UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM 10-Q
☑
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended December 31, 2017
or
☐
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Transition Period from _________ to _________
Commission file number: 000-54030
NATURALSHRIMP INCORPORATED
(Exact
name of registrant as specified in its charter)
Nevada
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74-3262176
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(State
or other Jurisdiction of Incorporation or
Organization)
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(I.R.S.
Employer Identification No.)
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15150 Preston Rd, Suite 300
Dallas, TX
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75248
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(Address
of Principal Executive Offices)
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(Zip
Code)
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(888) 791-9474
(Registrant’s
telephone number, including area code)
N/A
(Former
name, former address and former fiscal year, if changed since last
report)
Indicate
by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes ☑ No ☐
Indicate
by check mark whether the registrant has submitted electronically
and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405
of Regulation S-T (§ 232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files). Yes ☑ No
☐
Indicate
by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, a smaller reporting
company or an emerging growth company. See the definitions of
“large accelerated filer,” “accelerated
filer,” “smaller reporting company” and
“emerging growth company” in Rule 12b-2 of the Exchange
Act.
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Large accelerated
filer
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☐
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Accelerated filer
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☐
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Non-accelerated
filer
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☐
(Do not check if a smaller reporting company)
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Smaller reporting company
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☑
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Emerging Growth
Company
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☐
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If an
emerging growth company, indicate by check mark if the registrant
has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided
pursuant to Section 13(a) of the Exchange Act: ☐
Indicate
by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). Yes ☐ No
☑.
As of
February 14, 2017, there were 95,426,339 shares of the
registrant’s common stock outstanding.
NATURALSHRIMP INCORPORATED
FORM 10-Q
FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 2017
TABLE OF CONTENTS
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Page
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PART I. FINANCIAL
INFORMATION
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ITEM
1. Financial
Statements
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3
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Condensed
consolidated balance sheets as of December 31, 2017 (unaudited) and
March 31, 2017
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3
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Condensed
consolidated statements of operations for the three and nine months
ended December 31, 2017 and 2016 (unaudited)
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4
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Condensed
consolidated statements of cash flows for the three and nine months
ended December 31, 2017 and 2016 (unaudited)
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5
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Notes
to condensed consolidated financial statements
(unaudited)
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6
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ITEM
2. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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20
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ITEM
3. Quantitative and
Qualitative Disclosures about Market Risk
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29
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ITEM
4. Controls and
Procedures
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30
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PART II. OTHER
INFORMATION
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ITEM
1. Legal
Proceedings
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31
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ITEM
1A. Risk
Factors
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31
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ITEM
2. Unregistered Sales
of Equity Securities and Use of Proceeds
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31
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ITEM
3. Defaults Upon
Senior Securities
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33
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ITEM
4. Mine Safety
Disclosures
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33
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ITEM
5. Other
Information
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33
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ITEM
6. Exhibits
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34
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SIGNATURES
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35
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PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NATURALSHRIMP INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
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ASSETS
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Current
assets
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Cash
and cash equivalents
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$15,715
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$88,195
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Notes
receivable
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131,200
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-
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Prepaid
expenses
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131,552
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224,000
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Total
current assets
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278,467
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312,195
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Fixed
assets
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Land
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202,293
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202,293
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Buildings
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1,328,161
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1,328,161
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Machinery
and equipment
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929,214
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929,214
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Autos
and trucks
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14,063
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14,063
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Furniture
and fixtures
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22,060
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22,060
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Accumulated
depreciation
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(1,274,589)
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(1,221,419)
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Fixed
assets, net
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1,221,202
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1,274,372
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Other
assets
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Deposits
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10,500
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10,500
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Total
other assets
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10,500
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10,500
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Total
assets
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$1,510,169
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$1,597,067
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LIABILITIES AND STOCKHOLDERS' DEFICIT
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Current
liabilities
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Accounts
payable
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$539,653
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$505,033
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Accrued
interest - related parties
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215,568
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178,922
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Other
accrued expenses
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426,345
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317,499
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Short-term
promissory note and lines of credit
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794,976
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145,964
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Current
maturities of bank loan
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7,497
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7,310
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Current
maturities of convertible debentures, less debt discount of
$687,521
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187,463
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-
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Convertible
debentures, related party, less debt discount of
$8,000
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97,000
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-
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Notes
payable - related parties
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1,271,162
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1,296,162
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Derivative
liability
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1,532,000
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218,000
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Warrant
liability
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463,000
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28,000
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Total
current liabilities
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5,534,664
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2,696,890
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Bank
loan, less current maturities
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230,819
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235,690
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Lines
of credit
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-
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651,498
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Convertible
debentures, less current maturities
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-
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50,000
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Total
liabilities
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5,765,483
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3,634,078
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Commitments
and contingencies (Note 11)
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Stockholders'
deficit
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Preferred
stock, $0.0001 par value, 200,000,000 shares authorized, 0 and 0
shares issued and outstanding at December 31, 2017 and March 31,
2017, respectively
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-
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-
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Common stock, $0.0001 par value, 300,000,000
shares authorized, 95,416,339 and 92,408,298 shares issued and outstanding at
December 31, 2017 and March 31, 2017,
respectively
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9,542
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9,242
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Additional
paid in capital
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27,499,722
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26,681,521
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Accumulated
deficit
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(31,764,578)
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(28,727,774)
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Total
stockholders' deficit
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(4,255,314)
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(2,037,011)
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Total
liabilities and stockholders' deficit
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$1,510,169
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$1,597,067
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The
accompanying footnotes are in integral part of these condensed
consolidated financial statements.
NATURALSHRIMP INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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For the Three Months Ended
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For the Nine Months Ended
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Sales
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$-
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$-
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$-
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$-
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Operating
expenses:
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Facility
operations
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5,835
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16,344
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21,241
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58,674
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General
and administrative
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250,772
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171,345
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866,053
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530,075
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Depreciation
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17,726
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21,500
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53,170
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42,500
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Total
operating expenses
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274,333
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209,189
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940,464
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631,249
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Operating
loss before other income (expense)
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(274,333)
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(209,189)
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(940,464)
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(631,249)
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Other
income (expense):
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Interest
expense
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(63,870)
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(55,822)
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(124,386)
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(164,489)
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Amortization
of debt discount
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(231,834)
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-
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(401,313)
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-
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Financing
costs
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(385,576)
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-
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(895,640)
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-
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Change
in fair value of derivative liability
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(332,000)
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-
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(239,000)
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-
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Change
in fair value of warrant liability
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(406,000)
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-
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(436,000)
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-
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Total
other income (expense)
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(1,419,280)
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(55,822)
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(2,096,339)
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(164,489)
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Loss
before income taxes
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(1,693,613)
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(265,011)
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(3,036,803)
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(795,738)
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Provision
for income taxes
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-
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-
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-
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-
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Net
loss
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$(1,693,613)
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$(265,011)
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$(3,036,803)
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$(795,738)
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Loss
per share - Basic
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$(0.02)
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$(0.00)
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$(0.03)
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$(0.01)
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Weighted
average shares outstanding - Basic
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94,701,159
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89,424,477
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93,345,203
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89,437,931
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The
accompanying footnotes are in integral part of these condensed
consolidated financial statements.
