line of credit at both
June 30, 2018 and March 31, 2018 was $25,298.
The
Company also has a working capital line of credit with Extraco
Bank. On April 30, 2018, the Company renewed the line of credit for
$475,000. The line of credit bears an interest rate of 5.0% that is
compounded monthly on unpaid balances and is payable monthly. The
line of credit matures on April 30, 2019, and is secured by
certificates of deposit and letters of credit owned by directors
and shareholders of the Company. The balance of the line of credit
is $472,675 at both June 30, 2018 and March 31, 2018.
The
Company also has additional lines of credit with Extraco Bank for
$100,000 and $200,000, which were renewed on January 19, 2018 and
April 30, 2018, respectively, with maturity dates of January 19,
2019 and April 30, 2019, respectively. The lines of credit bear an
interest rate of 4.5% (increased to 6.5% and 5%, respectively, upon
renewal in 2017) that is compounded monthly on unpaid balances and
is payable monthly. They are secured by certificates of deposit and
letters of credit owned by directors and shareholders of the
Company. The balance of the lines of credit was $278,470 at both
June 30, 2018 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 30.9% as of June 30,
2018. The line of credit is unsecured. The balance of the line of
credit was $9,580 at both June 30, 2018 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 15.00% as of June 30, 2018. The
line of credit is secured by assets of the Company’s
subsidiaries. The balance of the line of credit is $10,237 at both
June 30, 2018 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. As consideration for the guarantee,
the Company issued 600,000 of its common stock to the shareholders,
which was recognized as debt issuance costs with a fair value of
$264,000, based on the market value of the Company’s common
stock of $0.44 on the date of issuance. As the fair value of the
debt issuance costs exceeded the face amount of the promissory
note, the excess of the fair value was recognized as financing
costs in the statement of operations. The resulting debt discount
is to be amortized over the term of the CNB Note under the
effective interest method. As the debt discount is in excess of the
face amount of the promissory note, the effective interest rate is
not determinable, and as such, all of the discount was immediately
expensed.
Maturities on Bank
loan is as follows:
12 months
ending:
|
|
June 30,
2019
|
$
7,751
|
June 30,
2020
|
226,800
|
|
$
234,551
|
NOTE 5 – CONVERTIBLE DEBENTURES
July Debenture
On July
31, 2017, the Company entered into a 5% Securities Purchase
Agreement. The agreement calls for the purchase of up to $135,000
in convertible debentures, due 12 months from issuance, with a
$13,500 OID. The first closing was for principal of $45,000 with a
purchase price of $40,500 (an OID of $4,500), with additional
closings at the sole discretion of the holder. On October 2, 2017,
the Company entered into a second closing of the July 31, 2017
debenture, in the principal amount of $22,500 for a purchase price
of $20,250, with $1,500 deducted for legal fees, resulting in net
cash proceeds of $18,750. The July 31 debenture is convertible at a
conversion price of 60% of the lowest trading price during the
twenty-five days prior to the conversion date, and is also subject
to equitable adjustments for stock splits, stock dividends or
rights offerings by the Company. A further adjustment occurs if the
trading price at any time is equal to or lower than $0.10, whereby
an additional 10% discount to the market price shall be factored
into the conversion rate, as well as an adjustment to occur upon
subsequent sales of securities at a price lower than the original
conversion price. The conversion feature meets the definition of a
derivative and therefore requires bifurcation and is accounted for
as a derivative liability.
On
February 5, 2018, the Company entered into an amendment to the July
Debenture, whereby in exchange for a payment of $6,500 the note
holder, except for a conversion of up to 125,000 shares of the
Company’s common shares, would be only entitled to effectuate
a conversion under the note on or after March 2, 2018.
The
Company estimated the fair value of the conversion feature
derivatives embedded in the convertible debentures at issuance at
$61,000, based on weighted probabilities of assumptions used in the
Black Scholes pricing model. The key valuation assumptions used
consist, in part, of the price of the Company’s common stock
of $0.33 at issuance date; a risk-free interest rate of 1.23% and
expected volatility of the Company’s common stock, of
192.43%, and the various estimated reset exercise prices weighted
by probability. This resulted in the calculated fair value of the
debt discount being greater than the face amount of the debt, and
the excess amount of $45,500, including the commitment fees, was
immediately expensed as financing costs.
