NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 2017
(Unaudited)
NOTE 1 – NATURE OF THE ORGANIZATION AND BUSINESS
Nature of the Business
NaturalShrimp
Incorporated (“NaturalShrimp” “the
Company”), a Nevada corporation, is a biotechnology company
and has developed a proprietary technology that allows it to grow
Pacific White shrimp (Litopenaeus vannamei, formerly Penaeus
vannamei) in an ecologically controlled, high-density, low-cost
environment, and in fully contained and independent production
facilities. The Company’s system uses technology which allows
it to produce a naturally-grown shrimp “crop” weekly,
and accomplishes this without the use of antibiotics or toxic
chemicals. The Company has developed several proprietary technology
assets, including a knowledge base that allows it to produce
commercial quantities of shrimp in a closed system with a computer
monitoring system that automates, monitors and maintains proper
levels of oxygen, salinity and temperature for optimal shrimp
production. Its initial production facility is located outside of
San Antonio, Texas.
The
Company has three wholly-owned subsidiaries including NaturalShrimp
Corporation, NaturalShrimp Global, Inc. and Natural Aquatic
Systems, Inc.
Going Concern
The
accompanying condensed 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
ofassets and satisfaction of liabilities in the normal course of
business. For the three and nine months ended December 31, 2017,
the Company had a net loss of approximately $1,694,000 and
$3,037,000, respectively. At December 31, 2017, the Company had an
accumulated deficit of approximately $31,765,000 and a working
capital deficit of approximately $5,256,000. 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 nine months ended December 31, 2017, the
Company received net cash proceeds of approximately $744,000 from
the issuance of convertible debentures, $140,000 from the issuance
of convertible debt to a related party and $25,000 from the sale of
the Company’s common stock. Subsequent to December 31, 2017,
the Company received $118,000 in net proceeds from three
convertible debentures (See Note 12). Management believes that
private placements of equity capital and/or additional debt
financing will be needed to fund the Company’s long-term
operating requirements. The Company may also encounter business
endeavors that require significant cash commitments or
unanticipated problems or expenses that could result in a
requirement for additional cash. If the Company raises
additional funds through the issuance of equity or convertible debt
securities, the percentage ownership of its current shareholders
could be reduced, and such securities might have rights,
preferences or privileges senior to our common stock. Additional
financing may not be available upon acceptable terms, or at
all. If adequate funds are not available or are not
available on acceptable terms, the Company may not be able to take
advantage of prospective business endeavors or opportunities, which
could significantly and materially restrict our operations. The
Company continues to pursue external financing alternatives to
improve its working capital position. If the Company is unable to
obtain the necessary capital, the Company may have to cease
operations.
The
Company plans to improve the growth rate of the shrimp and the
environmental conditions of its production facilities. Management
also plans to acquire a hatchery in which the Company can better
control the environment in which to develop the post larvaes. If
management is unsuccessful in these efforts, discontinuance of
operations is possible. The condensed 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 and nine months ended December 31, 2017 and 2016 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
and nine months ended December 31, 2017 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, 2017 included in our Annual Report on Form
10-K filed with the SEC on June 29, 2017.
The
condensed consolidated balance sheet at March 31, 2017 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
condensed consolidated financial statements include the accounts of
NaturalShrimp Incorporated and its wholly-owned subsidiaries,
NaturalShrimp Corporation and NaturalShrimp Global. 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 condensed 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
and nine months ended December 31, 2017, the Company had $977,000
in convertible debentures whose underlying shares are convertible
at the holders’ option at initial fixed conversion prices
ranging from 50 - 60% of the defined trading price and
approximately 3,087,000 warrants with an exercise price of 50% 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. The Company did not have any potentially
dilutive common stock equivalents during the three and nine months
ended December 31, 2016.
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:
|
Autos
and Trucks
|
5
years
|
|
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
condensed consolidated statements of operations reflect
depreciation expense of approximately $18,000 and $53,000, and
$22,000 and $43,000 for the three and nine months ended December
31, 2017 and 2016, 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
has elected to use the cumulative effect transition method and does
not expect the adoption to have a material impact on its financial
statements and related disclosures as revenues to date have been
insignificant.
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.
The Company is currently evaluating the timing of adoption and the
potential impact of this standard, but as the Company does not have
any significant leases, it does not expect it to have a material
impact on its financial position or results of
operations.
