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, 2019
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
|
|
74-3262176
|
(State
or other Jurisdiction of Incorporation or
Organization)
|
|
(I.R.S.
Employer Identification No.)
|
15150 Preston Road, Suite #300
Dallas, Texas
|
|
75248
|
(Address
of Principal Executive Offices)
|
|
(Zip
Code)
|
(888) 791-9474
(Registrant’s
telephone number, including area code)
N/A
(Former
address)
Securities
registered pursuant to Section 12(b) of the Act:
Title of each class
|
|
Trading symbol(s)
|
|
Name of exchange on
which registered
|
None
|
|
N/A
|
|
N/A
|
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
every Interactive Data File required to be submitted 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 such files). Yes ☑ No
☐
Indicate
by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, or a small reporting
company. See the definitions of “large accelerated
filer,” “accelerated filer,” a “smaller
reporting company” and an “emerging growth
company” in Rule 12b-2 of the Exchange Act.
|
|
|
|
Large
accelerated filer
|
☐
|
Accelerated
filer
|
☐
|
|
|
|
|
Non-accelerated
filer
|
☑
|
Smaller
reporting company
|
☑
|
|
|
|
|
|
|
Emerging growth
company
|
☐
|
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 7(a)(2)(B) of the Securities 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 11, 2020, there were 369,096,888 shares of the
registrant’s common stock outstanding.
NATURALSHRIMP INCORPORATED
FORM 10-Q
FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 2019
TABLE OF CONTENTS
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NATURALSHRIMP INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
|
|
|
ASSETS
|
|
|
Current
assets
|
|
|
Cash
|
$582,990
|
$137,499
|
Notes
receivable
|
1,700
|
1,700
|
Inventory
|
4,200
|
4,200
|
Prepaid
expenses
|
126,929
|
35,286
|
|
|
|
Total
current assets
|
715,819
|
178,685
|
|
|
|
Fixed
assets
|
|
|
Land
|
202,293
|
202,293
|
Buildings
|
1,645,454
|
1,328,161
|
Machinery
and equipment
|
1,224,118
|
934,621
|
Autos
and trucks
|
19,063
|
14,063
|
Furniture
and fixtures
|
22,060
|
22,060
|
Accumulated
depreciation
|
(1,364,130)
|
(1,322,609)
|
|
|
|
Fixed
assets, net
|
1,748,858
|
1,178,589
|
|
|
|
Other
assets
|
|
|
Construction-in-process
|
919,239
|
377,504
|
Right
of Use asset
|
252,140
|
-
|
Deposits
|
20,633
|
10,500
|
|
|
|
Total
other assets
|
1,192,012
|
388,004
|
|
|
|
Total
assets
|
$3,656,689
|
$1,745,278
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' DEFICIT
|
|
|
Current
liabilities
|
|
|
Accounts
payable
|
$632,030
|
$576,028
|
Accrued
interest - related parties
|
284,624
|
295,184
|
Other
accrued expenses
|
769,897
|
609,243
|
Short-term
Promissory Note and Lines of credit
|
679,083
|
139,418
|
Bank
loan
|
222,736
|
228,725
|
Current
maturities of convertible debentures, less debt discount of $61,382
and $511,640, respectively
|
629,233
|
494,451
|
Convertible
debentures, related party
|
18,600
|
87,600
|
Notes
payable - related parties
|
1,271,162
|
1,271,162
|
Derivative
liability
|
130,000
|
157,000
|
Warrant
liability
|
93,000
|
93,000
|
|
|
|
Total
current liabilities
|
4,730,365
|
3,951,811
|
|
|
|
Lines
of credit
|
-
|
650,453
|
Lease
Liability
|
252,140
|
-
|
|
|
|
Total
liabilities
|
4,982,505
|
4,602,264
|
|
|
|
|
|
|
Commitments
and contingencies (Note 9)
|
|
|
|
|
|
Stockholders'
deficit
|
|
|
Series
A Convertible Preferred stock, $0.0001 par value, 5,000,000 shares
authorized, 5,000,000 shares issued and outstanding at December 31,
2019 and March 31, 2019
|
500
|
500
|
Series
B Convertible Preferred stock, $0.0001 par value, 5,000 shares
authorized, 1,250 and 0 shares issued and outstanding at December
31, 2019 and March 31, 2019, respectively
|
-
|
-
|
Common
stock, $0.0001 par value, 900,000,000 shares authorized,
354,116,535 and 301,758,293 shares issued and outstanding at
December 31, 2019 and March 31, 2019, respectively
|
35,411
|
30,177
|
Additional
paid in capital
|
42,434,545
|
38,335,782
|
Accumulated
deficit
|
(43,744,909)
|
(41,223,445)
|
|
(1,274,453)
|
(2,856,986)
|
|
|
|
Non-controlling
interest in NAS
|
(51,363)
|
-
|
|
|
|
Total
stockholders' deficit
|
(1,325,816)
|
(2,856,986)
|
|
|
|
Total
liabilities and stockholders' deficit
|
$3,656,689
|
$1,745,278
|
The
accompanying footnotes are in integral part of these condensed
consolidated financial statements.