NATURALSHRIMP INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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For the Nine Months Ended
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Cash
flows from operating activities
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Net
loss
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$(3,036,803)
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$(795,738)
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Adjustments to
reconcile net loss to net cash used in operating
activities:
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Stock-based
compensation
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-
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24,750
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Depreciation and
amortization expense
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53,170
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42,500
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Amortization of
debt discount
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401,313
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-
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Change in fair
value of derivative liability
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239,000
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-
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Change in fair
value of warrant liability
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436,000
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-
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Financing
costs
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895,641
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-
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Shares issued for
services
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100,000
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Changes in
operating assets and liabilities:
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Prepaid expenses
and other current assets
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42,448
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(4,000)
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Deposits
|
-
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(10,000)
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Accounts
payable
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43,129
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(48,465)
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Other accrued
expenses
|
108,846
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149,921
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Accrued interest -
related parties
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36,646
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106,659
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Cash used in
operating activities
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(680,610)
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(534,373)
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Cash
flows from financing activities
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Payments on bank
loan
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(4,684)
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-
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Repayment Line of
Credit Short-term
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(2,486)
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(9,379)
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Borrowing on Notes
payable - related party
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-
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617,257
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Proceeds from sale
of stock
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25,000
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10,000
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Proceeds from
convertible debentures
|
730,200
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-
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Proceeds from
convertible debentures, related party
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180,000
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-
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Payments on
convertible debentures
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(227,500)
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-
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Payments on
convertible debentures, related party
|
(92,400)
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-
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|
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Cash
provided by financing activities
|
608,130
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617,878
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Net change in
cash
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(72,480)
|
83,505
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Cash at beginning
of period
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88,195
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6,158
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Cash at end of
period
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$15,715
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$89,663
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Interest
paid
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$87,740
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$57,830
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Supplemental
Disclosure of Non-Cash Investing and Financing
Activities:
|
|
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Notes
receivable issued as consideration for convertible
debenture
|
$131,200
|
$-
|
Cashless exercise
of warrants
|
$67,000
|
$-
|
The
accompanying footnotes are in integral part of these condensed
consolidated financial statements.
NATURALSHRIMP INCORPORATED
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.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q
includes a number of forward-looking statements that reflect
management’s current views with respect to future events and
financial performance. Forward-looking statements are
projections in respect of future events or our future financial
performance. In some cases, you can identify forward-looking
statements by terminology such as “may,”
“should,” “expects,” “plans,”
“anticipates,” “believes,”
“estimates,” “predicts,”
“potential” or “continue” or the negative
of these terms or other comparable terminology. These statements include statements
regarding the intent, belief or current expectations of us and
members of our management team, as well as the assumptions on which
such statements are based. Prospective investors are cautioned that
any such forward-looking statements are not guarantees of future
performance and involve risk and uncertainties, and that actual
results may differ materially from those contemplated by such
forward-looking statements. These statements are only
predictions and involve known and unknown risks, uncertainties and
other factors, including the risks set forth in the section
entitled “Risk Factors” in our Annual Report on Form
10-K for the fiscal year ended March 31, 2017, as filed with the
U.S. Securities and Exchange Commission (the “SEC”) on
June 29, 2017, any of which may cause our company’s or our
industry’s actual results, levels of activity, performance or
achievements to be materially different from any future results,
levels of activity, performance or achievements expressed or
implied in our forward-looking statements. These risks and factors
include, by way of example and without limitation:
●
our ability to
successfully commercialize our shrimp farming operations to produce
a market-ready product in a timely manner and in sufficient
quantities;
●
absence of
contracts with customers or suppliers;
●
our ability to
maintain and develop relationships with customers and
suppliers;
●
our ability to
successfully integrate acquired businesses or new
brands;
●
the impact of
competitive products and pricing;
●
supply constraints
or difficulties;
●
the availability,
recruitment and retention of key personnel;
●
general economic
and business conditions;
●
substantial doubt
about our ability to continue as a going concern;
●
our need to raise
additional funds in the future;
●
our ability to
successfully implement our business plan;
●
our ability to
successfully acquire, develop or commercialize new products and
equipment;
●
the commercial
success of our products;
●
intellectual
property claims brought by third parties; and
●
the impact of any
industry regulation.
Although we believe
that the expectations reflected in our forward-looking statements
are reasonable, we cannot guarantee future results, levels of
activity, or performance. Except as required by applicable law,
including the securities laws of the United States, we do not
intend to update any of these forward-looking statements to conform
such statements to actual results.
Readers are urged to carefully review and consider the various
disclosures made by us in this report and in our other reports
filed with the SEC. We undertake no obligation to update or revise
forward-looking statements to reflect changed assumptions, the
occurrence of unanticipated events, or changes in the future
operating results over time, except as required by law. We believe
that our assumptions are based upon reasonable data derived from
and known about our business and operations. No assurances are made
that actual results of operations or the results of our future
activities will not differ materially from our
assumptions.
As used
in this Quarterly Report on Form 10-Q and unless otherwise
indicated, the terms “Company,” “we,”
“us,” and “our” refer to NaturalShrimp
Incorporated and its three wholly-owned subsidiaries: NaturalShrimp
Corporation, a Delaware corporation (“NSC”),
NaturalShrimp Global, Inc., a Delaware corporation (“NS
Global”) and Natural Aquatic Systems, Inc., a Texas
corporation (“NAS”). Unless otherwise specified, all
dollar amounts reflected herein are expressed in United States
dollars.
Corporate History and Overview
We were
incorporated in the State of Nevada on July 3, 2008 under the name
“Multiplayer Online Dragon, Inc.” Effective November 5,
2010, we effected an 8 for 1 forward stock split, increasing the
issued and outstanding shares of our common stock from 12,000,000
shares to 96,000,000 shares. On October 29, 2014, we effected a 1
for 10 reverse stock split, decreasing the issued and outstanding
shares of our common stock from 97,000,000 to
9,700,000.
On
November 26, 2014, we entered into an Asset Purchase Agreement (the
“Agreement”) with NaturalShrimp Holdings, Inc. a
Delaware corporation (“NSH”), pursuant to which we
agreed to acquire substantially all of the assets of NSH, which
assets consisted primarily of all of the issued and outstanding
shares of capital stock of NSC and NS Global, and certain real
property located outside of San Antonio, Texas (the
“Assets”).
On
January 30, 2015, we consummated the acquisition of the Assets
pursuant to the Agreement. In accordance with the terms of the
Agreement, we issued 75,520,240 shares of our common stock to NSH
as consideration for the Assets. As a result of the transaction,
NSH acquired 88.62% of our issued and outstanding shares of common
stock, NSC and NS Global became our wholly-owned subsidiaries, and
we changed our principal business to a global shrimp farming
company.