In July
2017, FASB issued ASU No. 2017-11, Earning Per Share (Topic 260),
Distinguishing Liabilities from Equity (Topic 480) and Derivatives
and Hedging (Topic 815), which was issued in two parts, Part I,
Accounting for Certain Financial Instruments with Down Round
Features and Part II, Replacement of the Indefinite Deferral for
Mandatorily Redeemable Financial Instruments of Certain Nonpublic
Entities and Certain Mandatorily Redeemable Non-controlling
Interests with a Scope Exception. Part I of ASC No. 2017-11
addresses the classification analysis of certain equity-linked
financial instruments (or embedded features) with down round
features. When determining whether certain financial instruments
should be classified as liabilities or equity instruments, a down
round feature no longer precludes equity classification when
assessing whether the instrument is indexed to an entity’s
own stock. The amendments also clarify existing disclosure
requirements for equity-classified instruments. As a result, a
freestanding equity-linked financial instrument (or embedded
conversion option) no longer would be accounted for as a derivative
liability at fair value as a result of the existence of a down
round feature. For freestanding equity classified financial
instruments, the amendments require entities that present earnings
per share (EPS) in accordance with Topic 260 to recognize the
effect of the down round feature when it is triggered. That effect
is treated as a dividend and as a reduction of income available to
common shareholders in basic EPS. The amendments in Part II of ASU
2017-11 recharacterize the indefinite deferral of certain
provisions of Topic 480 that now are presented as pending content
in the codification, to a scope exception. Part II amendments do
not have an accounting effect. The ASU 2017-11 is effective for
annual and interim periods beginning after December 15, 2018, with
early adoption permitted.
The Company
is currently evaluating the timing of adoption and the potential
impact of this standard
on the classification of the
Company’s embedded derivatives and warrants.
During
the nine months ended December 31, 2017, 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 condensed
consolidated financial statements.
Management’s Evaluation of Subsequent Events
The Company evaluates events that have occurred
after the balance sheet date of December 31, 2017, through the date
which the
condensed
consolidated financial statements were issued.
Based upon the review, other than described in Note 12 –
Subsequent Events, the Company did not identify any recognized or
non-recognized subsequent events that would have required
adjustment or disclosure in the
condensed
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
December 31, 2017 and March 31, 2017 was $25,298.
The
Company had a working capital line of credit with Community
National Bank for $30,000. The line of credit bore interest at a
rate of 7.3% and was payable quarterly. The line of credit matured
on February 28, 2014, was secured by various assets of the
Company’s subsidiaries, and was guaranteed by two directors
of the Company. It was renewed by the Company with a maturity date
of June 10, 2017, but was subsequently paid off and closed. The
balance of the line of credit at both December 31, 2017 and March
31, 2017 was zero.
The
Company also has a working capital line of credit with Extraco
Bank. On April 30, 2017, 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, 2018, 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 $473,029 at both December 31, 2017 and March 31,
2017.
The
Company also has additional lines of credit with Extraco Bank for
$100,000 and $200,000, which were renewed on January 19, 2017 and
April 30, 2017, respectively, with maturity dates of January 19,
2019 and April 30, 2018, 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 December 31, 2017 and March 31,
2017.
The
Company also has a working capital line of credit with Capital One
Bank for $50,000. The line of credit bears an interest rate of
prime plus 25.9 basis points, which totaled 30.40% as of December
31, 2017. The line of credit is unsecured. The balance of the line
of credit was $9,580 at both December 31, 2017 and March 31,
2017.
The
Company also has a working capital line of credit with Chase Bank
for $25,000. The line of credit bears an interest rate of prime
plus 10 basis points, which totaled 14.50% as of December 31, 2017.
The line of credit is secured by assets of the Company’s
subsidiaries. The balance of the line of credit is $11,197 at both
December 31, 2017 and March 31, 2017.
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:
|
|
|
December 31,
2018
|
$
7,497
|
|
December 31,
2019
|
7,853
|
|
December 31,
2020
|
224,813
|
|
|
$
240,163
|
NOTE 5 – CONVERTIBLE DEBENTURES
January Debentures
On
January 23, 2017, the Company entered into a Securities Purchase
Agreement (“January SPA”) for the sale of a convertible
debenture (“January debenture”) with an original
principal amount of $262,500, for consideration of $250,000, with a
prorated five percent original issue discount (“OID”).
The debenture has a one-time interest charge of twelve percent
applied on the issuance date and due on the maturity date, which is
two years from the date of each payment of consideration. The
January SPA included a warrant to purchase 350,000 shares of the
Company’s common stock. The warrants have a five-year term
and vest such that the buyer shall receive 1.4 warrants for every
dollar funded to the Company under the January debenture. The
Company received $50,000 at closing, with additional consideration
to be paid at the holder’s option. Upon the closing the buyer
was granted a warrant to purchase 70,000 shares of the
Company’s common stock.
The
January debentures are convertible at an original conversion price
of $0.35, subject to adjustment if the Company’s common stock
trades at a price lower than $0.60 per share during the forty-five
day period immediately preceding August 15, 2017, in which case the
conversion price is reset to sixty percent of the lowest trade
occurring during the twenty-five days prior to the conversion date.
