NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2019
(Unaudited)
NOTE 1 – NATURE OF THE ORGANIZATION AND BUSINESS
Nature of the Business
NaturalShrimp
Incorporated (“NaturalShrimp” or the
“Company”), a Nevada corporation, is a biotechnology
company and has developed 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 (“GAAP”), assuming the Company
will continue as a going concern, which contemplates the
realization of assets and satisfaction of liabilities in the normal
course of business. For the six months ended September 30, 2019,
the Company had a net loss of approximately $1,652,000. At
September 30, 2019, the Company had an accumulated deficit of
approximately $42,875,000 and a working capital deficit of
approximately $4,562,000. 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 six months ended September 30, 2019, the Company
received net cash proceeds of approximately $100,000 from the
issuance of convertible debentures, approximately $1,774,000 from
the issuance of approximately 14,745,000 common shares of the
Company’s common stock through an equity financing agreement,
and $250,000 from the sale of 250 Series B Preferred shares.
Subsequent to September 30, 2019, the Company received $500,000
from the sale of Series B Preferred shares. (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 and six months ended September 30, 2019 and 2018 has been
prepared in accordance with GAAP 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 six months ended September 30, 2019 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, 2019 included in the Company’s Annual
Report on Form 10-K filed with the SEC on July 1,
2019.
The
condensed consolidated balance sheet at March 31, 2019 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 shares of common stock
outstanding. Diluted EPS is based on the weighted average number of
shares of common stock outstanding and dilutive common stock
equivalents. Basic EPS is computed by dividing net income or loss
available to common stockholders (numerator) by the weighted
average number of shares of common stock outstanding (denominator)
during the period. For the six months ended September 30, 2019, the
Company had approximately $1,033,000 in convertible debentures
whose approximately 40,717,000 underlying shares are convertible at
the holders’ option at conversion prices ranging from $0.01
to $0.30 for fixed conversion rates, and 34% - 60% of the defined
trading price for variable conversion rates and approximately
551,000 warrants with an exercise price of 45% of the market price
of the Company’s common stock, which were not included in the
calculation of diluted EPS as their effect would be anti-dilutive.
For the six months ended September 30, 2018, the Company had
approximately $1,2967,000 in principal on convertible debentures
whose approximately 193,807,000 underlying shares are convertible
at the holders’ option at conversion prices ranging from 34%
- 61% of the defined trading price and approximately 14,537,000
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.
Fair Value Measurements
ASC
Topic 820, “Fair Value
Measurement”, requires that certain financial
instruments be recognized at their fair values at our balance sheet
dates. However, other financial instruments, such as debt
obligations, are not required to be recognized at their fair
values, but GAAP provides an option to elect fair value accounting
for these instruments. GAAP requires the disclosure of the fair
values of all financial instruments, regardless of whether they are
recognized at their fair values or carrying amounts in our balance
sheets. For financial instruments recognized at fair value, GAAP
requires the disclosure of their fair values by type of instrument,
along with other information, including changes in the fair values
of certain financial instruments recognized in income or other
comprehensive income. For financial instruments not recognized at
fair value, the disclosure of their fair values is provided below
under “Financial
Instruments.”
Nonfinancial
assets, such as property, plant and equipment, and nonfinancial
liabilities are recognized at their carrying amounts in the
Company’s balance sheets. GAAP does not permit nonfinancial
assets and liabilities to be remeasured at their fair values.
However, GAAP requires the remeasurement of such assets and
liabilities to their fair values upon the occurrence of certain
events, such as the impairment of property, plant and equipment. In
addition, if such an event occurs, GAAP requires the disclosure of
the fair value of the asset or liability along with other
information, including the gain or loss recognized in income in the
period the remeasurement occurred.
The
Company did not have any Level 1 or Level 2 assets and liabilities
at September 30, 2019 and March 31, 2019.
The
Derivative liabilities are Level 3 fair value
measurements.
The
following is a summary of activity of Level 3 liabilities during
the six months ended September 30, 2019 and 2018:
Derivatives
|
|
|
|
|
Derivative
liability balance at beginning of period
|
$157,000
|
$3,455,000
|
|
Additions to
derivative liability for new debt
|
--
|
1,724,000
|
|
Reclass to equity
upon conversion or redemption
|
--
|
(1,740,500)
|
|
Change in fair
value
|
39,000
|
(1,328,000)
|
|
Balance at end of
period
|
$196,000
|
$2,110,500
|
At
September 30, 2019, the fair value of the derivative liabilities of
convertible notes was estimated using the following
weighted-average inputs: the price of the Company’s common
stock of $0.17; a risk-free interest rate of 1.88%, and expected
volatility of the Company’s common stock of 252.90%, and the
various estimated reset exercise prices weighted by
probability.
At
September 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.