In
connection with our receipt of approval from the Financial Industry
Regulatory Authority (“FINRA”), effective March 3,
2015, we amended our Articles of Incorporation to change our name
to “NaturalShrimp Incorporated.”
We are
a biotechnology company and have developed a proprietary technology
that allows us to grow Pacific White shrimp (Litopenaeus vannamei,
formerly Penaeus vannamei) in an ecologically controlled,
high-density, low-cost environment, and in fully contained and
independent production facilities. Our system uses technology which
allows us to produce a naturally-grown shrimp “crop”
weekly, and accomplishes this without the use of antibiotics or
toxic chemicals. We have developed several proprietary technology
assets, including a knowledge base that allows us to produce
commercial quantities of shrimp in a closed system with a computer
monitoring system that automates, monitors and maintains proper
levels of oxygen, salinity and temperature for optimal shrimp
production. Our initial production facility is located outside of
San Antonio, Texas.
NS
Global, one of our wholly-owned subsidiaries, owns approximately 1%
of NaturalShrimp International A.S. in Europe. Our European-based
partner, NaturalShrimp International A.S., Oslo, Norway, is
responsible for the construction cost of its facility and initial
operating capital.
The
first facility built in Spain for NaturalShrimp International A.S.
is GambaNatural de España, S.L. The land for the first
facility was purchased in Medina del Campo, Spain, and construction
of the 75,000 sq. ft. facility was completed in 2015. Medina del
Campo is approximately seventy-five miles northwest of Madrid,
Spain.
On
October 16, 2015, we formed NAS. The purpose of the NAS is to
formalize the business relationship between our Company and F&T
Water Solutions LLC for the joint development of certain water
technologies. The technologies shall include, without limitation,
any and all inventions, patents, intellectual property and know-how
dealing with enclosed aquatic production systems worldwide. This
includes construction, operation, and management of enclosed
aquatic production, other than shrimp, facilities throughout the
world, co-developed by both parties at our facility located outside
of La Coste, Texas.
The
Company has three wholly-owned subsidiaries, including NSC, NS
Global and NAS.
Evolution of Technology and Revenue Expectations
Historically,
efforts to raise shrimp in a high-density, closed system at the
commercial level have been met with either modest success or
outright failure through “BioFloc Technology.”
Infectious agents such as parasites, bacteria and viruses are the
most damaging and most difficult to control. Bacterial infection
can in some cases be combated through the use of antibiotics
(although not always), and in general, the use of antibiotics is
considered undesirable and counter to “green”
cultivation practices. Viruses can be even worse, in that they are
immune to antibiotics. Once introduced to a shrimp population,
viruses can wipe out entire farms and shrimp populations, even with
intense probiotic applications.
Our
primary solution against infectious agents is our “Vibrio
Suppression Technology.” We believe this system creates
higher sustainable densities, consistent production, improved
growth and survival rates and improved food conversion without the
use of antibiotics, probiotics or unhealthy anti-microbial
chemicals. Vibrio Suppression Technology helps to exclude and
suppress harmful organisms that usually destroy
“BioFloc” and other enclosed technologies.
In
2001, we began research and development of a high density, natural
aquaculture system that is not dependent on ocean water to provide
quality, fresh shrimp every week, fifty-two weeks a year. The
initial NaturalShrimp system was successful, but the Company
determined that it would not be economically feasible due to high
operating costs. Over the next several years, using the knowledge
we gained from developing the first system, we developed a shrimp
production system that eliminated the high costs associated with
the previous system. We have continued to refine this technology,
eliminating bacteria and other problems that affect enclosed
systems, and now have a successful shrimp growing process. We have
produced thousands of pounds of shrimp over the last few years in
order to develop a design that will consistently produce quality
shrimp that grow to a large size at a specific rate of growth. This
included experimenting with various types of natural live and
synthesized feed supplies before selecting the most appropriate
nutritious and reliable combination. It also included utilizing
monitoring and control automation equipment to minimize labor costs
and to provide the necessary oversight for proper regulation of the
shrimp environment. However, there were further enhancements needed
to our process and technology in order to begin production of
shrimp on a commercially viable scale and to generate
revenues.
Our
current system consists of a reception tank where the shrimp are
acclimated, then moved to a larger grow-out tank for the rest of
the twenty-week cycle. During 2016, we engaged in additional
engineering projects with third parties to further enhance our
indoor production capabilities. For example, through our
relationship with Trane, Inc., a division of Ingersoll-Rand Plc
(“Trane”), Trane is proceeding with a detailed audit to
use data to verify the capabilities of an initial Phase 1 prototype
of a Trane-proposed three tank system at our La Coste, Texas
facility. The prototype consists of a modified Electrocoagulation
system for the human grow-out, harvesting and processing of fully
mature, antibiotic-free Pacific White Leg shrimp. The detailed
audit and design is ongoing and, once completed, will present a
viable pathway to begin generating revenue and producing shrimp on
a commercially viable scale. After the design is completed,
installation of the system is expected to be provided by an outside
general contractor, and financing for the system is expected to be
provided by an outside firm. Once both of these factors are
complete, which is estimated to be in the Q-2 of calendar 2018, we
expect it would take approximately six to nine months to begin
producing and shipping shrimp.
Results of Operations
Comparison of the Three Months Ended December 31, 2017 to the Three
Months Ended December 31, 2016
Revenue
We have
not earned any significant revenues since our inception and we do
not anticipate earning revenues in the near future.
Expenses
Our
expenses for the three months ended December 31, 2017 are
summarized as follows, in comparison to our expenses for the three
months ended December 31, 2016:
|
Three Months
Ended December 31,
|
|
|
|
Salaries and
related expenses
|
$95,544
|
$88,440
|
Rent
|
3,221
|
3,819
|
Professional
fees
|
82,120
|
17,137
|
Other general and
administrative expenses
|
69,887
|
61,949
|
Facility
operations
|
5,835
|
16,344
|
Depreciation
|
17,726
|
21,500
|
Total
|
$274,333
|
$209,189
|
Operating expenses
for the three months ended December 31, 2017 were $274,333,
representing an increase of 37% compared to operating expenses of
$209,189 for the same period in 2016. The primary reason for the
change is an increase in professional fees, plus services provided
by a new consultant, the fees to whom are included in other general
and administrative expenses. This increase was slightly offset by
reduced facility fees and depreciation expense.
Comparison of the Nine Months Ended December 31, 2017 to the Nine
Months Ended December 31, 2016
Revenue
We have
not earned any significant revenues since our inception and we do
not anticipate earning revenues in the near future.