Additionally, the conversion price, as well as other terms
including interest rates, original issue discounts, warrant
coverage, adjusts if any future financings have more favorable
terms. The January debenture also has piggyback registration
rights.
The
conversion feature of the January debenture meets the definition of
a derivative and due to the adjustment to the conversion price to
occur upon subsequent sales of securities at a price lower than the
original conversion price, requires bifurcation and is accounted
for as a derivative liability. The derivative was initially
recognized at an estimated fair value of $85,000 and created a
discount on the January debentures that will be amortized over the
life of the debentures using the effective interest rate method.
The fair value of the embedded derivative is measured and
recognized at fair value each subsequent reporting period and the
changes in fair value are recognized in the Condensed Consolidated
Statement of Operations as a change in fair value of derivative
liability.
The
Company estimated the fair value of the conversion feature
derivatives embedded in the convertible debentures based on
weighted probabilities of assumptions used in the Black Scholes
pricing model. The key valuation assumptions used consist, in part,
of the price of the Company’s common stock of $0.46 at
issuance date; a risk-free interest rate of 1.16% and expected
volatility of the Company’s common stock, of 384.75%, and the
various estimated reset exercise prices weighted by probability.
This resulted in the calculated fair value of the debt discount
being greater than the face amount of the debt, and the excess
amount of $35,000 was immediately expensed as Financing costs. As
the discount was in excess of the face amount of the debenture, the
effective interest rate is not determinable, and as such, all of
the discount was immediately expensed.
During
the three months ended September 30, 2017, the holder converted
$40,000 of the January debentures to common shares of the Company,
leaving outstanding principal of $10,000 as of September 30, 2017.
As a result of the conversion the derivative liability was
remeasured immediately prior to the conversion with a fair value of
$55,000, with an increase of $2,000 recognized, with the fair value
of the derivative liability related to the converted portion, of
$44,000 being reclassified to equity. The key valuation assumptions
used consist, in part, of the price of the Company’s common
stock of $0.17; a risk-free interest rate of 1.12% and expected
volatility of the Company’s common stock, of 190.70%, and the
various estimated reset exercise prices weighted by
probability.
During
the three months ended December 31, 2017, the holder converted the
remaining $10,000 of the January debentures to common shares of the
Company. As a result of the conversion the derivative liability was
remeasured immediately prior to the conversion with a fair value of
$16,000, with an increase of $4,000 recognized, with the fair value
of the derivative liability related to the converted portion being
reclassified to equity. The key valuation assumptions used consist,
in part, of the price of the Company’s common stock of $0.10;
a risk-free interest rate of 1.46% and expected volatility of the
Company’s common stock, of 200.17%, and the various estimated
reset exercise prices weighted by probability.
The
warrants have an original exercise price of $0.60, which adjusts
for any future dilutive issuances. The exercise price was adjusted
to $0.15, and the warrants issued increased to 280,000, 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 $0.46
at issuance date; a risk-free interest rate of 1.88% and expected
volatility of the Company’s common stock, of 309.96%,
resulting in a fair value of $32,000. As noted above, the
calculated fair value of the discount is greater than the face
amount of the debt, and therefore, the excess amount of $32,000 was
immediately expensed as Financing costs.
March Debentures
On
March 28, 2017, the Company entered into a Securities Purchase
Agreement (“SPA”) for the purchase of up to $400,000 in
convertible debentures (“March debentures”), due 3
years from issuance. The SPA consists of three separate convertible
debentures, the first purchase which occurred at the signing
closing date on March 28, 2017, for $100,000 with a purchase price
of $90,000 (an OID of $10,000). The second closing is to occur by
mutual agreement of the buyer and Company, at any time sixty to
ninety days following the signing closing date, for $150,0000 with
a purchase price of $135,000 (an OID of $15,000). The third closing
is to occur sixty to ninety days after the second closing for
$150,000 with a purchase price of $135,000 (an OID of $15,000). The
SPA also includes a commitment fee to include 100,000 restricted
shares of common stock of the Company upon the signing closing
date. The commitment shares fair value was calculated as $34,000,
based on the market value of the common shares at the closing date
of $0.34, and was recognized as a debt discount. The conversion
price is fixed at $0.30 for the first 180 days. After 180 days, or
in the event of a default, the conversion price becomes the lower
of $0.30 or 60% (or 55% based on certain conditions) of the lowest
closing bid price for the past 20 days.
On July
5, 2017, the March Debenture was amended. The total principal
amount of the convertible debentures issuable under the SPA was
reduced to $325,000, for a total purchase price of $292,500, and
the second closing was reduced to $75,000 with a purchase price of
$67,500. The second closing occurred on July 5, 2017. As a fee in
connection with the second closing, the Company issued 75,000 of
its restricted common shares to the debenture holder. The fair
value of the fee shares was calculated as $26,625, based on the
market value of the common shares at the closing date of $0.36,
which will be recognized as a debt discount and amortized over the
life of the note with a 34.4% effective interest rate.