Warrant liability
|
|
|
|
|
Warrant liability
balance at beginning of period
|
$93,000
|
$277,000
|
|
Reclass to equity
upon exercise
|
-
|
(150,000)
|
|
Change in fair
value
|
-
|
47,000
|
|
Balance at end of
period
|
$93,000
|
$174,000
|
At
September 30, 2019, the fair value of the warrant liability was
estimated using the following weighted-average inputs: the price of
the Company’s common stock of $0.17; a risk-free interest
rate of 1.71%, and expected volatility of the Company’s
common stock ranging of 271.83%.
At
September 30, 2018, the fair value of the warrant liability was
estimated using the following weighted-average inputs: the price of
the Company’s common stock of $0.01 a risk-free interest rate
of 2.88%, and expected volatility of the Company’s common
stock of 342.7%.
Financial Instruments
The
Company’s financial instruments include cash and cash
equivalents, receivables, payables, and debt and are accounted for
under the provisions of ASC Topic 825, “Financial Instruments”. The
carrying amount of these financial instruments, with the exception
of discounted debt, as reflected in the consolidated balance sheets
approximates fair value.
Cash and Cash Equivalents
For the
purpose of the consolidated statements of cash flows, the Company
considers all highly liquid instruments purchased with a maturity
of three months or less to be cash equivalents. There were no cash
equivalents at September 30, 2019 and March 31, 2019.
Concentration of Credit Risk
The
Company maintains cash balances at two financial institution.
Accounts at this institution are insured by the Federal Deposit
Insurance Corporation (FDIC) up to $250,000. As of September 30,
2019 and March 31, 2019, the Company’s cash balances did not
exceed FDIC coverage. The Company has not experienced any losses in
such accounts and periodically evaluates the credit worthiness of
the financial institutions and has determined the credit exposure
to be negligible.
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 $25,000 and $12,000 and $35,000 and $18,000 for
the three and six months ended September 30, 2019 and 2018,
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
February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) The standard
requires all leases that have a term of over 12 months to be
recognized on the balance sheet with the liability for lease
payments and the corresponding right-of-use asset initially
measured at the present value of amounts expected to be paid over
the term. Recognition of the costs of these leases on the income
statement will be dependent upon their classification as either an
operating or a financing lease. Costs of an operating lease will
continue to be recognized as a single operating expense on a
straight-line basis over the lease term. Costs for a financing
lease will be disaggregated and recognized as both an operating
expense (for the amortization of the right-of-use asset) and
interest expense (for interest on the lease liability). The Company
adopted ASU 2016-02 on April 1, 2019, and the adoption resulted in
the recognition of a Right of Use Asset (“ROU”) and a
Lease Liability for a new equipment lease entered into on June 24,
2019 (Note 8).
During
the six months ended September 30, 2019, there were several new
accounting pronouncements issued by the Financial Accounting
Standards Board. Each of these pronouncements, as applicable, has
been or will be adopted by the Company. Management does not believe
the adoption of any of these accounting pronouncements has had or
will have a material impact on the Company’s consolidated
financial statements.
Management’s Evaluation of Subsequent Events
The
Company evaluates events that have occurred after the balance sheet
date of September 30, 2019, 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 had a stated interest rate of 5.25%,
maturity date of December 15, 2017 and had an initial interest only
payment on February 3, 2016. On July 18, 2018, the short-term note
was replaced by a promissory note for the outstanding balance of
$25,298, which bears interest at 8% with a maturity date of July
18, 2021. The short-term note is guaranteed by an officer and
director. The balance of the note at September 30, 2019 and March
31, 2019 was $16,185 and $20,193, respectively.
The
Company also has a working capital line of credit with Extraco
Bank. On April 30, 2019, the Company renewed the line of credit for
$372,675. The line of credit bears an interest rate of 5.0% that is
compounded monthly on unpaid balances and is payable monthly. The
line of credit matures on April 30, 2020 and is secured by
certificates of deposit and letters of credit owned by directors
and shareholders of the Company. On April 12, 2019, prior to the
renewal, the Company paid $100,000 on the loan. The balance of the
line of credit is $372,675 and $472,675 at September 30, 2019 and
March 31, 2019, respectively.
The
Company also has additional lines of credit with Extraco Bank for
$100,000 and $200,000, which were renewed on January 19, 2019 and
April 30, 2019, respectively, with maturity dates of January 19,
2020 and April 30, 2020, respectively. The lines of credit bear
interest at a rate of 6.5% and 5%, respectively, that is compounded
monthly on unpaid balances and is payable monthly. They are secured
by certificates of deposit and letters of credit owned by directors
and shareholders of the Company. The balance of the lines of credit
was $276,958 at both September 30, 2019 and March 31,
2019.
The
Company also has a working capital line of credit with Capital One
Bank for $50,000. The line of credit bears an interest rate of
prime plus 25.9 basis points, which totaled 31.4% as of September
30, 2019. The line of credit is unsecured. The balance of the line
of credit was $9,580 at both September 30, 2019 and March 31,
2019.