Expenses
Our
expenses for the nine months ended December 31, 2017 are summarized
as follows, in comparison to our expenses for the nine months ended
December 31, 2016:
|
Nine Months
Ended December 31,
|
|
|
|
Salaries and
related expenses
|
$250,039
|
$279,501
|
Rent
|
8,011
|
8,803
|
Professional
fees
|
200,015
|
115,664
|
Other general and
administrative expenses
|
407,988
|
126,501
|
Facility
operations
|
21,241
|
58,674
|
Depreciation
|
53,170
|
42,500
|
Total
|
$940,464
|
$631,249
|
Operating expenses
for the nine months ended December 31, 2017 were $940,464,
representing an increase of 49% compared to operating expenses of
$631,249 for the same period in 2016. The primary reason for the
change is the amortization of prepaid expenses of $220,000 for the
current period expense related to shares issued in January 2017 to
a consultant for services to be provided over six months, plus an
increase in professional fees. This increase was offset by a
decrease in salaries and related expenses due to an executive who
has left the company since the prior year, and reduced facility
fees.
Liquidity, Financial Condition and Capital Resources
As of
December 31, 2017, we had cash and cash equivalents on hand of
$15,715 and a working capital deficiency of approximately
$5,256,197, as compared to cash equivalents on hand of $88,195 and
a working capital deficiency of $2,384,695 as of March 31, 2017.
The increase in working capital deficiency for the period ended
December 31, 2017 is mainly due to an approximate $650,000 increase
in current liabilities reflecting the reclassification to current
liabilities of certain lines of credit based on their maturity
dates, an increase in convertible debentures net of debt discounts,
an increase in the warrant liability of $435,000, an increase in
the fair value of the derivative liability of $1,314,000 and the
decrease in prepaid expenses discussed above, as well as an
increase in accrued expenses.
Working Capital Deficiency
Our
working capital deficiency as of December 31, 2017, in comparison
to our working capital deficiency as of March 31, 2017, can be
summarized as follows:
|
|
|
|
|
|
Current
assets
|
$278,467
|
$312,195
|
Current
liabilities
|
5,518,414
|
2,696,890
|
Working capital
deficiency
|
$5,239,947
|
$2,384,695
|
The
decrease in current assets is mainly due to the current period
expense recognition of $220,000 out of prepaid expenses for shares
issued for services in connection with a six-month agreement with a
consultant, as well as an approximate $72,000 decrease in cash and
equivalents, offset by the addition of new notes receivable. The
increase in current liabilities is primarily due an approximately
$650,000 reclassification to current liabilities of certain lines
of credit based on their maturity dates, as well as in increase in
the carrying amount of the convertible debentures in the current
period, net of the related debt discounts. The new convertible
debentures entered into during the nine months also contained
embedded derivatives, which were bifurcated and further increased
the fair value of the derivative liability, which was $1,532,000 as
of December 31, 2017 as compared to $218,000 as of March 31, 2017.
Additionally, the warrant liability increased by $435,000 due to
additional warrants issued as well as the reset provision which
increased the number of warrants outstanding.
Cash Flows
Our
cash flows for the nine months ended December 31, 2017, in
comparison to our cash flows for the nine months ended December 31,
2016, can be summarized as follows:
|
Nine Months
Ended December 31,
|
|
|
|
Net cash used in
operating activities
|
$(680,610)
|
$(534,373)
|
Net cash used in
investing activities
|
-
|
-
|
Net cash provided
by financing activities
|
608,130
|
617,878
|
Increase (decrease)
in cash and cash equivalents
|
$(72,480)
|
$83,505
|
The
increase in net cash used in operating activities in the nine
months ended December 31, 2017, compared to the same period 2016,
mainly relates to a decrease in prepaid expenses, offset by the
non-cash charges of the amortization of the debt discount, changes
in fair value of the derivative and warrant liabilities, financing
costs and shares issued for services. The net cash provided by
financing activities is fairly constant between periods, with the
cash provided by financing activities during the nine months ended
December 31, 2017 arising from proceeds on convertible debentures
and the sale of common stock of the Company, offset by payments on
outstanding convertible debentures. In comparison, the cash
provided by financing activities during the nine months ended
December 31, 2016 arose mainly from borrowings on notes payable
with related parties.
Our
cash position was approximately $16,000 as of December 31, 2017.
Management believes that our cash on hand and working capital are
not sufficient to meet our current anticipated cash requirements
through fiscal 2018, as described in further detail under the
section titled “Going
Concern” below.
Recent Financing Arrangements and Developments During the
Period
Short-Term Debt 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.
Bank Loan
On
January 10, 2017, we entered into a promissory note agreement with
Community National Bank in the principal amount of $245,000, with
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 La Coste, Texas, and
is also personally guaranteed by the Company’s President and
Chairman of the Board, as well as certain non-affiliated
shareholders of the Company.
Convertible Debentures
On
January 23, 2017, the Company entered into a Securities Purchase
Agreement and issued a Convertible Note in the original principal
amount of $262,500 to an accredited investor, along with a Warrant
to purchase 350,000 shares of the Company’s common stock, in
exchange for a purchase price of $250,000. The Company received
$50,000 upon closing, with additional consideration to be paid to
the Company in such amounts and at such dates as the holder may
choose in its sole discretion. The warrants are exercisable over a
period of five (5) years at an exercise price of $0.60, subject to
adjustment. 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. The note is convertible into shares
of the Company’s common stock at a conversion price of $0.35
per share, subject to adjustment. The maturity date of the note
shall be two years form the date of each payment of consideration
thereunder. A one-time interest charge of twelve percent (12%)
shall be applied on the issuance date and payable on the maturity
date. During the three months ended September 30, 2017, the holder
converted $40,000 of the January debentures to common shares of the
Company, and 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.
On
March 28, 2017, the Company entered into a Securities Purchase
Agreement with an accredited investor related to the purchase and
sale of certain convertible debentures in the aggregate principal
amount of up to $400,000 for an aggregate purchase price of up to
$360,000. The agreement contemplates three separate convertible
debentures, with each maturing three years following the date of
issuance. On March 28, 2017, the Company issued the first
convertible debenture in the principal amount of $100,000 for a
purchase price of $90,000. Pursuant to the Securities Purchase
Agreement, the closing of the second convertible debenture was to
occur upon mutual agreementof the parties, at any time within sixty
(60) to ninety (90) days following the original signing closing
date, in the principal amount of $150,000 for a purchase price of
$135,000. On July 5, 2017, the Securities Purchase Agreement was
amended to reduce the maximum aggregate principal amount of the
convertible debentures to $325,000, for an aggregate purchase price
of up to $292,500, and to reduce the principal amount of the second
convertible debenture to $75,000 for a purchase price of $67,500.
The closing of the second convertible debenture occurred on July 5,
2017. In connection with the closing of the second convertible
debenture, the Company issued 75,000 shares of restricted common
stock to the holder as a fee in consideration of the expenses
incurred in consummating the transaction. The closing of the third
convertible debenture was to occur upon mutual agreement of the
parties within sixty (60) to ninety (90) days following the second
closing, in the principal amount of $150,000 for a purchase price
of $135,000. The convertible debentures are convertible into shares
of the Company’s common stock at a fixed conversion price of
$0.30 for the first one hundred eighty (180) days. After one
hundred eighty (180) days, or in an event of default, the
conversion price will be the lower of $0.30 or sixty percent (60%)
of the lowest closing bid price over the 20 trading days preceding
the date of conversion. 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. 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.