NATURALSHRIMP INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
|
For the Three Months Ended
|
For the Nine Months Ended
|
|
|
|
|
|
|
|
|
|
|
Sales
|
$-
|
$-
|
$-
|
$-
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
Facility
operations
|
41,375
|
22,479
|
180,934
|
66,442
|
General
and administrative
|
306,834
|
223,821
|
944,571
|
654,119
|
Research
and development
|
101,500
|
-
|
101,500
|
-
|
Depreciation
and amortization
|
15,958
|
17,726
|
41,521
|
53,171
|
|
|
|
|
|
Total
operating expenses
|
465,667
|
264,026
|
1,268,526
|
773,732
|
|
|
|
|
|
Net loss from
operations
|
(465,667)
|
(264,026)
|
(1,268,526)
|
(773,732)
|
|
|
76.4%
|
|
63.9%
|
Other
income (expense):
|
|
|
|
|
Interest
expense
|
(40,820)
|
(68,634)
|
(160,351)
|
(205,561)
|
Amortization
of debt discount
|
(38,831)
|
(342,724)
|
(515,204)
|
(1,051,707)
|
Financing
costs
|
(53,528)
|
(77,390)
|
(217,746)
|
(1,361,735)
|
Change
in fair value of derivative liability
|
58,000
|
(211,500)
|
19,000
|
1,116,500
|
Change
in fair value of warrant liability
|
-
|
-
|
-
|
(47,000)
|
Loss
on warrant settlement
|
-
|
-
|
(50,000)
|
-
|
|
|
|
|
|
Total
other income (expense)
|
(75,179)
|
(700,248)
|
(924,301)
|
(1,549,503)
|
|
|
|
|
|
Loss
before income taxes
|
(540,846)
|
(964,274)
|
(2,192,827)
|
(2,323,235)
|
|
|
|
|
|
Provision
for income taxes
|
-
|
-
|
-
|
-
|
|
|
|
|
|
Net
loss
|
(540,846)
|
(964,274)
|
(2,192,827)
|
(2,323,235)
|
|
|
|
|
|
Less
net loss attributable to non-controlling interest
|
(51,363)
|
-
|
(51,363)
|
-
|
|
|
|
|
|
Net loss
attributable to Natural Shrimp Inc.
|
(489,483)
|
(964,274)
|
(2,141,464)
|
(2,323,235)
|
|
|
|
|
|
Amoritzation of
beneficial conversion feature on Series B PS
|
(380,000)
|
-
|
(380,000)
|
-
|
|
|
|
|
|
Net loss available
for common stockholders
|
$(869,483)
|
$(964,274)
|
$(2,521,464)
|
$(2,323,235)
|
|
|
|
|
|
EARNINGS
PER SHARE (Basic and diluted)
|
$(0.00)
|
$(0.01)
|
$(0.01)
|
$(0.02)
|
|
|
|
|
|
WEIGHTED
AVERAGE SHARES OUTSTANDING (Basic and diluted)
|
345,260,292
|
165,284,849
|
326,835,226
|
129,672,152
|
The
accompanying footnotes are in integral part of these condensed
consolidated financial statements.
NATURALSHRIMP INCORPORATED
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
|
|
|
|
Additional paid in
|
Accumulated
|
Non-controlling
|
Total stockholders'
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
April 1, 2019
|
5,000,000
|
$500
|
-
|
$-
|
301,758,293
|
$30,177
|
$38,335,782
|
$(41,223,445)
|
-
|
$(2,856,986)
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of shares under equity financing agreement
|
|
|
|
|
11,482,721
|
1,148
|
1,498,852
|
|
|
1,500,000
|
Issuance
of shares upon conversion
|
|
|
|
|
3,000,000
|
300
|
29,700
|
|
|
30,000
|
Beneficial
conversion feature
|
|
|
|
|
|
|
58,548
|
|
|
58,548
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
|
|
|
|
|
(795,270)
|
-
|
(795,270)
|
|
|
|
|
|
|
|
|
|
|
|
Balance
June 30, 2019
|
5,000,000
|
$500
|
-
|
$-
|
316,241,014
|
$31,625
|
$39,922,882
|
$(42,018,715)
|
$-
|
$(2,063,708)
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
of Series B Preferred shares
|
|
|
250
|
-
|
|
|
250,000
|
|
|
250,000
|
Issuance
of shares upon conversion
|
|
|
|
|
14,000,000
|
1,400
|
138,600
|
|
|
140,000
|
Issuance