On
February 20, 2018, the holder converted $4,431 of the January
debentures into 125,000 common shares of the Company. As a result
of the conversion the derivative liability relating to the portion
converted was remeasured immediately prior to the conversion with a
fair value of $11,000, with an increase of $4,000 recognized, with
the fair value of the derivative liability related to the converted
portion being reclassified to equity. The key valuation assumptions
used consist, in part, of the price of the Company’s common
stock of $0.12; a risk-free interest rate of 1.87% and expected
volatility of the Company’s common stock, of 353.27%, and the
various estimated reset exercise prices weighted by
probability.
During
March, 2018, the holder converted an additional $17,113 of the July
debentures into 630,000 common shares of the Company. As a result
of the conversion the derivative liability was remeasured
immediately prior to the conversion with a fair value of $138,000,
with an increase of $74,000 recognized, with the fair value of the
derivative liability related to the converted portion being
reclassified to equity. The key valuation assumptions used consist,
in part, of the price of the Company’s common stock of $0.11;
a risk-free interest rate of 1.77% and expected volatility of the
Company’s common stock, of 375.93%, and the various estimated
reset exercise prices weighted by probability.
During
April 2018, in three separate conversions, the remainder of the
first closing was fully converted into 1,225,627 common shares 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 common shares
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. As a result of the dilutive issuance adjustment
provision, the warrants have been classified out of equity as a
warrant liability. The Company estimated the fair value of the
warrant liability using the Black Scholes pricing model. The key
valuation assumptions used consist, in part, of the price of the
Company’s common stock of $0.33 at issuance date; a risk-free
interest rate of 1.84% and expected volatility of the
Company’s common stock, of 316.69%, resulting in a fair value
of $25,000.
August Debenture
On
August 28, 2017, the Company entered into a 12% convertible
promissory note for $110,000, with an OID of $10,000, which matures
on February 28, 2018. The note is convertible at a variable
conversion rate that is the lesser of 60% of the lowest trading
price for last 20 days prior to issuance of the note or 60% of the
lowest market price over the 20 days prior to conversion. The
conversion price shall be adjusted upon subsequent sales of
securities at a price lower than the original conversion price.
There are additional adjustments to the conversion price for events
set forth in the agreement, including if the Company is not DTC
eligible, the Company is no longer a reporting company, or the note
cannot be converted into free trading shares on or after nine
months from issue date. Per the agreement, the Company is required
at all times to have authorized and reserved five times the number
of shares that is actually issuable upon full conversion of the
note. The conversion feature meets the definition of a derivative
and therefore requires bifurcation and is accounted for as a
derivative liability. The note was sold to the holder of the
January 29, 2018 note (below) on February 8, 2018, with an
amendment entered into to extend the note until March 5, 2018. In
exchange for a cash payment of $5,000 and the issuance of 50,000
shares of common stock, on March 5, 2018, the holder agreed to not
convert any of the outstanding debt into common stock of the
Company until April 8, 2018. 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 common shares
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 common shares at the closing date of $0.17,
and was recognized as part of the debt discount. The shares are to
be returned to the Treasury of the Company in the event the
debenture is fully repaid prior to the date which is 180 days
following the issue date. On February 22, 2018, in connection with
the sale of the note to the 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 common shares at the closing date of $0.11,
and was recognized as part of the debt discount. The shares are to
be returned to the Treasury of the Company in the event the
debenture is fully repaid prior to the date which is 180 days
following the issue date.
During
May 2018, the second closing was fully converted into 5,072,216
common shares 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 convertible
promissory note for $146,000, with an OID of $13,500, which matures
on June 11, 2018. The note bears interest at 12%, which increases
to 24% upon an event of default. 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. As a result of the dilutive issuance adjustment
provision, the warrants have been classified out of equity as a
warrant liability. The Company estimated the fair value of the
warrant liability using the Black Scholes pricing model. The key
valuation assumptions used consist, in part, of the price of the
Company’s common stock of $0.13 at issuance date; a risk-free
interest rate of 1.71% and expected volatility of the
Company’s common stock, of 276.90%, resulting in a fair value
of $32,000.