On July
31, 2017, the Company entered into a 5% Securities Purchase
Agreement with an accredited investor. The agreement calls for the
purchase of up to $135,000 in convertible debentures, due 12 months
from issuance, with an original issue discount of $13,500. The
first convertible debenture was issued in the principal amount of
$45,000 for a purchase price of $40,500 (an original issue discount
of $4,500), with additional closings to occur at the sole
discretion of the holder. The convertible debentures are
convertible into shares of the Company’s common stock at a
conversion price of sixty percent (60%) of the lowest trading price
over the 25 trading days preceding the date of conversion, subject
to adjustment. With each tranche under the July 31, 2017
convertible debentures, 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 number of warrants
issued 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. On October 2, 2017, the Company entered into a second
closing of the July 31, 2017 debenture, in the principal amount of
$22,500 for a purchase price of $20,250, with $1,500 deducted for
legal fees, resulting in net cash proceeds of $18,750. On February
5, 2018, subsequent to the quarterly period ended December 31,
2017, the Company entered into an amendment to the July 31, 2017
debenture, whereby in exchange for a payment of $6,500, the
noteholder shall only be entitled to effectuate a conversion under
the note on or after March 2, 2018.
On
August 28, 2017, the Company entered into a 12% convertible
promissory note with an accredited investor in the principal amount
of $110,000, with an original issue discount of $10,000, which
matures on February 28, 2018. The note is convertible into shares
of the Company’s common stock at a variable conversion rate
equal to the lesser of sixty percent (60%) of the lowest trading
price over the 20 trading days prior to the issuance of the note or
sixty percent (60%) of the lowest trading price over the 20 trading
days prior to conversion, subject to adjustment. 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 issued 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. Additionally, in connection with the
note, 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.
Additionally, in connection with the second closing, the Company
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.
On
September 11, 2017, the Company entered into a 12% convertible
promissory note with an accredited investor in the principal amount
of $146,000, with an original issue discount of $13,500, which
matures on June 11, 2018. The note is convertible into shares of
the Company’s common stock at a variable conversion rate
equal to the lesser of the lowest trading price over the 25 trading
days prior to the issuance of the note or fifty percent (50%) of
the lowest trading price over the 25 trading days prior to
conversion, subject to adjustment. 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.
On
September 12, 2017, the Company entered into a 12% convertible
promissory note with an accredited investor in the principal amount
of $96,500 with an original issue discount of $4,500, 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, at a variable conversion rate of sixty percent (60%) of
the market price, defined as the lowest trading price during the 20
trading days prior to conversion, subject to
adjustment.
On
September 28, 2017, the Company entered into a Securities Purchase
Agreement with an accredited investor, pursuant to which the
Company agreed to sell a 12% Convertible Note in the principal
amount of $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 Convertible Note was
October 17, 2017. The note is convertible into shares of the
Company’s common stock 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) sixty percent (60%) of either the lowest sale price for the
Company’s common stock during the 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.
On
November 14, 2017, the Company entered into two 8% convertible
redeemable notes with an accredited investor, 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 principal 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 into
shares of the Company’s common stock at a conversion rate of
fifty-seven percent (57%) of the lowest of trading price over last
20 trading days prior to conversion, or the lowest closing bid
price over the last 20 trading days prior to conversoin, with the
discount increased (i.e., the conversion rate decreased) to
forty-seven percent (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. During the first six months the
convertible redeemable notes are in effect, the Company may redeem
the notes 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 note.
On
December 20, 2017, the Company entered into two 8% convertible
redeemable notes with an accredited investor, 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
was issued in the principal amount of $160,000, with a $4,000
original issue discount, resulting in a purchase price of $156,000.
The second note was issued in the principal amount of $80,000, with
an original issue discount 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 into shares of
the Company’s common stock at a conversion rate of sixty
percent (60%) of the lower of: (i) lowest trading price or (ii)
lowest closing bid price of the Company’s common stock over
the last 20 trading days prior to conversion, with the discount
increased (i.e., the conversion rate decreased) to fifty percent
(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. During the first six months the convertible redeemable
notes are in effect, the Company may redeem the notes 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
note.
On
January 29, 2018, subsequent to the quarterly period ended December
31, 2017, the Company entered into three (3) 12% convertible
redeemable promissory notes with an accredited investor in the
aggregate principal amount of $120,000, with maturity dates of
January 29, 2019. The notes are convertible into shares of the
Company’s common stock at a conversion rate of sixty percent
(60%) of the lowest closing bid price over the last 20 trading days
prior to conversion, with the discount increased (i.e., the
conversion rate decreased) to fifty percent (50%) in the event of a
DTC chill. The interest rate upon an event of default, as defined
in the notes, is 24% per annum. Each note was issued in the
principalamount of $40,000, with $2,000 deducted for legal fees,
for net proceeds of $38,000. The first note was paid for by the
buyer in cash upon closing, with the second and third notes
initially paid by the issuance of offsetting $40,000 secured
promissory notes issued to the Company by the buyer (the
“Buyer Notes”). The Buyer Notes are due on September
29, 2018. During the first 180 days the 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 the note. Upon any sale event, as defined
in the note, at the holder’s request, the Company will redeem
the note for 150% of the principal and accrued
interest.
On
January 30, 2018, subsequent to the quarterly period ended December
31, 2017, the Company entered into a 12% convertible redeemable
promissory note with an accredited investor for the principal
amount of $80,000, which matures on January 30, 2019. The note is
convertible into shares of the Company’s common stock at a
conversion rate of sixty-one percent (61%) of the lowest closing
bid price over the last 15 trading days prior to conversion. The
interest rate upon an event of default, as defined in the note, is
22% per annum, and the note becomes immediately due and payable in
an amount equal to 150% of the principal and interest due on the
note upon an event of default. If the Company fails to deliver
conversion shares within two (2) days following a conversion
request, the note will become immediately due and payable at an
amount of twice the default amount. During the first 180 days the
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
note.
Sale and Issuance of Common Stock
On May
2, 2017, the Company sold 100,000 shares of its common stock to an
accredited investor at $0.25 per share, for total proceeds of
$25,000.
On
October 10, 2017, the Company issued 200,000 shares of its common
stock to consultants in consideration for consulting services
provided to the Company.
Shareholder Notes Payable
Since
inception, the Company has entered into several working capital
notes payable to Bill Williams, an executive officer, director, and
shareholder of the Company, for a total of $486,500. These notes
are demand 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 our consolidated balance
sheets.
In
2009, the Company made and entered into an unsecured note payable
to Randall Steele, a shareholder of NSH, in the principal amount of
$50,000. The note accrues interest at six percent (6%) and matured
on January 20, 2011. As of December 31, 2017, and March 31, 2017,
the balance of the note was $50,000, and is classified as a current
liability on our consolidated balance sheets.
On
January 1, 2016, the Company entered into a note payable agreement
with NSH, the Company’s majority shareholder. Between January
16, 2016 and March 31, 2017, the Company borrowed $736,111 under
this agreement. The note payable has no set monthly payment or
maturity date, and has a stated interest rate of two percent (2%).