of shares under equity financing agreement
|
|
|
|
|
3,275,060
|
326
|
273,675
|
|
|
274,001
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
|
|
|
|
|
(856,711)
|
-
|
(856,711)
|
|
|
|
|
|
|
|
|
|
|
|
Balance
September 30, 2019
|
5,000,000
|
$500
|
250
|
$-
|
333,516,074
|
$33,351
|
$40,585,157
|
$(42,875,426)
|
$-
|
$(2,256,418)
|
|
|
|
|
|
|
(3,786)
|
(2,511,663)
|
(1,726,194)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
of Series B Preferred shares
|
|
|
1,250
|
-
|
|
|
1,250,000
|
|
|
1,250,000
|
Issuance
of shares upon conversion
|
|
|
|
|
20,600,461
|
2,060
|
211,388
|
|
|
213,448
|
Reclass
of derivative liability upon conversion of related convertible
debentures
|
|
|
|
|
|
|
8,000
|
|
|
8,000
|
Beneficial
conversion feature related to the Series B Preferred
Shares
|
|
|
|
|
|
|
380,000
|
(380,000)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
|
|
|
|
|
(489,483)
|
(51,363)
|
(540,846)
|
|
|
|
|
|
|
|
|
|
|
|
Balance
December 31, 2019
|
5,000,000
|
$500
|
1,500
|
$-
|
354,116,535
|
$35,411
|
$42,434,545
|
$(43,744,909)
|
$(51,363)
|
$(1,325,816)
|
|
|
|
Additional
paid in
|
Accumulated
|
Total stockholders'
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance April 1,
2018
|
-
|
-
|
97,656,095
|
$9,766
|
$27,743,352
|
$(34,012,864)
|
$(6,259,746)
|
|
|
|
|
|
|
|
|
Issuance
of shares for cash
|
|
|
220,000
|
22
|
15,378
|
|
15,400
|
Issuance
of shares upon conversion
|
|
|
37,887,704
|
3,789
|
511,932
|
|
515,721
|
Reclass
of derivative liability upon conversion or redemption of related
convertible debentures
|
|
|
|
|
1,305,000
|
|
1,305,000
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
|
|
|
(1,097,109)
|
(1,097,109)
|
|
|
|
|
|
|
|
|
Balance
June 30, 2018
|
-
|
$-
|
135,763,799
|
$13,577
|
$29,575,662
|
$(35,109,973)
|
$(5,520,734)
|
|
|
|
|
|
|
|
|
Issuance
of shares upon conversion
|
|
|
25,966,857
|
2,596
|
144,607
|
|
147,203
|
Issuance
of shares upon exercise of warrants
|
|
|
11,214,272
|
1,121
|
148,879
|
|
150,000
|
Issuance
of shares as commitment fee in relation to convertible
debentures
|
|
|
3,000,000
|
300
|
34,200
|
|
34,500
|
Conversion
of common shares into Series A Convertible Preferred
stock
|
5,000,000
|
500
|
(75,000,000)
|
(7,500)
|
7,000
|
|
-
|
Reclass
of derivative liability upon conversion or redemption of related
convertible debentures
|
|
|
|
|
435,500
|
|
435,500
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
|
|
|
(261,523)
|
(261,523)
|
|
|
|
|
|
|
|
|
Balance
September 30, 2018
|
5,000,000
|
$500
|
100,944,928
|
$10,094
|
$30,345,848
|
$(35,371,496)
|
$(5,015,054)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of shares upon conversion
|
|
|
133,376,806
|
13,338
|
451,777
|
|
465,115
|
Reclass
of derivative liability upon conversion or redemption of related
convertible debentures
|
|
|
|
|
812,000
|
|
812,000
|
Issuance
of shares under equity financing agreement
|
|
|
19,999,999
|
2,000
|
162,516
|
|
164,516
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
|
|
|
(964,274)
|
(964,274)
|
|
|
|
|
|
|
|
|
Balance
December 31, 2018
|
5,000,000
|
$500
|
254,321,733
|
$25,432
|
$31,772,141
|
$(36,335,770)
|
$(4,537,697)
|
The
accompanying footnotes are in integral part of these condensed
consolidated financial statements.