The
conversion feature of the March debenture meets the definition of a
derivative as it would not be classified as equity were it a
stand-alone instrument, and therefore requires bifurcation and is
accounted for as a derivative liability. The derivative was
initially recognized at an estimated fair value of $144,000 and
created a discount on the March debentures that will be amortized
over the life of the debentures using the effective interest rate
method. The fair value of the embedded derivative is measured and
recognized at fair value each subsequent reporting period and the
changes in fair value are recognized in the Condensed Consolidated
Statement of Operations as Change in fair value of derivative
liability.
The
Company estimated the fair value of the conversion feature
derivatives embedded in the convertible debentures based on
weighted probabilities of assumptions used in the Black Scholes
pricing model. The key valuation assumptions used consist, in part,
of the price of the Company’s common stock of $0.40 at
issuance date; a risk-free interest rate of 1.56% and expected
volatility of the Company’s common stock, of 333.75%, and the
various estimated reset exercise prices weighted by probability.
This resulted in the calculated fair value of the debt discount
being greater than the face amount of the debt, and the excess
amount of $104,000, including the commitment fees, was immediately
expensed as financing costs.
The
debenture is also redeemable at the option of the Company, at
amounts ranging from 105% to 140% of the principal and accrued
interest balance, based on the redemption date’s passage of
time ranging from 90 days to 180 days from the date of issuance of
each debenture.
On
September 22, 2017, the Company exercised its option to redeem the
first closing of the March debenture, for a redemption price at
$130,000, 130% of the principal amount. The principal of $100,000
was derecognized with the additional $30,000 paid upon redemption
recognized as a financing cost. As a result of the redemption, the
unamortized discount related to the converted balance of $91,667
was immediately expensed. Additionally, the derivative was
remeasured upon redemption of the debenture, resulting in an
estimated fair value of $189,000, for an increase in fair value of
$45,000. The key valuation assumptions used consist, in part, of
the price of the Company’s common stock of $0.17; a risk-free
interest rate of 1.58% and expected volatility of the
Company’s common stock, of 290.41%, and the various estimated
reset exercise prices weighted by probability.
On
December 28, 2017, the Company exercised its option to redeem the
second closing of the March debenture, for a redemption price at
$97,500, 130% of the principal amount. Upon redemption, the
principal of $75,000 was relieved, with the additional $22,500 paid
recognized as a financing cost. As a result of the redemption, the
unamortized discount related to the converted balance of $68,750
was immediately expensed. Additionally, the derivative was
remeasured upon redemption of the debenture, resulting in an
estimated fair value of $151,000, for an increase in fair value of
$63,000. The key valuation assumptions used consist, in part, of
the price of the Company’s common stock of $0.15; a risk-free
interest rate of 1.89% and expected volatility of the
Company’s common stock, of 260.54%, and the various estimated
reset exercise prices weighted by probability.
July Debenture
On July
31, 2017, the Company entered into a 5% Securities Purchase
Agreement. The agreement calls for the purchase of up to $135,000
in convertible debentures, due 12 months from issuance, with a
$13,500 OID. The first closing was for principal of $45,000 with a
purchase price of $40,500 (an OID of $4,500), with additional
closings at the sole discretion of the holder. 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.
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.
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
Company estimated the fair value of the conversion feature
derivatives embedded in the convertible debentures at issuance at
$150,000, based on weighted probabilities of assumptions used in
the Black Scholes pricing model. The key valuation assumptions used
consist, in part, of the price of the Company’s common stock
of $0.17 at issuance date; a risk-free interest rate of 1.12% and
expected volatility of the Company’s common stock, of
190.70%, and the various estimated reset exercise prices weighted
by probability. This resulted in the calculated fair value of the
debt discount being greater than the face amount of the debt, and
the excess amount of $116,438, was immediately expensed as
financing costs.
In
connection with the note, the Company issued 50,000 warrants,
exercisable at $0.20, with a five-year term. The exercise price is
adjustable upon certain events, as set forth in the agreement,
including for future dilutive issuance. The exercise price was
adjusted to $0.15 and the warrants outstanding increased to 66,667,
upon a warrant issuance related to a new convertible debenture on
September 11, 2017. The warrants exercise price was subsequently
reset to 50% of the market price during the third quarter of fiscal
2018, and the warrants issued increased accordingly. As a result of
the dilutive issuance adjustment provision, the warrants have been
classified out of equity as a warrant liability. The Company
estimated the fair value of the warrant liability using the Black
Scholes pricing model. The key valuation assumptions used consist,
in part, of the price of the Company’s common stock of $0.17
at issuance date; a risk-free interest rate of 1.74% and expected
volatility of the Company’s common stock, of 276.90%,
resulting in a fair value of $8,000.