There was no borrowing under this loan during the nine months ended
December 31, 2017.
Between
January 1, 2017 and March 31, 2017, the Company entered into two
Private Placement Subscription Agreements and issued two Six
Percent (6%) Unsecured Convertible Notes to Dragon Acquisitions
LLC, an affiliate of the Company (“Dragon
Acquisitions”). William Delgado, our Treasurer, Chief
Financial Officer, and director, is the managing member of Dragon
Acquisitions. The first note was issued on January 20, 2017, in the
principal amount of $20,000, and the second note was issued on
March 14, 2017, in the principal amount of $20,000. The notes
accrue interest at the rate of six percent (6%) per annum, and
mature one (1) year from the date of issuance. Upon an event of
default, the default interest rate will be increased to twenty-four
percent (24%), and the total amount of principal and accrued
interest shall become immediately due and payable at the
holder’s discretion. The notes are convertible into shares of
the Company’s common stock at a conversion price of $0.30 per
share, subject to adjustment.
On
April 20, 2017, the Company issued an additional Six Percent (6%)
Unsecured Convertible Note to Dragon Acquisitions in the principal
amount of $140,000. The note accrues interest at the rate of six
percent (6%) per annum, and matures one (1) year from the date of
issuance. Upon an event of default, the default interest rate will
be increased to twenty-four percent (24%), and the total amount of
principal and accrued interest shall become immediately due and
payable at the holder’s discretion. The note is convertible
into shares of the Company’s common stock at a conversion
price of $0.30 per share, subject to adjustment. During the nine
months ended December 31, 2017, $92,400 has been paid on the Dragon
Acquisitions convertible notes.
Going Concern
The
unaudited condensed consolidated financial statements contained in
this Quarterly Report on Form 10-Q have been prepared assuming that
the Company will continue as a going concern. For the nine months
ended December 31, 2017, we had a net loss of approximately
$3,037,000. As of December 31, 2017, we had an accumulated deficit
of approximately $31,765,000 and a working capital deficit of
approximately $5,256,000. These factors raise substantial doubt
regarding our Company’s ability to continue as a going
concern through the balance of this fiscal year ending March 31,
2018. Our ability to continue as a going concern is dependent on
our ability to raise the additional capital or debt financing
needed to meet short and long-term operating requirements. During
the nine months ended December 31, 2017, we 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 and up to the date of
this filing, we have received $118,000 in net proceeds from
convertible debentures. 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 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 we
are unsuccessful in obtaining the financing required to carry out
these initiatives, discontinuance of operations is
possible.
The
condensed consolidated financial statements do not include any
adjustments that may be necessary should our Company be unable to
continue as a going concern. Our continuation as a going concern
will be dependent on our ability to obtain additional financing as
may be required, and ultimately to generate revenues and attain
profitability. If the Company raises additional funds through the
issuance of equity, the percentage ownership of current
shareholders could be reduced, and such securities might have
rights, preferences or privileges senior to its 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 future plans for
developing our business and achieving commercial revenues. If we
are unable to obtain the necessary capital, the Company may have to
cease operations.
Future Financing
We will
require additional funds to implement our growth strategy for our
business. In addition, while we have received capital from various
private placements and credit lines that have enabled us to fund
our operations, these funds have been largely used to develop our
processes, although additional funds are needed for other corporate
operational and working capital purposes. Therefore, we will need
to raise an additional $850,000 to cover all of our expansion and
operational expenses through the middle of calendar year 2018. This
amount does not include any capital expenditures related to
equipment financing with Trane, which is approximately $600,000
over the next 12 months. These funds may be raised through equity
financing, debt financing, or other sources, which may result in
further dilution in the equity ownership of our shares. There can
be no assurance that additional financing will be available to us
when needed or, if available, that it can be obtained on
commercially reasonable terms. If we are not able to obtain
additional financing on a timely basis, should it be required, or
to generate significant material revenues from operations, we will
not be able to meet our obligations as they become due, and we will
be forced to scale down, or perhaps even cease, our
operations.
Off-Balance Sheet Arrangements
We have
no off-balance sheet arrangements that have, or are reasonably
likely to have, a current or future effect on our financial
condition, changes in financial condition, revenues or expenses,
results of operations, liquidity, capital expenditures or capital
resources that is material to stockholders.
Critical Accounting Policies and Estimates
Our
significant accounting policies are more fully described in the
notes to our financial statements included herein for the quarter
ended December 31, 2017 and in the notes to our consolidated
financial statements included in our Annual Report on Form 10-K for
the fiscal year ended March 31, 2017.
Recently Adopted Accounting Pronouncements
Our
recently adopted accounting pronouncements are more fully described
in Note 1 to our financial statements included herein for the
quarter ended December 31, 2017.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Not
Applicable. As a smaller reporting company, we are not required to
provide the information required by this Item.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We
carried out an evaluation, under the supervision and with the
participation of our management, including our Chief Executive
Officer (who is our Principal Executive Officer) and our Chief
Financial Officer and Treasurer (who is our Principal Financial
Officer and Principal Accounting Officer), of the effectiveness of
the design of our disclosure controls and procedures (as defined by
Exchange Act Rules 13a-15(e) or 15d-15(e)) as of December 31, 2017
pursuant to Exchange Act Rule 13a-15. Based upon that evaluation,
our Principal Executive Officer and Principal Financial Officer
concluded that our disclosure controls and procedures were not
effective as of December 31, 2017 in ensuring that information
required to be disclosed by us in reports that we file or submit
under the Exchange Act is recorded, processed, summarized, and
reported within the time periods specified in the SEC’s rules
and forms. This conclusion is based on findings that constituted
material weaknesses. A material weakness is a deficiency, or a
combination of control deficiencies, in internal control over
financial reporting such that there is a reasonable possibility
that a material misstatement of the Company’s interim
financial statements will not be prevented or detected on a timely
basis.
In
performing the above-referenced assessment, management identified
the following deficiencies in the design or operation of our
internal controls and procedures, which management considers to be
material weaknesses:
(i) Lack of Formal Policies and Procedures.
We utilize a third party independent contractor for the preparation
of our financial statements. Although the financial statements and
footnotes are reviewed by our management, we do not have a formal
policy to review significant accounting transactions and the
accounting treatment of such transactions. The third party
independent contractor is not involved in the day to day operations
of the Company and may not be provided information from management
on a timely basis to allow for adequate reporting/consideration of
certain transactions.
(ii) Audit
Committee and Financial Expert. We do not have a formal
audit committee with a financial expert, and thus we lack the board
oversight role within the financial reporting process.
(iii) Insufficient
Resources. We have insufficient quantity of dedicated
resources and experienced personnel involved in reviewing and
designing internal controls. As a result, a material misstatement
of the interim and annual financial statements could occur and not
be prevented or detected on a timely basis.