The
Company also has a working capital line of credit with Chase Bank
for $25,000. The line of credit bears an interest rate of prime
plus 10 basis points, which totaled 15.50% as of September 30,
2019. The line of credit is secured by assets of the
Company’s subsidiaries. The balance of the line of credit is
$10,237 at September 30, 2019 and March 31, 2019.
NOTE 4 – BANK LOAN
On
January 10, 2017, the Company entered into a promissory note with
Community National Bank for $245,000, at an annual interest rate of
5% and a maturity date of January 10, 2020 (the “CNB
Note”). The CNB Note is secured by certain real property
owned by the Company in LaCoste, Texas, and is also personally
guaranteed by the Company’s President, as well as certain
shareholders of the Company. The balance of the CNB Note is
$224,779 at September 30, 2019 and $228,725 at March 31,
2019.
NOTE 5 – CONVERTIBLE DEBENTURES
September 14, 2018 Debenture
On
September 14, 2018, the Company entered into a 12% convertible
promissory note for $112,500, with an OID of $10,250, which matures
on March 14, 2019. There is a right of prepayment in the first 180
days, but there is no right to repay after 180 days. Per the
agreement, the Company is required at all times to have authorized
and reserved three times the number of shares that is actually
issuable upon full conversion of the note. The Company has not
maintained the required share reservation under the terms of the
note agreement. The Company believes it has sufficient available
shares of the Company’s common stock in the event of
conversion for these notes. The interest rate increases to a
default rate of 24% for events as set forth in the agreement,
including if the market capitalization is below $5 million, or
there are any dilutive issuances. There is also a cross default
provision to all other notes. In the event of default, the
outstanding principal balance increases to 150%, and if the Company
fails to maintain the required authorized share reserve, the
outstanding principal increases to 200%. Additionally, If the
Company enters into a 3(a)(9) or 3(a)(10) issuance of shares there
are liquidation damages of 25% of principal, not to be below
$15,000. The Company must also obtain the noteholder's written
consent before issuing any new debt. Additionally, if the note is
not repaid by the maturity date the principal balance increases by
$15,000. The market capitalization is below $5 million and
therefore the note was in default, however, the holder has issued a
waiver to the Company on this default provision.
The
note is convertible into shares of the Company’s common stock
at a variable conversion rate that is equal to the lesser of 60% of
the lowest trading price for the last 20 days prior to the issuance
of the note or 60% of the lowest market price over the 20 days
prior to conversion. The conversion price shall be adjusted upon
subsequent sales of securities at a price lower than the original
conversion price. There are additional 10% adjustments to the
conversion price for events set forth in the agreement, including
if the conversion price is less than $0.01, if the Company is not
DTC eligible, the Company is no longer a reporting company, or the
note cannot be converted into free trading shares on or after nine
months from issue date. Per the agreement, the Company is required
at all times to have authorized and reserved three times the number
of shares that is actually issuable upon full conversion of the
note. The conversion feature meets the definition of a derivative
and therefore requires bifurcation and is accounted for as a
derivative liability.
On
December 13, 2018 the holder converted $11,200 of principal into
4,000,000 shares of common stock of the Company.
On
January 25, 2019 the outstanding principal of $101,550, plus an
additional $56,375 of default principal and $13,695 in accrued
interest of the note was purchased from the noteholder by a third
party. The new balance outstanding as of September 30, 2019 is
$171,620.
December 6, 2018 Debenture
On
December 6, 2018, the Company entered into an 10% convertible
promissory note for $210,460, which matures on September 6, 2019.
During the first 180 days the convertible redeemable note is in
effect, the Company may redeem the note at a prepayment percentage
of 120% to 130% of the outstanding principal and accrued interest
based on the redemption date’s passage of time ranging from
60 days to 180 days from the date of issuance of the debenture. Per
the agreement, the Company is required at all times to have
authorized and reserved three times the number of shares that is
actually issuable upon full conversion of the note. In the event of
default, as set forth in the agreement, the outstanding principal
balance increases to 150%. The Company did not pay the outstanding
principal and accrued interest of approximately $54,000 on the
maturity date of September 6, 2019, and therefore the principal was
increased by the default penalty of 50%, amounting to approximately
$27,000. In addition to standard events of default, an event of
default occurs if the common stock of the Company shall lose the
“bid” price for its Common Stock, on trading markets,
including the OTCBB, OTCQB or an equivalent replacement exchange.