During
April and June, 2018, in three separate conversions, $85,000 of the
note was converted into 9,200,600 common shares of the Company. The
remainder of the principal, $61,000, is in default as of June 30,
2018, although the Company has not received a written notice of
default from the lender. As a result of the conversions 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. On July 27, 2018, the holder converted $15,113 of
the September 11, 2017 debentures into 3,436,049 common shares of
the Company.
September 12, 2017 Debenture
On
September 12, 2017, the Company entered into a 12% convertible
promissory note for principal amount of $96,500 with a $4,500 OID,
which matures on June 12, 2018. The note is able to be prepaid
prior to the maturity date, at a cash redemption premium, at
various stages as set forth in the agreement. The note is
convertible commencing 180 days after issuance date (or upon an
event of Default), or March 11, 2018, with a variable conversion
rate at 60% of market price, defined as the lowest trading price
during the twenty days prior to the conversion date. Additionally,
the conversion price adjusts if the Company is not able to issue
the shares requested to be converted, or upon any future financings
have more favorable terms. Per the agreement, the Company is
required at all times to have authorized and reserved six times the
number of shares that is actually issuable upon full conversion of
the note. The conversion feature meets the definition of a
derivative and therefore requires bifurcation and is accounted for
as a derivative liability.
On
March 20, 2018, the holder converted $32,500 of the September 12,
2017 debentures into 1,031,746 common shares of the Company. As a
result of the conversion the derivative liability was remeasured
immediately prior to the conversion with a fair value of $318,000,
with an increase of $165,000 recognized, with the fair value of the
derivative liability related to the converted portion of $107,000
being reclassified to equity. The key valuation assumptions used
consist, in part, of the price of the Company’s common stock
of $0.09; a risk-free interest rate of 1.81% and expected
volatility of the Company’s common stock, of 375.93%, and the
various estimated reset exercise prices weighted by
probability.
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.
During
April 2018, in two separate conversions, the debenture was fully
converted into 2,611,164 common shares 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 common shares 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. Subsequent to June 30,
2018, the holder converted another $10,450 of the October 17, 2017
debentures into 2,300,000 common shares of the
Company.
November 14, 2017 Debenture
On
November 14, 2017, the Company entered into two 8% convertible
redeemable notes, in the aggregate principal amount of $112,000,
convertible into shares of common stock of the Company, with
maturity dates of November 14, 2018. Each note was in the face
amount of $56,000, with an original issue discount of $2,800,
resulting in a purchase price for each note of $53,200. The first
of the two notes was paid for by the buyer in cash upon closing,
with the second note initially paid for by the issuance of an
offsetting $53,200 secured promissory note issued to the Company by
the buyer (“Buyer Note”). The Buyer Note is due on July
14, 2018. The notes are convertible at 57% of the lowest of trading
price for last 20 days, or lowest closing bid price for last 20
days, with the discount increased to 47% in the event of a DTC
chill, with the second note not being convertible until the buyer
has settled the Buyer Note in cash payment. The Buyer Note is
included in Notes Receivable in the accompanying financial
statements.
During
the first six months, the convertible redeemable notes are in
effect, the Company may redeem the note at amounts ranging from
120% to 140% of the principal and accrued interest balance, based
on the redemption date’s passage of time ranging from 90 days
to 180 days from the date of issuance of each
debenture.
The
conversion feature meets the definition of a derivative and
therefore requires bifurcation and is accounted for as a derivative
liability.
The
Company estimated the aggregate fair value of the conversion
feature derivatives embedded in the two convertible debentures at
issuance at $164,000, based on weighted probabilities of
assumptions used in the Black Scholes pricing model. The key
valuation assumptions used consist, in part, of the price of the
Company’s common stock of $0.10 at issuance date; a risk-free
interest rate of 1.59% and expected volatility of the
Company’s common stock, of 192.64%, and the various estimated
reset exercise prices weighted by probability. This resulted in the
calculated fair value of the debt discount being greater than the
face amount of the debt, and the excess amount of $63,200 was
immediately expensed as financing costs.
During
May and June, 2018, in three separate conversions, the first
debenture was fully converted into 4,834,790 common shares 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. If the note is not paid by its maturity date
the outstanding principal due on the note increases by 10%. The
note also contains a cross default to all other outstanding notes.