(iv) Entity
Level Risk Assessment. We did not perform an entity level
risk assessment to evaluate the implication of relevant risks on
financial reporting, including the impact of potential fraud
related risks and the risks related to non-routine transactions, if
any, on internal control over financial reporting. Lack of an
entity-level risk assessment constituted an internal control design
deficiency which resulted in more than a remote likelihood that a
material error would not have been prevented or detected, and
constituted a material weakness.
(v) Lack of Personnel with GAAP Experience.
We lack personnel with formal training to properly analyze and
record complex transactions in accordance with U.S.
GAAP.
Our
management feels the weaknesses identified above have not had any
material effect on our financial results. However, we are currently
reviewing our disclosure controls and procedures related to these
material weaknesses, and expect to implement changes in the near
term, as resources permit, in order to address these material
weaknesses. Our management will continue to monitor and evaluate
the effectiveness of our internal controls and procedures and our
internal controls over financial reporting on an ongoing basis, and
is committed to taking further action and implementing additional
enhancements or improvements, as necessary and as funds
permit.
Because
of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Projections of
any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or
procedures may deteriorate. All internal control systems, no matter
how well designed, have inherent limitations. Therefore, even those
systems determined to be effective can provide only reasonable
assurance with respect to financial statement preparation and
presentation.
Changes in Internal Control Over Financial Reporting
There
were no changes in our internal control over financial reporting
during the quarter ended December 31, 2017 that have materially
affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We know
of no material pending proceedings to which we are a party or of
which our properties are subject.
ITEM 1A. RISK FACTORS
As a
smaller reporting company, we are not required to provide the
information required by this Item. We note, however, that an
investment in our common stock involves a number of very
significant risks. Investors should carefully consider the risk
factors included in the “Risk Factors” section of our
Annual Report on Form 10-K for our fiscal year ended March 31,
2017, as filed with SEC on June 29, 2017, in addition to other
information contained in such Annual Report and in this Quarterly
Report on Form 10-Q, in evaluating the Company and our business
before purchasing shares of our common stock. The Company’s
business, operating results and financial condition could be
adversely affected due to any of those risks.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
On July
31, 2017, the Company entered into a 5% Securities Purchase
Agreement with an accredited investor . The agreement calls for the
purchase of up to $135,000 in convertible debentures, due 12 months
from issuance, with an original issue discount of $13,500. The
first convertible debenture was issued in the principal amount of
$45,000 for a purchase price of $40,500 (an original issue discount
of $4,500), with additional closings to occur at the sole
discretion of the holder. The convertible debentures are
convertible into shares of the Company’s common stock at a
conversion price of sixty percent (60%) of the lowest trading price
over the 25 trading days preceding the date of conversion, subject
to adjustment. With each tranche under the July 31, 2017
convertible debentures, 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 number of warrants
issued 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. On October 2, 2017, the Company entered into a second
closing of the July 31, 2017 debenture, in the principal amount of
$22,500 for a purchase price of $20,250, with $1,500 deducted for
legal fees, resulting in net cash proceeds of $18,750. On February
5, 2018, subsequent to the quarterly period ended December 31,
2017, the Company entered into an amendment to the July 31, 2017
debenture, whereby in exchange for a payment of $6,500, the
noteholder shall only be entitled to effectuate a conversion under
the note on or after March 2, 2018.
On
August 28, 2017, the Company entered into a 12% convertible
promissory note with an accredited investor in the principal amount
of $110,000, with an original issue discount of $10,000, which
matures on February 28, 2018. The note is convertible into shares
of the Company’s common stock at a variable conversion rate
equal to the lesser of sixty percent (60%) of the lowest trading
price over the 20 trading days prior to the issuance of the note or
sixty percent (60%) of the lowest trading price over the 20 trading
days prior to conversion, subject to adjustment. 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 issued 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. Additionally, in connection with the
note, 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.
Additionally, in connection with the second closing, the Company
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.
On
September 11, 2017, the Company entered into a 12% convertible
promissory note with an accredited investor in the principal amount
of $146,000, with an original issue discount of $13,500, which
matures on June 11, 2018. The note is convertible into shares of
the Company’s common stock at a variable conversion rate
equal to the lesser of the lowest trading price over the 25 trading
days prior to the issuance of the note or fifty percent (50%) of
the lowest trading price over the 25 trading days prior to
conversion, subject to adjustment. 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.
On
September 12, 2017, the Company entered into a 12% convertible
promissory note with an accredited investor in the principal amount
of $96,500 with an original issue discount of $4,500, 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, at a variable conversion rate of sixty percent (60%) of
the market price, defined as the lowest trading price during the 20
trading days prior to conversion, subject to
adjustment.
On
September 28, 2017, the Company entered into a Securities Purchase
Agreement with an accredited investor, pursuant to which the
Company agreed to sell a 12% Convertible Note in the principal
amount of $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 Convertible Note was
October 17, 2017. The note is convertible into shares of the
Company’s common stock 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) sixty percent (60%) of either the lowest sale price for the
Company’s common stock during the 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.
On
November 14, 2017, the Company entered into two 8% convertible
redeemable notes with an accredited investor, 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 principal 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 into
shares of the Company’s common stock at a conversion rate of
fifty-seven percent (57%) of the lowest of trading price over last
20 trading days prior to conversion, or the lowest closing bid
price over the last 20 trading days prior to conversoin, with the
discount increased (i.e., the conversion rate decreased) to
forty-seven percent (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. During the first six months the
convertible redeemable notes are in effect, the Company may redeem
the notes 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 note.
On December 20,
2017, the Company entered into two 8% convertible redeemable notes
with an accredited investor, 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 was issued in the
principal amount of $160,000, with a $4,000 original issue
discount, resulting in a purchase price of $156,000. The second
note was issued in the principal amount of $80,000, with an
original issue discount 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 into shares of the
Company’s common stock at a conversion rate of sixty percent
(60%) of the lower of: (i) lowest trading price or (ii)
lowest closing bid price of the Company’s common stock over
the last 20 trading days prior to conversion, with the discount
increased (i.e., the conversion rate decreased) to fifty percent
(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. During the first six months the convertible redeemable
notes are in effect, the Company may redeem the notes 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
note.
On
January 29, 2018, subsequent to the quarterly period ended December
31, 2017, the Company entered into three (3) 12% convertible
redeemable promissory notes with an accredited investor in the
aggregate principal amount of $120,000, with maturity dates of
January 29, 2019. The notes are convertible into shares of the
Company’s common stock at a conversion rate of sixty percent
(60%) of the lowest closing bid price over the last 20 trading days
prior to conversion, with the discount increased (i.e., the
conversion rate decreased) to fifty percent (50%) in the event of a
DTC chill. The interest rate upon an event of default, as defined
in the notes, is 24% per annum. Each note was issued in the
principal amount of $40,000, with $2,000 deducted for legal fees,
for net proceeds of $38,000. The first note was paid for by the
buyer in cash upon closing, with the second and third notes
initially paid by the issuance of offsetting $40,000 secured
promissory notes issued to the Company by the buyer (the
“Buyer Notes”). The Buyer Notes are due on September
29, 2018. During the first 180 days the 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 the note. Upon any sale event, as defined
in the note, at the holder’s request, the Company will redeem
the note for 150% of the principal and accrued
interest.