If the Company enters into a 3(a)(9) or 3(a)(10) issuance of shares
there are liquidation damages of 25% of principal, not to be below
$15,000. The Company must also obtain the noteholder's written
consent before issuing any new debt. The note is convertible at a
fixed conversion price of $0.01. If an event of default occurs, the
fixed conversion price is extinguished and replaced by a variable
conversion rate that is 70% of the lowest trading prices during the
20 days prior to conversion. The fixed conversion price shall reset
upon any future dilutive issuance of shares, options or convertible
securities. The conversion feature at issuance meets the definition
of conventional convertible debt and therefore qualifies for the
scope exception in Accounting Standards Codification
(“ASC”) 815-10-15-74(a) and would not be bifurcated and
accounted for separately as a derivative liability. The Company
analyzed the conversion feature under ASC 470-20, “Debt with
conversion and other options”, and based on the market price
of the common stock of the Company on the date of funding as
compared to the conversion price, determined there was a $136,799
beneficial conversion feature to recognize, which will be amortized
over the term of the note using the effective interest method. The
amortization expense recognized during the three and six months
ended September 30, 2019
amounted to approximately $46,000 and $91,000,
respectively.
On June
27, 2019 the holder converted $30,000 of principal into 3,000,000
shares of common stock of the Company. On three occasions during
the three months ended September 30, 2019, the holder converted
$140,000 of principal into 14,000,000 shares of common stock of the
Company. The note was fully converted subsequent to September 30,
2019 (see Note 10).
December 31, 2018 Debenture
On
December 31, 2018, the Company entered into an 10% convertible
promissory note for $135,910, which matures on September 30, 2019.
The maturity date has been extended to March 1, 2020. During the
first 180 days the convertible redeemable note is in effect, the
Company may redeem the note at a prepayment percentage of 120% to
130% of the outstanding principal and accrued interest based on the
redemption date’s passage of time ranging from 60 days to 180
days from the date of issuance of the debenture. Per the agreement,
the Company is required at all times to have authorized and
reserved three times the number of shares that is actually issuable
upon full conversion of the note. In the event of default, as set
forth in the agreement, the outstanding principal balance increases
to 150%. In addition to standard events of default, an event of
default occurs if the common stock of the Company shall lose the
“bid” price for its Common Stock, on trading markets,
including the OTCBB, OTCQB or an equivalent replacement exchange.
If the Company enters into a 3(a)(9) or 3(a)(10) issuance of shares
there are liquidation damages of 25% of principal, not to be below
$15,000. The Company must also obtain the noteholder’s
written consent before issuing any new debt. The note is
convertible at a fixed conversion price of $0.01. If an event of
default occurs, the fixed conversion price is extinguished and
replaced by a variable conversion rate that is 70% of the lowest
trading prices during the 20 days prior to conversion. The fixed
conversion price shall reset upon any future dilutive issuance of
shares, options or convertible securities. The conversion feature
at issuance meets the definition of conventional convertible debt
and therefore qualifies for the scope exception in Accounting
Standards Codification (“ASC”) 815-10-15-74(a) and
would not be bifurcated and accounted for separately as a
derivative liability. The Company analyzed the conversion feature
under ASC 470-20, “Debt with conversion and other
options”, and based on the market price of the common stock
of the Company on the date of funding as compared to the conversion
price, determined there was a $88,342 beneficial conversion feature
to recognize, which will be amortized over the term of the note
using the effective interest method. The amortization expense
recognized during the three and six months ended September
30, 2019 amounted to
approximately $29,000 and $59,000,
respectively.
January 16, 2019 Debenture
On
January 16, 2019, the Company entered into an 10% convertible
promissory note for $205,436, with an OID of $18,686, for a
purchase price of $186,750, which matures on October 16, 2019.
During the first 180 days the convertible redeemable note is in
effect, the Company may redeem the note at a prepayment percentage
of 120% to 130% of the outstanding principal and accrued interest
based on the redemption date’s passage of time ranging from
60 days to 180 days from the date of issuance of the debenture. Per
the agreement, the Company is required at all times to have
authorized and reserved three times the number of shares that is
actually issuable upon full conversion of the note. In the event of
default, as set forth in the agreement, the outstanding principal
balance increases to 150%. In addition to standard events of
default, an event of default occurs if the common stock of the
Company shall lose the “bid” price for its Common
Stock, on trading markets, including the OTCBB, OTCQB or an
equivalent replacement exchange. If the Company enters into a
3(a)(9) or 3(a)(10) issuance of shares there are liquidation
damages of 25% of principal, not to be below $15,000. The Company
must also obtain the noteholder's written consent before issuing
any new debt. The note is convertible at a fixed conversion price
of $0.01. If an event of default occurs, the fixed conversion price
is extinguished and replaced by a variable conversion rate that is
70% of the lowest trading prices during the 20 days prior to
conversion. The fixed conversion price shall reset upon any future
dilutive issuance of shares, options or convertible securities. The
conversion feature at issuance meets the definition of conventional
convertible debt and therefore qualifies for the scope exception in
Accounting Standards Codification (“ASC”)
815-10-15-74(a) and would not be bifurcated and accounted for
separately as a derivative liability. The Company analyzed the
conversion feature under ASC 470-20, “Debt with conversion
and other options”, and based on the market price of the
common stock of the Company on the date of funding as compared to
the conversion price, determined there was a $176,675 beneficial
conversion feature to recognize, which will be amortized over the
term of the note using the effective interest method. The
amortization expense recognized during the three and six months
ended September 30, 2019
amounted to approximately $59,000 and $118,000,
respectively.