Additionally, in
connection with the debenture the Company also issued 343,750
shares of common stock of the Company as a commitment fee. The
commitment shares fair value was calculated as $58,438, based on
the market value of the common shares at the closing date of $0.17,
and was recognized as part of the debt discount. The shares are to
be returned to the Treasury of the Company in the event the
debenture is fully repaid prior to the date which is 180 days
following the issue date.
On
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.
The
Company estimated the fair value of the conversion feature
derivatives embedded in the convertible debentures at issuance at
$94,000, based on weighted probabilities of assumptions used in the
Black Scholes pricing model. The key valuation assumptions used
consist, in part, of the price of the Company’s common stock
of $0.11 at issuance date; a risk-free interest rate of 1.28% and
expected volatility of the Company’s common stock, of
193.79%, and the various estimated reset exercise prices weighted
by probability. This resulted in the calculated fair value of the
debt discount being greater than the face amount of the debt, and
the excess amount of $69,877, was immediately expensed as financing
costs.
Additionally, in
connection with the second closing, the Company also issued 332,500
shares of common stock of the Company as a commitment fee. The
commitment shares fair value was calculated as $35,877, based on
the market value of the common shares at the closing date of $0.11,
and was recognized as part of the debt discount. The shares are to
be returned to the Treasury of the Company in the event the
debenture is fully repaid prior to the date which is 180 days
following the issue date.
September 11, 2017 Debenture
On
September 11, 2017, the Company entered into a 12% convertible
promissory note for $146,000, with an OID of $13,500, which matures
on June 11, 2018. The note is convertible at a variable conversion
rate that is the lower of the trading price for last 25 days prior
to issuance of the note or 50% of the lowest market price over the
25 days prior to conversion. Furthermore, the conversion rate may
be adjusted downward if, within three business days of the
transmittal of the notice of conversion, the common stock has a
closing bid which is 5% or lower than that set forth in the notice
of conversion. There are additional adjustments to the conversion
price for events set forth in the agreement, if any third party has
the right to convert monies at a discount to market greater than
the conversion price in effect at that time then the holder, may
utilize such greater discount percentage. Per the agreement, the
Company is required at all times to have authorized and reserved
seven times the number of shares that is actually issuable upon
full conversion of the note. The conversion feature meets the
definition of a derivative and therefore requires bifurcation and
is accounted for as a derivative liability.
The
Company estimated the fair value of the conversion feature
derivatives embedded in the convertible debentures at issuance at
$269,000, based on weighted probabilities of assumptions used in
the Black Scholes pricing model. The key valuation assumptions used
consist, in part, of the price of the Company’s common stock
of $0.17 at issuance date; a risk-free interest rate of 1.16% and
expected volatility of the Company’s common stock, of
190.70%, and the various estimated reset exercise prices weighted
by probability. This resulted in the calculated fair value of the
debt discount being greater than the face amount of the debt, and
the excess amount of $168,250, was immediately expensed as
financing costs.
In
connection with the note, the Company issued 243,333 warrants,
exercisable at $0.15, with a five-year term. The exercise price is
adjustable upon certain events, as set forth in the agreement,
including for future dilutive issuance. The warrants exercise price
was subsequently reset to 50% of the market price during the third
quarter of fiscal 2018, and the warrants issued increased
accordingly. As a result of the dilutive issuance adjustment
provision, the warrants have been classified out of equity as a
warrant liability. The Company estimated the fair value of the
warrant liability using the Black Scholes pricing model. The key
valuation assumptions used consist, in part, of the price of the
Company’s common stock of $0.13 at issuance date; a risk-free
interest rate of 1.71% and expected volatility of the
Company’s common stock, of 276.90%, resulting in a fair value
of $32,000.
September 12, 2017 Debenture
On
September 12, 2017, the Company entered into a 12% convertible
promissory note for principal amount of $96,500 with a $4,500 OID,
which matures on June 12, 2018. The note is able to be prepaid
prior to the maturity date, at a cash redemption premium, at
various stages as set forth in the agreement. The note is
convertible commencing 180 days after issuance date (or upon an
event of Default), or March 11, 2018, with a variable conversion
rate at 60% of market price, defined as the lowest trading price
during the twenty days prior to the conversion date. Additionally,
the conversion price adjusts if the Company is not able to issue
the shares requested to be converted, or upon any future financings
have more favorable terms. Per the agreement, the Company is
required at all times to have authorized and reserved six times the
number of shares that is actually issuable upon full conversion of
the note. The conversion feature meets the definition of a
derivative and therefore requires bifurcation and is accounted for
as a derivative liability.