On
January 30, 2018, subsequent to the quarterly period ended December
31, 2017, the Company entered into a 12% convertible redeemable
promissory note with an accredited investor for the principal
amount of $80,000, which matures on January 30, 2019. The note is
convertible into shares of the Company’s common stock at a
conversion rate of sixty-one percent (61%) of the lowest closing
bid price over the last 15 trading days prior to conversion. The
interest rate upon an event of default, as defined in the note, is
22% per annum, and the note becomes immediately due and payable in
an amount equal to 150% of the principal and interest due on the
note upon an event of default. If the Company fails to deliver
conversion shares within two (2) days following a conversion
request, the note will become immediately due and payable at an
amount of twice the default amount. During the first 180 days the
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
note.
All the
foregoing issuances were exempt from the registration requirements
of the Securities Act pursuant to the exemption for transactions by
an issuer not involved in any public offering under Section 4(a)(2)
of the Securities Act and Rule 506 of Regulation D. The Company
intends to use the proceeds of the foregoing transactions for
general working capital purposes. The foregoing descriptions do not
purport to be complete, and are qualified in their entirety by
reference to the full text of such documents attached hereto as
exhibits and incorporated herein by reference.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not
Applicable.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
Exhibit Number
|
|
Description
|
(2)
|
|
Plan of acquisition, reorganization, arrangement, liquidation or
succession
|
|
|
Asset
Purchase Agreement, dated November 26, 2014, by and between
Multiplayer Online Dragon, Inc. and NaturalShrimp Holdings, Inc.
(incorporated by reference to our Current Report on Form 8-K filed
with the SEC on December 3, 2014).
|
(3)
|
|
(i) Articles of Incorporation; and (ii) Bylaws
|
|
|
Articles
of Incorporation (incorporated by reference to our Registration
Statement on Form S-1 originally filed with the SEC on June 11,
2009).
|
|
|
Amendment
to Articles of Incorporation (incorporated by reference to our
Amended Quarterly Report on Form 10-Q/A filed with the SEC on May
19, 2014).
|
|
|
Bylaws
(incorporated by reference to our Registration Statement on Form
S-1 originally filed with the SEC on June 11, 2009).
|
(10)
|
|
Material Agreements
|
|
|
6%
Convertible Note dated January 20, 2017 issued Dragon Acquisitions
LLC
|
|
|
Securities
Purchase Agreement dated March 16, 2017 with Peak One Opportunity
Fund, L.P. (incorporated by reference to our Quarterly Report on
Form 10-Q filed as Exhibit 10.1 with the SEC on August 14,
2017)
|
|
|
Amendment
#1 to the Securities Purchase Agreement Entered into on March 16,
2017, dated July 5, 2017, with Peak One Opportunity Fund, L.P.
(incorporated by reference to our Quarterly Report on Form 10-Q
filed as Exhibit 10.2 with the SEC on August 14, 2017)
|
|
|
6%
Convertible Note dated March 11, 2017 issued to Dragon Acquisitions
LLC
|
|
|
6%
Convertible Note dated April 20, 2017 issued to Dragon Acquisitions
LLC
|
|
|
Securities
Purchase Agreement dated July 31, 2017, with Crown Bridge Partners
LLC
|
|
|
5%
Convertible Note dated July 31, 2017, issued to Crown Bridge
Partners LLC
|
|
|
Common
Stock Purchase Warrant dated July 31, 2017, issued to Crown Bridge
Partners LLC
|
|
|
Securities
Purchase Agreement dated August 28, 2017 with Labrys Fund,
LP
|
|
|
12%
Convertible Note dated August 28, 2017, with Labrys Fund,
LP
|
|
|
Common
Stock Purchase Warrant dated August 28, 2017, issued to Labrys
Fund, LP
|
|
|
12%
Convertible Note dated September 11, 2017 issued to Auctus Funds,
LLC
|
|
|
Common
Stock Purchase Warrant dated September 11, 2017 issued to Auctus
Funds, LLC
|
|
|
12%
Convertible Note dated September 12, 2017 issued to JSJ
Investments, Inc.
|
|
|
Securities
Purchase Agreement dated September 28, 2017 with EMA Financial, LLC
(incorporated by reference to our Current Report on Form 8-K filed
as Exhibit 10.1 with the SEC on October 17, 2017)
|
|
|
12%
Convertible Note issued to EMA Financial, LLC dated September 28,
2017 (incorporated by reference to our Current Report on Form 8-K
filed as Exhibit 10.1 with the SEC on October 17,
2017)
|
|
|
Common
Stock Purchase Warrant dated October 2, 2017, issued to Crown
Bridge Partners LLC
|
|
|
Securities
Purchase Agreement dated October 31, 2017 with Labrys Fund,
LP
|
|
|
12%
Convertible Note dated October 31, 2017, issued to Labrys Fund,
LP
|
|
|
Securities
Purchase Agreement dated November 9, 2017 with GS Capital Partners,
LLC.
|
|
|
8%
Convertible Secured Redeemable Note issued to GS Capital Partners,
LLC dated November 14, 2017
|
|
|
8%
Convertible Secured Redeemable Note issued to GS Capital Partners,
LLC dated November 14, 2017
|
|
|
8%
Collateralized Secured Promissory Note dated November 14, 2017,
from GS Capital Partners, LLC
|
|
|
Securities
Purchase Agreement dated December 20, 2017 with GS Capital
Partners, LLC.
|
|
|
8%
Convertible Secured Redeemable Note issued to GS Capital Partners,
LLC dated December 20, 2017
|
|
|
8%
Convertible Secured Redeemable Note issued to GS Capital Partners,
LLC dated December 20, 2017
|
|
|
8%
Collateralized Secured Promissory Note dated November 14, 2017,
from GS Capital Partners, LLC
|
|
|
|
(31)
|
|
Rule 13a-14(a)/15d-14(a) Certifications
|
|
|
Section
302 Certification under the Sarbanes-Oxley Act of 2002 of the
Principal Executive Officer.
|
|
|
Section
302 Certification under the Sarbanes-Oxley Act of 2002 of the
Principal Financial Officer and Principal Accounting
Officer.
|
(32)
|
|
Section 1350 Certifications
|
|
|
Section
906 Certification under the Sarbanes-Oxley Act of 2002 of the
Principal Executive Officer.
|
|
|
Section
906 Certification under the Sarbanes-Oxley Act of 2002 of the
Principal Financial Officer and Principal Accounting
Officer.
|
(101)*
|
|
Interactive Data Files
|
SIGNATURES
Pursuant to the
requirements of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
NATURALSHRIMP INCORPORATED
Bill G.
Williams
Chief
Executive Officer
(Principal
Executive Officer)
Date:
February 14, 2018
William
Delgado
Chief
Financial Officer
(Principal
Financial Officer and Principal Accounting Officer)
Date:
February 14, 2018