NATURALSHRIMP INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
For the Nine
Months Ended
|
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
Net
loss
|
$(2,141,464)
|
$(2,323,235)
|
|
|
|
Adjustments to
reconcile net loss to net cash used in operating
activities
|
|
|
|
|
|
Depreciation
expense
|
41,521
|
53,171
|
Amortization of
debt discount
|
515,204
|
1,051,707
|
Change in fair
value of derivative liability
|
(19,000)
|
(1,116,500)
|
Change in fair
value of warrant liability
|
-
|
47,000
|
Financing costs
related to convertible debentures
|
-
|
1,361,735
|
Default
penalty
|
27,000
|
-
|
Net loss
attributable to non-controlling interest
|
(51,363)
|
-
|
Shares issued for
services
|
-
|
-
|
|
|
|
Changes
in operating assets and liabilities:
|
|
|
Inventory
|
-
|
(4,200)
|
Prepaid expenses
and other current assets
|
(91,643)
|
(543)
|
Deposits
|
(10,133)
|
-
|
Accounts
payable
|
56,002
|
(1,403)
|
Other accrued
expenses
|
180,728
|
103,732
|
Accrued interest -
related parties
|
(10,560)
|
145,641
|
|
|
|
Cash
used in operating activitites
|
(1,503,708)
|
(682,895)
|
|
|
|
CASH FLOWS FROM
INVESTING ACTIVITIES
|
|
|
|
|
|
Cash paid for
machinery and equipment
|
(611,790)
|
(5,350)
|
Cash paid for
construction in process
|
(541,735)
|
(75,404)
|
|
|
|
CASH
USED IN INVESTING ACTIVITIES
|
(1,153,525)
|
(80,754)
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
Payments on bank
loan
|
(5,989)
|
(5,689)
|
Repayment
line of credit short-term
|
(110,788)
|
(3,153)
|
Notes
receivable
|
-
|
150,000
|
Proceeds from sale
of stock
|
1,774,001
|
179,916
|
Proceeds from sale
of Series B Convertible Preferred stock
|
1,500,000
|
-
|
Proceeds from
convertible debentures
|
100,000
|
565,800
|
Payments on
convertible debentures
|
(85,500)
|
(123,037)
|
Payments on
convertible debentures, related party
|
(69,000)
|
-
|
|
|
|
Cash
provided by financing activitites
|
3,102,724
|
763,837
|
|
|
|
NET
CHANGE IN CASH
|
445,491
|
188
|
|
|
|
CASH
AT BEGINNING OF PERIOD
|
137,499
|
24,280
|
|
|
|
CASH
AT END OF PERIOD
|
$582,990
|
$24,468
|
|
|
|
INTEREST
PAID
|
$170,911
|
$96,018
|
|
|
|
Supplemental
Disclosure of Non-Cash Investing and Financing
Activities:
|
|
|
Shares issued upon
conversion
|
$383,448
|
$1,128,068
|
Shares issued upon
exercise of warrants
|
$-
|
$150,000
|
Right of Use asset
and Lease liability
|
$275,400
|
$-
|
Notes receivable
for convertible debentures
|
$-
|
$90,000
|
Conversion of
common shares to Series A Preferred Shares
|
$-
|
$500
|
The
accompanying footnotes are in integral part of these condensed
consolidated financial statements.
NATURALSHRIMP INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED DECEMBER 31, 2019
(Unaudited)
NOTE 1 – NATURE OF THE ORGANIZATION AND BUSINESS
Nature of the Business
NaturalShrimp
Incorporated (“NaturalShrimp” or the
“Company”), a Nevada corporation, is a biotechnology
company and has developed a proprietary technology that allows it
to grow Pacific White shrimp (Litopenaeus vannamei, formerly
Penaeus vannamei) in an ecologically controlled, high-density,
low-cost environment, and in fully contained and independent
production facilities. The Company’s system uses technology
which allows it to produce a naturally-grown shrimp
“crop” weekly, and accomplishes this without the use of
antibiotics or toxic chemicals. The Company has developed several
proprietary technology assets, including a knowledge base that
allows it to produce commercial quantities of shrimp in a closed
system with a computer monitoring system that automates, monitors
and maintains proper levels of oxygen, salinity and temperature for
optimal shrimp production. Its initial production facility is
located outside of San Antonio, Texas.
The
Company has two wholly-owned subsidiaries including NaturalShrimp
Corporation, NaturalShrimp Global, Inc. and 51% owned Natural
Aquatic Systems, Inc. (“NAS”).
Going Concern
The
accompanying consolidated financial statements have been prepared
in conformity with accounting principles generally accepted in the
United States of America (“GAAP”), assuming the Company
will continue as a going concern, which contemplates the
realization of assets and satisfaction of liabilities in the normal
course of business. For the nine months ended December 31, 2019,
the Company had a net loss available for common stockholders of
approximately $2,521,000. At December 31, 2019, the Company had an
accumulated deficit of approximately $43,745,000 and a working
capital deficit of approximately $4,015,000. 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, 2019, the
Company received net cash proceeds of approximately $100,000 from
the issuance of convertible debentures, approximately $1,774,000
from the issuance of approximately 14,758,000 common shares of the
Company’s common stock through an equity financing agreement,
and $1,500,000 from the sale of 1,500 Series B Preferred shares.
Subsequent to December 31, 2019, the Company received $500,000 from
the sale of Series B Preferred shares. (See Note 10). Management
believes that private placements of equity capital and/or
additional debt financing will be needed to fund the
Company’s long-term operating requirements. The Company may
also encounter business endeavors that require significant cash
commitments or unanticipated problems or expenses that could result
in a requirement for additional cash. If the Company raises
additional funds through the issuance of equity or convertible debt
securities, the percentage ownership of its current shareholders
could be reduced, and such securities might have rights,
preferences or privileges senior to our common stock. Additional
financing may not be available upon acceptable terms, or at all. If
adequate funds are not available or are not available on acceptable
terms, the Company may not be able to take advantage of prospective
business endeavors or opportunities, which could significantly and
materially restrict our operations. The Company continues to pursue
external financing alternatives to improve its working capital
position. If the Company is unable to obtain the necessary capital,
the Company may have to cease operations.