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 included in Notes Receivable in the accompanying financial
statements. The Buyer Note was due on August 20, 2018. The Buyer
Note was settled on July 11, 2018, for a purchase price of $74,000,
net of fees. 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. On August 7,
2018, the holder converted $25,000 of the December 20, 2017
debentures into 4,363,013 common shares of the
Company.
During
the first six months, the convertible redeemable notes are in
effect, the Company may redeem the note at amounts ranging from
120% to 136% of the principal and accrued interest balance, based
on the redemption date’s passage of time ranging from 90 days
to 180 days from the date of issuance of each
debenture.
The
conversion feature meets the definition of a derivative and
therefore requires bifurcation and is accounted for as a derivative
liability.
The
Company estimated the aggregate fair value of the conversion
feature derivatives embedded in the two convertible debentures at
issuance at $403,000, based on weighted probabilities of
assumptions used in the Black Scholes pricing model. The key
valuation assumptions used consist, in part, of the price of the
Company’s common stock of $0.15 at issuance date; a risk-free
interest rate of 1.72% and expected volatility of the
Company’s common stock, of 215.40%, and the various estimated
reset exercise prices weighted by probability. This resulted in the
calculated fair value of the debt discount being greater than the
face amount of the debt, and the excess amount of $181,000 was
immediately expensed as financing costs.
January 29, 2018 Debenture
On
January 29, 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, including a cross default to all
other outstanding notes, is 24% per annum. If the note is not paid
by its maturity date the outstanding principal due on the note
increases by 10%. 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 first of the Buyer’s Notes was funded
on July 26, 2018. (Note 10). 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.
On August 8,
2018, the holder converted $10,000 of the January 29, 2018 first
debenture into 1,666,667 common shares of the Company.
During
the first 180 days, the convertible redeemable notes are in effect,
the Company may redeem the note at amounts ranging from 115% to
140% of the principal and accrued interest balance, based on the
redemption date’s passage of time ranging from 30 days to 180
days from the date of issuance of each debenture. Upon any sale
event, as defined, at the holder’s request the Company will
redeem the note for 150% of the principal and accrued
interest.
The
Company estimated the aggregate fair value of the conversion
feature derivatives embedded in the three convertible debentures at
issuance at $185,000, based on weighted probabilities of
assumptions used in the Black Scholes pricing model. The key
valuation assumptions used consist, in part, of the price of the
Company’s common stock of $0.12 at issuance date; a risk-free
interest rate of 1.80% and expected volatility of the
Company’s common stock, of 215.40%, and the various estimated
reset exercise prices weighted by probability. This resulted in the
calculated fair value of the debt discount being greater than the
face amount of the debt, and the excess amount of $71,000 was
immediately expensed as financing costs.
January 30, 2018 Debenture
On
January 30, 2018, the Company entered into a 12% convertible note
for the principal amount of $80,000, convertible into shares of
common stock of the Company, which matures on January 30, 2019.
Upon an event of default, as defined in the note, the note becomes
immediately due and payable, in an amount equal to 150% of all
principal and accrued interest due on the note, with default
interest of 22% per annum (the “Default Amount”). If
the Company fails to deliver conversion shares within 2 days of a
conversion request, the note becomes immediately due and payable at
an amount of twice the Default Amount. The note is convertible at
61% of the lowest closing bid price for the last 15 days. Per the
agreement, the Company is required at all times to have authorized
and reserved six times the number of shares that is actually
issuable upon full conversion of the note. Failure to maintain the
reserved number of shares is considered an event of default if not
cured within three days of a notice of conversion. The Company has
not maintained the required share reservation under the terms of
the note agreement. The Company believes it has sufficient
available shares of the Company’s common stock in the event
of conversion for these notes. The conversion feature meets the
definition of a derivative and therefore requires bifurcation and
will be accounted for as a derivative liability.
During
the first 180 days, the convertible redeemable note is in effect,
the Company may redeem the note at amounts ranging from 115% to
140% of the principal and accrued interest balance, based on the
redemption date’s passage of time ranging from 30 days to 180
days from the date of issuance of the debenture. The note was
redeemed on July 27, 2018, for approximately $123,000 (Note
10).