The
Company estimated the fair value of the conversion feature
derivatives embedded in the convertible debentures at issuance at
$110,000, based on weighted probabilities of assumptions used in
the Black Scholes pricing model. The key valuation assumptions used
consist, in part, of the price of the Company’s common stock
of $0.13 at issuance date; a risk-free interest rate of 1.16% and
expected volatility of the Company’s common stock, of
190.70%, and the various estimated reset exercise prices weighted
by probability. This resulted in the calculated fair value of the
debt discount being greater than the face amount of the debt, and
the excess amount of $18,000 was immediately expensed as financing
costs.
October 17, 2017 Debenture
On
September 28, 2017, the Company entered into a Securities Purchase
Agreement, pursuant to which the Company agreed to sell a 12%
Convertible Note for $55,000 with a maturity date of September 28,
2018, for a purchase price of $51,700, and $2,200 deducted for
legal fees, resulting in net cash proceeds of $49,500. The
effective closing date of the Securities Purchase Agreement and
Note is October 17, 2017. The note is convertible at the
holders’ option, at any time, at a conversion price equal to
the lower of (i) the closing sale price of the Company’s
common stock on the closing date, or (ii) 60% of either the lowest
sale price for the Company’s common stock during the twenty
(20) consecutive trading days including and immediately preceding
the closing date, or the closing bid price, whichever is lower ,
provided that, if the price of the Company’s common stock
loses a bid, then the conversion price may be reduced, at the
holder’s absolute discretion, to a fixed conversion price of
$0.00001. If at any time the adjusted conversion price for any
conversion would be less than par value of the Company’s
common stock, then the conversion price shall equal such par value
for any such conversion and the conversion amount for such
conversion shall be increased to include additional principal to
the extent necessary to cause the number of shares issuable upon
conversion equal the same number of shares as would have been
issued had the Conversion Price not been subject to the minimum par
value price. The conversion feature meets the definition of a
derivative and therefore requires bifurcation and is accounted for
as a derivative liability.
The
Company estimated the fair value of the conversion feature
derivatives embedded in the convertible debentures at issuance at
$91,000, based on weighted probabilities of assumptions used in the
Black Scholes pricing model. The key valuation assumptions used
consist, in part, of the price of the Company’s common stock
of $0.11 at issuance date; a risk-free interest rate of 1.41% and
expected volatility of the Company’s common stock, of
193.79%, and the various estimated reset exercise prices weighted
by probability. This resulted in the calculated fair value of the
debt discount being greater than the face amount of the debt, and
the excess amount of $41,500 was immediately expensed as financing
costs.
November 14, 2017 Debenture
On
November 14, 2017, the Company entered into two 8% convertible
redeemable notes, in the aggregate principal amount of $112,000,
convertible into shares of common stock of the Company, with
maturity dates of November 14, 2018. Each note was in the face
amount of $56,000, with an original issue discount of $2,800,
resulting in a purchase price for each note of $53,200. The first
of the two notes was paid for by the buyer in cash upon closing,
with the second note initially paid for by the issuance of an
offsetting $53,200 secured promissory note issued to the Company by
the buyer (“Buyer Note”). The Buyer Note is due on July
14, 2018. The notes are convertible at 57% of the lowest of trading
price for last 20 days, or lowest closing bid price for last 20
days, with the discount increased to 47% in the event of a DTC
chill, with the second note not being convertible until the buyer
has settled the Buyer Note in cash payment. The Buyer Note is
included in Notes Receivable in the accompanying financial
statements.
During
the first six months, the convertible redeemable notes are in
effect, the Company may redeem the note at amounts ranging from
120% to 140% of the principal and accrued interest balance, based
on the redemption date’s passage of time ranging from 90 days
to 180 days from the date of issuance of each
debenture.
The
conversion feature meets the definition of a derivative and
therefore requires bifurcation and is accounted for as a derivative
liability.
The
Company estimated the aggregate fair value of the conversion
feature derivatives embedded in the two convertible debentures at
issuance at $164,000, based on weighted probabilities of
assumptions used in the Black Scholes pricing model. The key
valuation assumptions used consist, in part, of the price of the
Company’s common stock of $0.10 at issuance date; a risk-free
interest rate of 1.59% and expected volatility of the
Company’s common stock, of 192.64%, and the various estimated
reset exercise prices weighted by probability. This resulted in the
calculated fair value of the debt discount being greater than the
face amount of the debt, and the excess amount of $63,200 was
immediately expensed as financing costs.