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, 2019 and 2018 has been
prepared in accordance with GAAP in the U.S. for interim financial
information and with the instructions to Quarterly Report on Form
10-Q and Article 10 of Regulation S-X. In the opinion of
management, such financial information includes all adjustments
(consisting only of normal recurring adjustments) considered
necessary for a fair presentation of our financial position at such
date and the operating results and cash flows for such periods.
Operating results for the nine months ended December 31, 2019 are
not necessarily indicative of the results that may be expected for
the entire year or for any other subsequent interim
period.
Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted
accounting principles have been omitted pursuant to the rules of
the U.S. Securities and Exchange Commission, or the SEC. These
unaudited financial statements and related notes should be read in
conjunction with our audited financial statements for the year
ended March 31, 2019 included in the Company’s Annual
Report on Form 10-K filed with the SEC on July 1,
2019.
The
condensed consolidated balance sheet at March 31, 2019 has been
derived from the audited financial statements at that date but does
not include all of the information and footnotes required by
generally accepted accounting principles in the U.S. for complete
financial statements.
Consolidation
The
consolidated financial statements include the accounts of
NaturalShrimp Incorporated and its wholly-owned subsidiaries,
NaturalShrimp Corporation, NaturalShrimp Global and 51 % owned
Natural Aquatic Systems, Inc. All significant intercompany accounts
and transactions have been eliminated in
consolidation.
Use of Estimates
Preparing financial
statements in conformity with accounting principles generally
accepted in the United States of America requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those
estimates.
Basic and Diluted Earnings/Loss per Common Share
Basic
and diluted earnings or loss per share (“EPS”) amounts
in the consolidated financial statements are computed in accordance
with ASC 260 – 10 “Earnings per Share”, which
establishes the requirements for presenting EPS. Basic EPS is based
on the weighted average number of shares of common stock
outstanding. Diluted EPS is based on the weighted average number of
shares of common stock outstanding and dilutive common stock
equivalents. Basic EPS is computed by dividing net income or loss
available to common stockholders (numerator) by the weighted
average number of shares of common stock outstanding (denominator)
during the period. For the nine months ended December 31, 2019, the
Company had approximately $709,000 in convertible debentures whose
approximately 22,895,000 underlying shares are convertible at the
holders’ option at conversion prices ranging from $0.01 to
$0.30 for fixed conversion rates, and 57% - 60% of the defined
trading price for variable conversion rates and approximately
848,000 warrants with an exercise price of 45% of the market price
of the Company’s common stock, which were not included in the
calculation of diluted EPS as their effect would be anti-dilutive.
For the nine months ended December 31, 2018, the Company had
approximately $974,000 in principal on convertible debentures whose
approximately 96,842,000 underlying shares are convertible at the
holders’ option at conversion prices ranging from 34% - 75%
of the defined trading price and approximately 10,637,000 warrants
with an exercise price of 45% of the market price of the
Company’s common stock, which were not included in the
calculation of diluted EPS as their effect would be
anti-dilutive.
Fair Value Measurements
ASC
Topic 820, “Fair Value
Measurement”, requires that certain financial
instruments be recognized at their fair values at our balance sheet
dates. However, other financial instruments, such as debt
obligations, are not required to be recognized at their fair
values, but GAAP provides an option to elect fair value accounting
for these instruments. GAAP requires the disclosure of the fair
values of all financial instruments, regardless of whether they are
recognized at their fair values or carrying amounts in our balance
sheets. For financial instruments recognized at fair value, GAAP
requires the disclosure of their fair values by type of instrument,
along with other information, including changes in the fair values
of certain financial instruments recognized in income or other
comprehensive income. For financial instruments not recognized at
fair value, the disclosure of their fair values is provided below
under “Financial
Instruments.”
Nonfinancial
assets, such as property, plant and equipment, and nonfinancial
liabilities are recognized at their carrying amounts in the
Company’s balance sheets. GAAP does not permit nonfinancial
assets and liabilities to be remeasured at their fair values.
However, GAAP requires the remeasurement of such assets and
liabilities to their fair values upon the occurrence of certain
events, such as the impairment of property, plant and equipment. In
addition, if such an event occurs, GAAP requires the disclosure of
the fair value of the asset or liability along with other
information, including the gain or loss recognized in income in the
period the remeasurement occurred.
The
Company did not have any Level 1 or Level 2 assets and liabilities
at December 31, 2019 and March 31, 2019.
The
Derivative liabilities are Level 3 fair value
measurements.