February 4, 2019 Debenture
On
February 4, 2019, the Company entered into an 10% convertible
promissory note for $85.500, with an OID of $7,500, for a purchase
price of $75,000, which matures on November 4, 2019. During the
first 180 days the convertible redeemable note is in effect, the
Company may redeem the note at a prepayment percentage of 120% to
130% of the outstanding principal and accrued interest based on the
redemption date’s passage of time ranging from 60 days to 180
days from the date of issuance of the debenture. Per the agreement,
the Company is required at all times to have authorized and
reserved three times the number of shares that is actually issuable
upon full conversion of the note. In the event of default, as set
forth in the agreement, the outstanding principal balance increases
to 150%. In addition to standard events of default, an event of
default occurs if the common stock of the Company shall lose the
“bid” price for its Common Stock, on trading markets,
including the OTCBB, OTCQB or an equivalent replacement exchange.
If the Company enters into a 3 (a)(9) or 3(a)(10) issuance of
shares there are liquidation damages of 25% of principal, not to be
below $15,000. The Company must also obtain the noteholder's
written consent before issuing any new debt. The note is
convertible at a fixed conversion price of $0.01. If an event of
default occurs, the fixed conversion price is extinguished and
replaced by a variable conversion rate that is 70% of the lowest
trading prices during the 20 days prior to conversion. The fixed
conversion price shall reset upon any future dilutive issuance of
shares, options or convertible securities. The conversion feature
at issuance meets the definition of conventional convertible debt
and therefore qualifies for the scope exception in ASC
815-10-15-74(a) and would not be bifurcated and accounted for
separately as a derivative liability. The Company analyzed the
conversion feature under ASC 470-20, “Debt with conversion
and other options”, and based on the market price of the
common stock of the Company on the date of funding as compared to
the conversion price, determined there was a $85,500 beneficial
conversion feature to recognize, which will be amortized over the
term of the note using the effective interest method.
On
August 6, 2019, the Company exercised its option to redeem the
February 4, 2019 debenture, for a redemption price of approximately
$132,000. The principal of $85,500 and interest of approximately
$5,000 was derecognized with the additional $27,000 paid upon
redemption recognized as a financing cost and $15,000 for legal
fees. As a result of the redemption, the unamortized discount
related to the redeemed balance of $38,000 was immediately
expensed.
March 1, 2019 Debenture
On
March 1, 2019, the Company entered into an 10% convertible
promissory note for $168,000, with an OID of $18,000, for a
purchase price of $150,000, which matures on November 1, 2019. The
maturity date has been extended to March 1, 2020. During the first
180 days the convertible redeemable note is in effect, the Company
may redeem the note at a prepayment percentage of 100% to 130% of
the outstanding principal and accrued interest based on the
redemption date’s passage of time ranging from 60 days to 180
days from the date of issuance of the debenture. Per the agreement,
the Company is required at all times to have authorized and
reserved three times the number of shares that is actually issuable
upon full conversion of the note. In the event of default, as set
forth in the agreement, the outstanding principal balance increases
to 150%. In addition to standard events of default, an event of
default occurs if the common stock of the Company shall lose the
“bid” price for its Common Stock, on trading markets,
including the OTCBB, OTCQB or an equivalent replacement exchange.
If the Company enters into a 3(a)(9) or 3(a)(10) issuance of shares
there are liquidation damages of 25% of principal, not to be below
$15,000. The Company must also obtain the noteholder’s
written consent before issuing any new debt. The note is
convertible at a fixed conversion price of $0.25. If an event of
default occurs, the fixed conversion price is extinguished and
replaced by a variable conversion rate that is 70% of the lowest
trading prices during the 20 days prior to conversion. The fixed
conversion price shall reset upon any future dilutive issuance of
shares, options or convertible securities. The conversion feature
at issuance meets the definition of conventional convertible debt
and therefore qualifies for the scope exception in ASC
815-10-15-74(a) and would not be bifurcated and accounted for
separately as a derivative liability. The Company analyzed the
conversion feature under ASC 470-20, “Debt with conversion
and other options”, and based on the market price of the
common stock of the Company on the date of funding as compared to
the conversion price, determined there was a $134,000 beneficial
conversion feature to recognize, which will be amortized over the
term of the note using the effective interest method. The
amortization expense recognized during the three and six months
ended September 30, 2019 amounted to approximately $50,000 and
$100,000 respectively.
April 17, 2019 Debenture
On
April 17, 2019, the Company entered into an 10% convertible
promissory note for $110,000, with an OID of $10,000, for a
purchase price of $100,000, which matures on January 23, 2020.