December 20, 2017 Debenture
On
December 20, 2017, the Company entered into two 8% convertible
redeemable notes, in the aggregate principal amount of $240,000,
convertible into shares of common stock, of the Company, with the
same buyers as the November 14, 2017 debenture. Both notes are due
on December 20, 2018. The first note has face amount of $160,000,
with a $4,000 OID, resulting in a purchase price of $156,000. The
second note has a face amount of $80,000, with an OID of $2,000,
for a purchase price of $78,000. The first of the two notes was
paid for by the buyer in cash upon closing, with the second note
initially paid for by the issuance of an offsetting $78,000 secured
promissory note issued to the Company by the buyer (“Buyer
Note”). The Buyer Note is due on August 20, 2018. The notes
are convertible at 60% of the lower of:
(i)
lowest trading price or (ii) lowest
closing bid price, of the Company’s common stock for the last
20 trading days prior to conversion, with the discount increased to
50% in the event of a DTC chill, with the second note not being
convertible until the buyer has settled the Buyer Note in cash
payment. The Buyer Note is included in Notes Receivable in the
accompanying financial statements.
During
the first six months, the convertible redeemable notes are in
effect, the Company may redeem the note at amounts ranging from
120% to 136% of the principal and accrued interest balance, based
on the redemption date’s passage of time ranging from 90 days
to 180 days from the date of issuance of each
debenture.
The
conversion feature meets the definition of a derivative and
therefore requires bifurcation and is accounted for as a derivative
liability.
The
Company estimated the aggregate fair value of the conversion
feature derivatives embedded in the two convertible debentures at
issuance at $403,000, based on weighted probabilities of
assumptions used in the Black Scholes pricing model. The key
valuation assumptions used consist, in part, of the price of the
Company’s common stock of $0.15 at issuance date; a risk-free
interest rate of 1.72% and expected volatility of the
Company’s common stock, of 215.40%, and the various estimated
reset exercise prices weighted by probability. This resulted in the
calculated fair value of the debt discount being greater than the
face amount of the debt, and the excess amount of $181,000 was
immediately expensed as financing costs.
The
derivative liability arising from all of the above discussed
debentures was revalued at December 31, 2017, resulting in an
increase of the fair value of the derivative liability of $249,000
and $95,000 for the three and nine months ended December 31, 2017,
respectively. The key valuation assumptions used consist, in part,
of the price of the Company’s common stock of $0.15; a
risk-free interest rate ranging from 1.75% to 1.89%, and expected
volatility of the Company’s common stock ranging from 215.40%
to 260.54%, 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 December 31, 2017, resulting in an
increase to the fair value of the warrant liability of $348,000 and
$378,000 for the three and nine months ended December 31, 2017,
respectively. The key valuation assumptions used consists, in part,
of the price of the Company’s common stock of $0.15; a
risk-free interest rate ranging from 1.99% to 2.22%, and expected
volatility of the Company’s common stock ranging from
276.10%.
NOTE 6 – STOCKHOLDERS’ DEFICIT
Common Stock
On May
2, 2017, the Company sold 100,000 shares of its common stock at
$0.25 per share, for a total financing of $25,000.
NOTE 7 – OPTIONS AND WARRANTS
The
Company has not granted any options since inception. The Company
has granted approximately 3,087,499 warrants in connection with
convertible debentures. For further discussions see Note
5.
NOTE 8 – RELATED PARTY TRANSACTIONS
Notes Payable – Related Parties
On
April 20, 2017, the Company entered into a convertible debenture
with an affiliate of the Company whose managing member is the
Treasurer, Chief Financial Officer, and a director of the Company
(the “affiliate”), for $140,000. The convertible
debenture matures one year from date of issuance, and bears
interest at 6%. Upon an event of default, as defined in the
debenture, the principal and any accrued interest becomes
immediately due, and the interest rate increases to 24%. The
convertible debenture is convertible at the holder’s option
at a conversion price of $0.30.
On
January 20, 2017 and on March 14, 2017, the Company entered into
convertible debentures with the affiliate. The convertible
debentures are each in the amount of $20,000, mature one year from
date of issuance, and bear interest at 6%. Upon an event of
default, as defined in the debenture, the principal and any accrued
interest becomes immediately due, and the interest rate increases
to 24%. The convertible debentures are convertible at the
holder’s option at a conversion price of $0.30.
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 31, 2017, the
Company borrowed $736,111 under this agreement. There was no
borrowing on this loan for the nine months ended December 31, 2017.
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 December 31, 2017 and March 31, 2017
was $426,404, and is classified as a current liability on the
condensed consolidated balance sheets. At December 31, 2017 and
March 31, 2017, accrued interest payable was $198,922 and $172,808,
respectively.
Shareholders
In
2009, the Company entered into a note payable to Randall Steele, a
shareholder of NSH, for $50,000. The note is unsecured and 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, which were valued at the date of issuance at fair
market value. The balance of the note at both December 31, 2017 and
March 31, 2017 was $50,000, and is classified as a current
liability on the condensed consolidated balance sheets. Interest
expense paid on the note was $750 and $750 during the three and
nine months ended December 31, 2017 and 2016,
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 December
31, 2017 and March 31, 2017 was $5,000, and is classified as a
current liability on the condensed consolidated balance sheets. At
December 31, 2017 and March 31, 2017, accrued interest payable was
$1,400 and $1,200, respectively.