The
following is a summary of activity of Level 3 liabilities during
the nine months ended December 31, 2019 and 2018:
Derivatives
|
|
|
Derivative
liability balance at beginning of period
|
$157,000
|
$3,455,000
|
Additions to
derivative liability for new debt
|
--
|
1,897,000
|
Reclass to equity
upon conversion or redemption
|
(8,000)
|
(2,552,500)
|
Change in fair
value
|
(19,000)
|
(1,116,500)
|
Balance at end of
period
|
$130,000
|
$1,683,000
|
At
December 31, 2019, the fair value of the derivative liabilities of
convertible notes was estimated using the following
weighted-average inputs: the price of the Company’s common
stock of $0.11; a risk-free interest rate of 1.55%, and expected
volatility of the Company’s common stock of 98.46%, and the
various estimated reset exercise prices weighted by
probability.
At
December 31, 2018, the fair value of the derivative liabilities of
convertible notes was estimated using the following
weighted-average inputs: the price of the Company’s common
stock of $0.02; a risk-free interest rate ranging from 2.45% to
2.63%, and expected volatility of the Company’s common stock
ranging from 315.25% to 448.43%, and the various estimated reset
exercise prices weighted by probability.
Warrant liability
|
|
|
Warrant liability
balance at beginning of period
|
$93,000
|
$277,000
|
Reclass to equity
upon exercise
|
-
|
(150,000)
|
Change in fair
value
|
-
|
47,000
|
Balance at end of
period
|
$93,000
|
$174,000
|
At
December 31, 2019, the fair value of the warrant liability was
estimated using the following weighted-average inputs: the price of
the Company’s common stock of $0.11; a risk-free interest
rate of 1.55%, and expected volatility of the Company’s
common stock ranging of 281.4%.
At
December 31, 2018, the fair value of the warrant liability was
estimated using the following weighted-average inputs: the price of
the Company’s common stock of $0.02 a risk-free interest rate
of 2.46%, and expected volatility of the Company’s common
stock of 350.2%.
Financial Instruments
The
Company’s financial instruments include cash and cash
equivalents, receivables, payables, and debt and are accounted for
under the provisions of ASC Topic 825, “Financial Instruments”. The
carrying amount of these financial instruments, with the exception
of discounted debt, as reflected in the consolidated balance sheets
approximates fair value.
Cash and Cash Equivalents
For the
purpose of the consolidated statements of cash flows, the Company
considers all highly liquid instruments purchased with a maturity
of three months or less to be cash equivalents. There were no cash
equivalents at December 31, 2019 and March 31, 2019.
Concentration of Credit Risk
The
Company maintains cash balances at two financial institution.
Accounts at this institution are insured by the Federal Deposit
Insurance Corporation (FDIC) up to $250,000. As of December
31, 2019
the Company’s cash balance exceeded FDIC coverage. As of
March 31, 2019, the Company’s cash balance did not exceed
FDIC coverage. The Company has not experienced any losses in
such accounts and periodically evaluates the credit worthiness of
the financial institutions and has determined the credit exposure
to be negligible.
Fixed Assets
Equipment is
carried at historical value or cost and is depreciated over the
estimated useful lives of the related assets. Depreciation on
buildings is computed using the straight-line method, while
depreciation on all other fixed assets is computed using the
Modified Accelerated Cost Recovery System (MACRS) method, which
does not materially differ from GAAP. Estimated useful lives are as
follows:
|
|
Buildings
|
27.5
– 39 years
|
Other
Depreciable Property
|
5
– 10 years
|
Furniture
and Fixtures
|
3
– 10 years
|
Maintenance and
repairs are charged to expense as incurred. At the time of
retirement or other disposition of equipment, the cost and
accumulated depreciation will be removed from the accounts and the
resulting gain or loss, if any, will be reflected in
operations.
The
consolidated statements of operations reflect depreciation expense
of approximately $16,000 and $42,000 and $18,000 and $53,000 for
the three and nine months ended December 31, 2019 and 2018,
respectively.
Commitments and Contingencies
Certain
conditions may exist as of the date the consolidated financial
statements are issued, which may result in a loss to the Company
but which will only be resolved when one or more future events
occur or fail to occur. The Company’s management and its
legal counsel assess such contingent liabilities, and such
assessment inherently involves an exercise of judgment. In
assessing loss contingencies related to legal proceedings that are
pending against the Company or unasserted claims that may result in
such proceedings, the Company’s legal counsel evaluates the
perceived merits of any legal proceedings or unasserted claims as
well as the perceived merits of the amount of relief sought or
expected to be sought therein.
If the
assessment of a contingency indicates that it is probable that a
material loss has been incurred and the amount of the liability can
be estimated, then the estimated liability would be accrued in the
Company’s consolidated financial statements. If the
assessment indicates that a potentially material loss contingency
is not probable, but is reasonably possible, or is probable but
cannot be estimated, then the nature of the contingent liability,
together with an estimate of the range of possible loss if
determinable and material, would be disclosed.
Loss
contingencies considered remote are generally not disclosed unless
they involve guarantees, in which case the nature of the guarantee
would be disclosed.