During the first 180 days the convertible redeemable note is in
effect, the Company may redeem the note at a prepayment percentage
of 120% to 130% of the outstanding principal and accrued interest
based on the redemption date’s passage of time ranging from
60 days to 180 days from the date of issuance of the debenture. Per
the agreement, the Company is required at all times to have
authorized and reserved three times the number of shares that is
actually issuable upon full conversion of the note. In the event of
default, as set forth in the agreement, the outstanding principal
balance increases to 150%. In addition to standard events of
default, an event of default occurs if the common stock of the
Company shall lose the “bid” price for its Common
Stock, on trading markets, including the OTCBB, OTCQB or an
equivalent replacement exchange. If the Company enters into a 3
(a)(9) or 3(a)(10) issuance of shares there are liquidation damages
of 25% of principal, not to be below $15,000. The Company must also
obtain the noteholder’s written consent before issuing any
new debt. The note is convertible at a fixed conversion price of
$0.124. If an event of default occurs, the fixed conversion price
is extinguished and replaced by a variable conversion rate that is
70% of the lowest trading prices during the 20 days prior to
conversion. The fixed conversion price shall reset upon any future
dilutive issuance of shares, options or convertible securities. The
conversion feature at issuance meets the definition of conventional
convertible debt and therefore qualifies for the scope exception in
ASC 815-10-15-74(a) and would not be bifurcated and accounted for
separately as a derivative liability. The Company analyzed the
conversion feature under ASC 470-20, “Debt with conversion
and other options”, and based on the market price of the
common stock of the Company on the date of funding as compared to
the conversion price, determined there was an approximately $59,000
beneficial conversion feature to recognize, which will be amortized
over the term of the note using the effective interest method. The
amortization expense recognized during the three and six months
ended September 30, 2019 amounted to approximately $20,000 and
$40,000, respectively.
NOTE 6 – STOCKHOLDERS’ DEFICIT
Preferred Stock
As of
September 30, 2019 and March 31, 2019, the Company had 200,000,000
shares of preferred stock authorized with a par value of $0.0001.
Of this amount, 5,000,000 shares Series A preferred stock are
authorized and outstanding.
On
September 5, 2019, the Board authorized the issuance of 5,000
preferred shares to be designated as Series B Preferred Stock
(“Series B PS”). The Series B PS have a par value of
$0.0001, a stated value of $1,200 and no voting rights. The Series
B PS are redeemable at the Company's option, at percentages ranging
from 120% to 135% for the first 180 days, based on the passage of
time. The Series B are also redeemable at the holder’s
option, upon the occurrence of a triggering event which includes a
change of control, bankruptcy, and the inability to deliver Series
B PS requested under conversion notices. The triggering redemption
amount is at the greater of (i) 135% of the stated value or (ii)
the product of the volume-weighted average price
(“VWAP”) on the day proceeding the triggering event
multiplied by the stated value divided by the conversion price. As
the redemption feature at the holder’s option is contingent
on a future triggering event, the Series B PS is considered
contingently redeemable, and as such the preferred shares are
classified in equity until such time as a triggering event occurs,
at which time they will be classified as mezzanine.
The
Series B PS is convertible, at the discounted market price which is
defined as the lowest VWAP over last 20 days. The conversion price
is adjustable based on several situations, including future
dilutive issuances. As the Series B PS does not have a redemption
date and is perpetual preferred stock, it is considered to be an
equity host instrument and as such the conversion feature is not
required to be bifurcated as it is clearly and closely related to
the equity host instrument.
Series B Preferred Equity Offering
On September 17,
2019, the Company entered into a Securities Purchase Agreement
(“SPA”) with GHS Investments LLC, a Nevada limited
liability company (“GHS”) for the purchase of up to
5,000 shares of Series B PS at a stated value of $1,200 per share,
or for a total net proceeds of $5,000,000 in the event the entire
5,000 shares of Series B PS are purchased. On September 17, 2019,
the Company received an initial tranche of $250,000 under the
SPA.
Equity Financing Agreement 2019
On
August 23, 2019, the Company entered into a new Equity Financing
Agreement (“Equity Financing Agreement”) and
Registration Rights Agreement (“Registration Rights
Agreement”) with GHS. Under the terms of the Equity Financing
Agreement, GHS agreed to provide the Company with up to $11,000,000
upon effectiveness of a registration statement on Form S-1 (the
“Registration Statement”) filed with the U.S.
Securities and Exchange Commission (the
“Commission”).
Following
effectiveness of the Registration Statement, the Company shall have
the discretion to deliver puts to GHS and GHS will be obligated to
purchase shares of the Company’s common stock, based on the
investment amount specified in each put notice. The maximum amount
that the Company shall be entitled to put to GHS in each put notice
shall not exceed two hundred percent (200%) of the average daily
trading dollar volume of the Company’s Common Stock during
the ten (10) trading days preceding the put, so long as such amount
does not exceed $500,000. Pursuant to the Equity Financing
Agreement, GHS and its affiliates will not be permitted to purchase
and the Company may not put shares of the Company’s Common
Stock to GHS that would result in GHS’s beneficial ownership
equaling more than 4.99% of the Company’s outstanding Common
Stock. The price of each put share shall be equal to eighty percent
(80%) of the Market Price (as defined in the Equity Financing
Agreement). Puts may be delivered by the Company to GHS until the
earlier of thirty-six (36) months after the effectiveness of the
Registration Statement or the date on which GHS has purchased an
aggregate of $11,000,000 worth of Common Stock under the terms of
the Equity Financing Agreement.