The
Company estimated the aggregate fair value of the conversion
feature derivatives embedded in the convertible debenture at
issuance at $163,000, based on weighted probabilities of
assumptions used in the Black Scholes pricing model. The key
valuation assumptions used consist, in part, of the price of the
Company’s common stock of $0.08 at issuance date; a risk-free
interest rate of 1.88% and expected volatility of the
Company’s common stock, of 215.40%, and the various estimated
reset exercise prices weighted by probability. This resulted in the
calculated fair value of the debt discount being greater than the
face amount of the debt, and the excess amount of $83,000 was
immediately expensed as financing costs.
On
March 9, 2018, the Company entered into a 12% convertible note for
the principal amount of $43,000, with the holder of the January 30,
2018 debenture, convertible into shares of common stock of the
Company, which matures on March 9, 2019. Upon an event of default,
as defined in the note, the note becomes immediately due and
payable, in an amount equal to 150% of all principal and accrued
interest due on the note, with default interest of 22% per annum
(the “Default Amount”). If the Company fails to deliver
conversion shares within 2 days of a conversion request, the note
becomes immediately due and payable at an amount of twice the
Default Amount. The note is convertible on the date beginning 180
days after issuance of the note, at 61% of the lowest closing bid
price for the last 15 days. Per the agreement, the Company is
required at all times to have authorized and reserved six times the
number of shares that is actually issuable upon full conversion of
the note. Failure to maintain the reserved number of shares is
considered an event of default. The conversion feature meets the
definition of a derivative and therefore requires bifurcation and
will be accounted for as a derivative liability.
During
the first 180 days the convertible redeemable note is in effect,
the Company may redeem the note at amounts ranging from 115% to
140% of the principal and accrued interest balance, based on the
redemption date’s passage of time ranging from 30 days to 180
days from the date of issuance of the debenture.
The
Company estimated the aggregate fair value of the conversion
feature derivatives embedded in the convertible debenture at
issuance at $94,000, based on weighted probabilities of assumptions
used in the Black Scholes pricing model. The key valuation
assumptions used consist, in part, of the price of the
Company’s common stock of $0.09 at issuance date; a risk-free
interest rate of 2.03% and expected volatility of the
Company’s common stock, of 215.40%, and the various estimated
reset exercise prices weighted by probability. This resulted in the
calculated fair value of the debt discount being greater than the
face amount of the debt, and the excess amount of $54,000 was
immediately expensed as financing costs.
March 20, 2018 Debenture
On
March 20, 2018, the Company entered into a convertible note for the
principal amount of $84,000, convertible into shares of common
stock of the Company, which matures on December 20, 2018. The note
bears interest at 12% for the first 180 days, which increases to
18% after 180 days, and 24% upon an event of default. 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. The note is convertible on the
date beginning 180 days after issuance of the note, at the lower of
60% of the lowest trading price for the last 20 days prior to the
issuance date of this note, or 60% of the lowest trading price for
the last 20 days prior to conversion. In the event of a "DTC
chill", the conversion rate is adjusted to 40% of the market price.
Per the agreement, the Company is required at all times to have
authorized and reserved ten times the number of shares that is
actually issuable upon full conversion of the note. The Company has
not maintained the required share reservation under the terms of
the note agreement. The Company believes it has sufficient
available shares of the Company’s common stock in the event
of conversion for these notes. The conversion feature meets the
definition of a derivative and therefore requires bifurcation and
will be accounted for as a derivative liability.
Additionally, the
Company also issued 255,675 shares of common stock of the Company
as a commitment fee. The commitment shares fair value was
calculated as $28,124, based on the market value of the common
shares at the closing date of $0.11, and was recognized as part of
the debt discount.
The
Company estimated the aggregate fair value of the conversion
feature derivatives embedded in the convertible debenture at
issuance at $191,000, based on weighted probabilities of
assumptions used in the Black Scholes pricing model. The key
valuation assumptions used consist, in part, of the price of the
Company’s common stock of $0.06 at issuance date; a risk-free
interest rate of 2.09% and expected volatility of the
Company’s common stock, of 272.06%, and the various estimated
reset exercise prices weighted by probability. This resulted in the
calculated fair value of the debt discount being greater than the
face amount of the debt, and the excess amount of $144,124
(including the fair value of the common shares issued) was
immediately expensed as financing costs.