Recently Issued Accounting Standards
In
February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) The standard
requires all leases that have a term of over 12 months to be
recognized on the balance sheet with the liability for lease
payments and the corresponding right-of-use asset initially
measured at the present value of amounts expected to be paid over
the term. Recognition of the costs of these leases on the income
statement will be dependent upon their classification as either an
operating or a financing lease. Costs of an operating lease will
continue to be recognized as a single operating expense on a
straight-line basis over the lease term. Costs for a financing
lease will be disaggregated and recognized as both an operating
expense (for the amortization of the right-of-use asset) and
interest expense (for interest on the lease liability). The Company
adopted ASU 2016-02 on April 1, 2019, and the adoption resulted in
the recognition of a Right of Use Asset (“ROU”) and a
Lease Liability for a new equipment lease entered into on June 24,
2019 (Note 8).
During
the nine months ended December 31, 2019, there were several new
accounting pronouncements issued by the Financial Accounting
Standards Board. Each of these pronouncements, as applicable, has
been or will be adopted by the Company. Management does not believe
the adoption of any of these accounting pronouncements has had or
will have a material impact on the Company’s consolidated
financial statements.
Management’s Evaluation of Subsequent Events
The
Company evaluates events that have occurred after the balance sheet
date of December 31, 2019, through the date which the consolidated
financial statements were issued. Based upon the review, other than
described in Note 10 – Subsequent Events, the Company did not
identify any recognized or non-recognized subsequent events that
would have required adjustment or disclosure in the consolidated
financial statements.
NOTE 3 – SHORT-TERM NOTE AND LINES OF CREDIT
On
November 3, 2015, the Company entered into a short-term note
agreement with Community National Bank for a total value of
$50,000. The short-term note had a stated interest rate of 5.25%,
maturity date of December 15, 2017 and had an initial interest only
payment on February 3, 2016. On July 18, 2018, the short-term note
was replaced by a promissory note for the outstanding balance of
$25,298, which bears interest at 8% with a maturity date of July
18, 2021. The short-term note is guaranteed by an officer and
director. The balance of the note at December 31, 2019 and March
31, 2019 was $14,116 and $20,193, respectively.
The
Company also has a working capital line of credit with Extraco
Bank. On April 30, 2019, the Company renewed the line of credit for
$372,675. The line of credit bears an interest rate of 5.0% that is
compounded monthly on unpaid balances and is payable monthly. The
line of credit matures on April 30, 2020 and is secured by
certificates of deposit and letters of credit owned by directors
and shareholders of the Company. On April 12, 2019, prior to the
renewal, the Company paid $100,000 on the loan. The balance of the
line of credit is $372,675 and $472,675 at December 31, 2019 and
March 31, 2019, respectively.
The
Company also has additional lines of credit with Extraco Bank for
$100,000 and $200,000, which were renewed on January 19, 2019 and
April 30, 2019, respectively, with maturity dates of January 19,
2020 and April 30, 2020, respectively. The lines of credit bear
interest at a rate of 6.5% and 5%, respectively, that is compounded
monthly on unpaid balances and is payable monthly. They are secured
by certificates of deposit and letters of credit owned by directors
and shareholders of the Company. The balance of the lines of credit
was $276,958 at both December 31, 2019 and March 31, 2019. On
January 8, 2020, the Company paid off the $100,000 line of
credit.
The
Company also has a working capital line of credit with Capital One
Bank for $50,000. The line of credit bears an interest rate of
prime plus 25.9 basis points, which totaled 31.4% as of December
31, 2019. The line of credit is unsecured. The balance of the line
of credit was $9,580 at both December 31, 2019 and March 31,
2019.
The
Company also has a working capital line of credit with Chase Bank
for $25,000. The line of credit bears an interest rate of prime
plus 10 basis points, which totaled 15.50% as of December 31, 2019.
The line of credit is secured by assets of the Company’s
subsidiaries. The balance of the line of credit is $10,237 at
December 31, 2019 and March 31, 2019.
NOTE 4 – BANK LOAN
On
January 10, 2017, the Company entered into a promissory note with
Community National Bank for $245,000, at an annual interest rate of
5% and a maturity date of January 10, 2020 (the “CNB
Note”). The CNB Note is secured by certain real property
owned by the Company in LaCoste, Texas, and is also personally
guaranteed by the Company’s President, as well as certain
shareholders of the Company. The balance of the CNB Note is
$222,736 at December 31, 2019 and $228,725 at March 31, 2019.
The CNB
note is in technical default as of the date of this filing, and the
Company is in negotiations with the bank to extend the maturity
date.