NOTE 9 – FEDERAL INCOME TAX
The
Company accounts for income taxes under ASC 740-10, which provides
for an asset and liability approach of accounting for income taxes.
Under this approach, deferred tax assets and liabilities are
recognized based on anticipated future tax consequences, using
currently enacted tax laws, attributed to temporary differences
between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts calculated for income
tax purposes.
For the
three and nine months ended December 31, 2017 and 2016, the Company
incurred net operating losses and, accordingly, no provision for
income taxes has been recorded. In addition, no benefit
for income taxes has been recorded due to the uncertainty of the
realization of any deferred tax assets.
Based
on the available objective evidence, including the Company’s
history of losses, management believes it is more likely than not
that any net deferred tax assets will not be fully realizable.
Accordingly, the Company provided for a full valuation allowance
against its net deferred tax assets at December 31, 2017 and March
31, 2017, respectively.
In
accordance with ASC 740, the Company has evaluated its tax
positions and determined that there are no uncertain tax
positions.
NOTE 10 – CONCENTRATION OF CREDIT RISK
The
Company maintains cash balances at one financial institution.
Accounts at this institution are insured by the Federal Deposit
Insurance Corporation (FDIC) up to $250,000. As of December 31,
2017, and March 31, 2017, the Company’s cash balance did not
exceed FDIC coverage.
NOTE 11 – COMMITMENTS AND CONTINGENCIES
Executive Employment Agreements – Bill Williams and Gerald
Easterling
On
April 1, 2015, the Company entered into employment agreements with
each of Bill G. Williams, as the Company’s Chief Executive
Officer, and Gerald Easterling as the Company’s President,
effective as of April 1, 2015 (the “Employment
Agreements”).
The
Employment Agreements are each terminable at will and each provide
for a base annual salary of $96,000. In addition, the Employment
Agreements each provide that the employee is entitled, at the sole
and absolute discretion of the Company’s Board of Directors,
to receive performance bonuses. Each employee will also be entitled
to certain benefits including health insurance and monthly
allowances for cell phone and automobile expenses.
Each
Employment Agreement provides that in the event employee is
terminated without cause or resigns for good reason (each as
defined in their Employment Agreements), the employee will receive,
as severance the employee’s base salary for a period of 60
months following the date of termination. In the event of a change
of control of the Company, the employee may elect to terminate the
Employment Agreement within 30 days thereafter and upon such
termination would receive a lump sum payment equal to 500% of the
employee’s base salary.
Each
Employment Agreement contains certain restrictive covenants
relating to non-competition, non-solicitation of customers and
non-solicitation of employees for a period of one year following
termination of the employee’s Employment
Agreement.
NOTE 12 – SUBSEQUENT EVENTS
On
January 29, 2 018, the Company entered into three 12% convertible
notes of the Company in the aggregate principal amount of
$120,000
,
convertible into
shares of common stock of the Company, with maturity dates of
January 29, 2019. The interest upon an event of default, as defined
in the note, is 24% per annum. Each note was in the face amount of
$40,000, with $2,000 legal fees, for net proceeds of $38,000. The
first of the three notes was paid for by the buyer in cash upon
closing, with the other two notes initially paid for by the
issuance of an offsetting $40,000 secured promissory note issued to
the Company by the buyer (“Buyer Note”). The Buyer
Notes are due on September 29, 2018. The notes are convertible at
60% of the lowest closing bid price for the last 20 days, with the
discount increased to 50% in the event of a DTC chill. The second
and third notes not being convertible until the buyer has settled
the Buyer Notes in a cash payment. The conversion feature meets the
definition of a derivative and therefore requires bifurcation and
will be accounted for as a derivative liability.
During
the first 180 days, the convertible redeemable notes are in effect,
the Company may redeem the note at amounts ranging from 115% to
140% of the principal and accrued interest balance, based on the
redemption date’s passage of time ranging from 30 days to 180
days from the date of issuance of each debenture. Upon any sale
event, as defined, at the holder’s request the Company will
redeem the note for 150% of the principal and accrued
interest.
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. The
conversion feature meets the definition of a derivative and
therefore requires bifurcation and will be accounted for as a
derivative liability.
During
the first 180 days, the convertible redeemable note is in effect,
the Company may redeem the note at amounts ranging from 115% to
140% of the principal and accrued interest balance, based on the
redemption date’s passage of time ranging from 30 days to 180
days from the date of issuance of the debenture.
On
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 shall only be entitled to effectuate a conversion under the
note on or after March 2, 2018.