March 21, 2018 Debenture
On
March 21, 2018, the Company entered into a convertible note for the
principal amount of $39,199, which includes an OID of $4,199,
convertible into shares of common stock of the Company, which
matures on December 20, 2018. The note bears interest at 12% for
the first 180 days, which increases to 18% after 180 days, and 24%
upon an event of default. 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. The note is convertible on the date beginning 180 days
after issuance of the note, at the lowest of 60% of the lowest
trading price for the last 20 days prior to the issuance date of
this note, or 60% of the lowest trading price for the last 20 days
prior to conversion. The discount is increased upon certain events
set forth in the agreement regarding the obtainability of the
shares, such as a DTC "chill". Additionally, if the Company ceases
to be a reporting company, or after 181 days the note cannot be
converted into freely traded shares, the discount is increased an
additional 15%. Per the agreement, the Company is required at all
times to have authorized and reserved ten times the number of
shares that is actually issuable upon full conversion of the note.
The Company has not maintained the required share reservation under
the terms of the note agreement. The Company believes it has
sufficient available shares of the Company’s common stock in
the event of conversion for these notes. The conversion feature
meets the definition of a derivative and therefore requires
bifurcation and will be accounted for as a derivative
liability.
Additionally, the
Company also issued 119,300 shares of common stock of the Company
as a commitment fee. The commitment shares fair value was
calculated as $13,123, based on the market value of the common
shares at the closing date of $0.11, and was recognized as part of
the debt discount.
The
Company estimated the aggregate fair value of the conversion
feature derivatives embedded in the two convertible debentures at
issuance at $89,000, based on weighted probabilities of assumptions
used in the Black Scholes pricing model. The key valuation
assumptions used consist, in part, of the price of the
Company’s common stock of $0.06 at issuance date; a risk-free
interest rate of 2.09% and expected volatility of the
Company’s common stock, of 272.06%, and the various estimated
reset exercise prices weighted by probability. This resulted in the
calculated fair value of the debt discount being greater than the
face amount of the debt, and the excess amount of $67,123
(including the fair value of the common shares issued) was
immediately expensed as financing costs.
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 Buyer Note
is due on December 12, 2018. 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.
The
notes are convertible at 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.
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 common shares, 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.
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 holders prior written consent, at
150% of the principal and accrued interest balance.
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.
As the
September 11, 2017 debenture was not paid in full by the maturity
date, the above notes which have cross default provisions as
disclosed, are in technical default.
The
derivative liability arising from all of the above discussed
debentures was revalued at June 30, 2018, resulting in an increase
of the fair value of the derivative liability of $232,000 for the
three months ended June 30, 2018, after the reclass of $1,305,000
of the derivative fair value to equity upon the conversions of
approximately $467,000 of principal, and a decrease in the fair
value of $468,000 immediately prior to conversion . The key
valuation assumptions used consist, in part, of the price of the
Company’s common stock of $0.02; a risk-free interest rate
ranging from 1.93% to 2.33%, and expected volatility of the
Company’s common stock ranging from 248.71% to 321.92%, and
the various estimated reset exercise prices weighted by
probability. The derivative liability was revalued at March 31,
2018, resulting in an increase of the fair value of the derivative
liability of $1,616,000 for the year ended March 31, 2018. The key
valuation assumptions used consist, in part, of the price of the
Company’s common stock of $0.06; a risk-free interest rate
ranging from 1.73% to 2.09%, and expected volatility of the
Company’s common stock ranging from 272.06% to 375.93%, and
the various estimated reset exercise prices weighted by
probability.
The
warrant liability relating to all of the warrant issuances
discussed above was revalued at June 30, 2018, resulting in an
estimated fair value of $324,000, for an increase to the fair value
of $47,000 for the three months ended June 30, 2018. The key
valuation assumptions used consists, in part, of the price of the
Company’s common stock of $0.02; a risk-free interest rate
ranging from 1.89% to 2.73%, and expected volatility of the
Company’s common stock of 351.3%. The warrant liability was
remeasured as of March 31, 2018, resulting in an estimated fair
value of $277,000, for a decrease in fair value of $244,000. 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
Common Stock
On
April 12, 2018, the Company sold 200,000 shares of its common stock
at $0.077 per share, for a total financing of $15,400.