The
Registration Rights Agreement provides that the Company shall (i)
use its best efforts to file with the Commission the Registration
Statement within 30 days of the date of the Registration Rights
Agreement; and (ii) have the Registration Statement declared
effective by the Commission within 30 days after the date the
Registration Statement is filed with the Commission, but in no
event more than 90 days after the Registration Statement is filed.
The Registration Statement was filed on October 8, 2019 and as of
this filing has not yet been deemed effective.
Equity Financing Agreement 2018
On
August 21, 2018, the Company entered into the first Equity
Financing Agreement and Registration Rights Agreement with GHS.
Under the terms of the first Equity Financing Agreement, GHS agreed
to provide the Company with up to $7,000,000 upon effectiveness of
a registration statement on Form S-1 filed with the U.S. Securities
and Exchange Commission. The registration statement was filed and
deemed effective on September 19, 2018.
Following
effectiveness of the first registration statement, the Company had
the discretion to deliver puts to GHS and GHS was obligated to
purchase shares of the Company’s common stock, par value
$0.0001 per share (the “Common Stock”) based on the
investment amount specified in each put notice. The maximum amount
that the Company was entitled to put to GHS in each put notice was
not to exceed two hundred percent (200%) of the average daily
trading dollar volume of the Company’s Common Stock during
the ten (10) trading days preceding the put, so long as such amount
did not exceed $300,000. Pursuant to the first Equity Financing
Agreement, GHS and its affiliates will not be permitted to
purchase, and the Company may not put shares of the Company’s
Common Stock to GHS that would result in GHS’s beneficial
ownership equaling more than 9.99% of the Company’s
outstanding Common Stock. The price of each put share was to be
equal to eighty percent (80%) of the Market Price (as defined in
the Equity Financing Agreement). Puts may be delivered by the
Company to GHS until the earlier of thirty-six (36) months after
the effectiveness of the Registration Statement or the date on
which GHS has purchased an aggregate of $7,000,000 worth of Common
Stock under the terms of the Equity Financing
Agreement.
During
the three months ended June 30, 2019, the Company put to GHS for
the issuance of 11,482,721 shares of common stock for a total of
$1,500,000. On July
2, 2019, the Company put to GHS for the issuance of 3,261,925
shares of common stock, at $0.09, for a total of
$274,000.
Options and Warrants
The
Company has not granted any options since inception.
The
Company granted warrants in connection with various convertible
debentures in previous periods. As of September 30, 2019 and March
31, 2019, there are 551,452 and 444,000 (after adjustment)
remaining warrants to purchase shares of common stock outstanding,
classified as a warrant liability, which expire on January 31,
2022, with an exercise price of 45% of the market value of the
common shares of the Company on the date of exercise.
The
warrant liability was revalued at September 30, 2019, resulting in
no change to the fair value of the warrant liability for the six
months ended September 30, 2019.
NOTE 7 – RELATED PARTY TRANSACTIONS
Accrued Payroll – Related Parties
Included in other
accrued expenses on the accompanying consolidated balance sheet as
of September 30, 2019 is approximately $209,000 owing to the former
Chief Executive Officer of the Company, approximately $69,000 owing
to the President of the Company, and approximately $96,000 owing to
a key employee.
Notes Payable – Related Parties
On
April 20, 2017, the Company entered into a convertible debenture
with an affiliate of the Company whose managing member is the
Treasurer, Chief Financial Officer, and a director of the Company
(the “affiliate”), for $140,000. The convertible
debenture matures one year from date of issuance, and bears
interest at 6%. Upon an event of default, as defined in the
debenture, the principal and any accrued interest becomes
immediately due, and the interest rate increases to 24%. The
convertible debenture is convertible at the holder’s option
at a conversion price of $0.30. As of March 31, 2018, the Company
had paid $52,400 on this note, with $87,600 remaining outstanding
as of March 31, 2019. On July 26, 2019, the Company paid $47,000 on
this note, leaving $40,600 remaining outstanding on the note as of
September 30, 2019.
NaturalShrimp Holdings, Inc.
On
January 1, 2016 the Company entered into a notes payable agreement
with NaturalShrimp Holdings, Inc.(“NSH”), a
shareholder. Between January 16, 2016 and March 7, 2016, the
Company borrowed $134,750 under this agreement. An additional
$601,361 was borrowed under this agreement in the year ended March
31, 2017. The note payable has no set monthly payment or maturity
date with a stated interest rate of 2%. As of September 30, 2019
and March 31, 2019 the outstanding balance is approximately
$736,000.