Between
April 6, 2018 and June 20, 2018, the Company issued 37,887,704
shares of the Company’s common stock upon conversion of
approximately $485,000 of their outstanding convertible debt and
approximately $31,000 of accrued interest.
NOTE 7 – RELATED PARTY TRANSACTIONS
Notes Payable – Related Parties
On
April 20, 2017, the Company entered into a convertible debenture
with an affiliate of the Company whose managing member is the
Treasurer, Chief Financial Officer, and a director of the Company
(the “affiliate”), for $140,000. The convertible
debenture matures one year from date of issuance, and bears
interest at 6%. Upon an event of default, as defined in the
debenture, the principal and any accrued interest becomes
immediately due, and the interest rate increases to 24%. The
convertible debenture is convertible at the holder’s option
at a conversion price of $0.30. As of June 30, 2018 and March 31,
2018, the Company has paid $52,400 on this note, with $87,600
remaining outstanding.
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, for a total of $736,111. The note payable has no set
monthly payment or maturity date with a stated interest rate of
2%.
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 both June 30, 2018 and March 31, 2018 was $426,404, and is
classified as a current liability on the consolidated balance
sheets. At June 30, 2018 and March 31, 2018, accrued interest
payable was $215,448 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 June 30,
2018 and March 31, 2018 was $50,000, respectively, and is
classified as a current liability on the consolidated balance
sheets. Interest expense on the note was $750 and $3,000 during the
three months ended June 30, 2018 and the year ended March 31, 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 June 30,
2018 and March 31, 2018 was $5,000 and is classified as a current
liability on the consolidated balance sheets. At June 30, 2018 and
March 31, 2018, accrued interest payable was $1,700 and $1,600,
respectively.
NOTE 8 – 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 June 30, 2018
and March 31, 2018, the Company’s cash balance did not exceed
FDIC coverage.
NOTE 9 – COMMITMENTS AND CONTINGENCIES
Executive Employment Agreements – Bill Williams and Gerald
Easterling
On
April 1, 2015, the Company entered into employment agreements with
each of Bill G. Williams, as the Company’s Chief Executive
Officer, and Gerald Easterling as the Company’s President,
effective as of April 1, 2015 (the “Employment
Agreements”).
The
Employment Agreements are each terminable at will and each provide
for a base annual salary of $96,000. In addition, the Employment
Agreements each provide that the employee is entitled, at the sole
and absolute discretion of the Company’s Board of Directors,
to receive performance bonuses. Each employee will also be entitled
to certain benefits including health insurance and monthly
allowances for cell phone and automobile expenses.
Each
Employment Agreement provides that in the event employee is
terminated without cause or resigns for good reason (each as
defined in their Employment Agreements), the employee will receive,
as severance the employee’s base salary for a period of 60
months following the date of termination. In the event of a change
of control of the Company, the employee may elect to terminate the
Employment Agreement within 30 days thereafter and upon such
termination would receive a lump sum payment equal to 500% of the
employee’s base salary.
Each
Employment Agreement contains certain restrictive covenants
relating to non-competition, non-solicitation of customers and
non-solicitation of employees for a period of one year following
termination of the employee’s Employment
Agreement.
NOTE 10 – SUBSEQUENT EVENTS
Subsequent to
period end, the Company has converted approximately $61,000 of
their outstanding convertible debt as of June 30, 2018 and
approximately $5,000 of accrued interest and fees, into 11,765,729
shares of the Company’s common stock. The Company also issued
6,719,925 shares of their common stock on July 17, 2018, upon
cashless exercise of warrants granted in connection with the July
Debenture.
On July
11, 2018, the Company received the funding for the Buyer Note
issued in connection with the second note under the December 20,
2017 8% convertible redeemable note, for cash proceeds of
$74,000.
On July
26, 2018, the Company received the funding for the Buyer Note
issued in connection with the January 29, 2018 12% convertible
redeemable note, for cash proceeds of $38,000.
On July
27, 2018, the Company redeemed the January 30, 2018, 12%
convertible note $83,000, for approximately $123,000, with the
approximately $40,000 redemption amount being recognized as
financing costs.
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 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%.
The
notes are convertible at 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 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 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.