Shareholder Notes
The
Company has entered into several working capital notes payable to
multiple shareholders of NSH and Bill Williams, a former officer
and director, and a current shareholder of the Company, for a total
of $486,500. The notes are unsecured and bear interest at 8%. These
notes had stock issued in lieu of interest and have no set monthly
payment or maturity date. The balance of these notes at September
30, 2019 and March 31, 2019 was $426,404 and $426,404,
respectively, and is classified as a current liability on the
consolidated balance sheets. At September 30, 2019 and March 31,
2019, accrued interest payable was $258,088 and $241,032,
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, and is currently
in default. The note is unsecured. The balance of the note at
September 30, 2019 and March 31, 2019 was $50,000, respectively,
and is classified as a current liability on the consolidated
balance sheets.
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 September
30, 2019 and March 31, 2019 was $104,647 and is classified as a
current liability on the consolidated balance sheets.
NOTE 8 – LEASE
On June
24, 2019, the Company entered into a service and equipment lease
agreement for water treatment services, consumables and equipment.
The lease term is for five years, with a renewal option of an
additional five years, with a monthly lease payment of $5,000. The
Company analyzed the classification of the lease under ASC 842, and
as it did not meet any of the criteria for a financing lease it has
been classified as an operating lease. The Company determined the
Right of Use asset and Lease liability values at inception
calculated at the present value of all future lease payments for
the lease term, using an incremental borrowing rate of 5%. The
Lease Liability will be expensed each month, on a straight line
basis, over the life of the lease.
For the
three and six months ended September 30, 2019 the lease expense was
$15,000, and the amortization of the Right of Use asset was
$11,558.
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.
On
August 15, 2019, Mr. Bill Williams resigned from his position as
Chairman of the Board and Chief Executive Officer of the Company,
effective August 31, 2019. A separation agreement is currently
being negotiated.
Vista Capital Investments, LLC
On
April 30, 2019, a complaint was filed against the Company in the
U.S. District Court in Dallas, Texas alleging that the Company
breached a provision in a common stock purchase warrant (the
“Vista Warrant”) issued by the Company to Vista Capital
Investments, LLC (“Vista”). Vista alleges that the
Company failed to issue certain shares of the Company’s
common stock as was required under the terms of the Vista Warrant.
Vista is currently seeking money damages in the approximate amount
of $7,000,000, which the Company believes is unwarranted and
excessive, as well as costs and reimbursement of expenses. As of
the date hereof, no hearing has been scheduled, but the Company is
vigorously defending itself against these claims, preparing a
counter-claim against Vista and taking such other appropriate
action, in addition to seeking for other costs and relief as may be
appropriate. The Company is currently in discussions with Vista and
has accrued $50,000 for the settlement of this complaint, which is
recognized as “loss on warrant settlement” on the
accompanying Statement of Operations in the six months ended
September 30, 2019.
Contingent Events
On
August 5, 2019, the Company received a formal notice from the Texas
Parks and Wildlife Department for the Company’s facility in
La Coste, Texas due to the detection of IHHNV, a viral disease of
Pacific white shrimp, from two Postlarvae (“PL”)
shipments from the Company’s Texas hatchery supplier in March
and April of this year. At the time of receipts of such shipments
from the hatchery in March and April, the Company was notified by
its supplier that the shipments were virus free. Based on the
Company’s quality control procedures during the course of the
shrimp farming process in the Company’s tanks and, in this
case the slower than normal growth rate indicating possible
compromise, the Company undertook to have lots independently tested
by the University of Arizona Pathology Laboratory in Tucson. Based
on those tests, IHHNV was detected and the Company’s facility
was placed under quarantine until further notice by Texas Parks and
Wildlife Department and the United States Department of
Agriculture/Animal and Plant Health Inspection Service. Such
quarantine notice also imposes no discharge of any culture water to
state waters (creeks, rivers, streams, bays) and no sales of any
shrimp until further notice. The Company’s system of tanks
prevents crossover contamination in order to quickly begin
restocking of PL shrimp from a different hatchery beginning in
August in different tanks. Such orders have been placed and are
expected to be placed into production as soon as inspection is
passed and the quarantine has been lifted. Furthermore, the Company
has enhanced its system to include nursery tanks that will allow
the Company to evaluate the health of the shrimp through much
earlier testing in its quality control process. While the Company
expects to incur costs associated with the proper disposal of such
batches, it does not expect it to be material. Furthermore, the
Company expects that it will also recover certain of these costs
from its Texas hatchery supplier.
NOTE 10 – SUBSEQUENT EVENTS
Sale of Series B PS
Subsequent to
period end, on October 4, 2019, and October 18, 2019, the Company
received further tranches of $250,000 each under the
SPA.
Issuance of Common Stock under Convertible Notes
Subsequent to
September 30, 2019, the GHS December 6, 2018 debenture was fully
converted into 8,420,477 shares of the Company’s common
stock.