NOTE 5 – CONVERTIBLE DEBENTURES
September 14, 2018 Debenture
On
September 14, 2018, the Company entered into a 12% convertible
promissory note for $112,500, with an OID of $10,250, which matures
on March 14, 2019. There is a right of prepayment in the first 180
days, but there is no right to repay after 180 days. Per the
agreement, the Company is required at all times to have authorized
and reserved three times the number of shares that is actually
issuable upon full conversion of the note. The Company has not
maintained the required share reservation under the terms of the
note agreement. The Company believes it has sufficient available
shares of the Company’s common stock in the event of
conversion for these notes. The interest rate increases to a
default rate of 24% for events as set forth in the agreement,
including if the market capitalization is below $5 million, or
there are any dilutive issuances. There is also a cross default
provision to all other notes. In the event of default, the
outstanding principal balance increases to 150%, and if the Company
fails to maintain the required authorized share reserve, the
outstanding principal increases to 200%. Additionally, If the
Company enters into a 3(a)(9) or 3(a)(10) issuance of shares there
are liquidation damages of 25% of principal, not to be below
$15,000. The Company must also obtain the noteholder's written
consent before issuing any new debt. Additionally, if the note is
not repaid by the maturity date the principal balance increases by
$15,000. The market capitalization is below $5 million and
therefore the note was in default, however, the holder has issued a
waiver to the Company on this default provision.
The
note is convertible into shares of the Company’s common stock
at a variable conversion rate that is equal to the lesser of 60% of
the lowest trading price for the last 20 days prior to the issuance
of the note or 60% of the lowest market price over the 20 days
prior to conversion. The conversion price shall be adjusted upon
subsequent sales of securities at a price lower than the original
conversion price. There are additional 10% adjustments to the
conversion price for events set forth in the agreement, including
if the conversion price is less than $0.01, if the Company is not
DTC eligible, the Company is no longer a reporting company, or the
note cannot be converted into free trading shares on or after nine
months from issue date. Per the agreement, the Company is required
at all times to have authorized and reserved three times the number
of shares that is actually issuable upon full conversion of the
note. The conversion feature meets the definition of a derivative
and therefore requires bifurcation and is accounted for as a
derivative liability.
On
December 13, 2018 the holder converted $11,200 of principal into
4,000,000 shares of common stock of the Company.
On
January 25, 2019 the outstanding principal of $101,550, plus an
additional $56,375 of default principal and $13,695 in accrued
interest of the note was purchased from the noteholder by a third
party, who extended the maturity date. The new balance outstanding
as of December 31, 2019 is $171,620.
December 6, 2018 Debenture
On
December 6, 2018, the Company entered into an 10% convertible
promissory note for $210,460, which matures on September 6, 2019.
During the first 180 days the convertible redeemable note is in
effect, the Company may redeem the note at a prepayment percentage
of 120% to 130% of the outstanding principal and accrued interest
based on the redemption date’s passage of time ranging from
60 days to 180 days from the date of issuance of the debenture. Per
the agreement, the Company is required at all times to have
authorized and reserved three times the number of shares that is
actually issuable upon full conversion of the note. In the event of
default, as set forth in the agreement, the outstanding principal
balance increases to 150%. The Company did not pay the outstanding
principal and accrued interest of approximately $54,000 on the
maturity date of September 6, 2019, and therefore the principal was
increased by the default penalty of 50%, amounting to approximately
$27,000. In addition to standard events of default, an event of
default occurs if the common stock of the Company shall lose the
“bid” price for its Common Stock, on trading markets,
including the OTCBB, OTCQB or an equivalent replacement exchange.
If the Company enters into a 3(a)(9) or 3(a)(10) issuance of shares
there are liquidation damages of 25% of principal, not to be below
$15,000. The Company must also obtain the noteholder's written
consent before issuing any new debt. The note is convertible at a
fixed conversion price of $0.01. If an event of default occurs, the
fixed conversion price is extinguished and replaced by a variable
conversion rate that is 70% of the lowest trading prices during the
20 days prior to conversion. The fixed conversion price shall reset
upon any future dilutive issuance of shares, options or convertible
securities. The conversion feature at issuance meets the definition
of conventional convertible debt and therefore qualifies for the
scope exception in Accounting Standards Codification
(“ASC”) 815-10-15-74(a) and would not be bifurcated and
accounted for separately as a derivative liability. The Company
analyzed the conversion feature under ASC 470-20, “Debt with
conversion and other options”, and based on the market price
of the common stock of the Company on the date of funding as
compared to the conversion price, determined there was a $136,799
beneficial conversion feature to recognize, which will be amortized
over the term of the note using the effective interest method.
There was not any amortization expense recognized during the three
months ended December 31, 2019, as the beneficial conversion feature was
fully amortized as of September 30, 2019. The amortization expense
recognized during the nine months ended December
31, 2019 amounted to
approximately $91,000,.
On June
27, 2019 the holder converted $30,000 of principal into 3,000,000
shares of common stock of the Company. On three occasions during
the three months ended September 30, 2019, the holder converted
$140,000 of principal into 14,000,000 shares of common stock of the
Company. The note was fully converted on two occasions during
October 2019.
December 31, 2018 Debenture
On
December 31, 2018, the Company entered into an 10% convertible
promissory note for $135,910, which matures on September 30, 2019.
The maturity date has been extended to March 1, 2020. During the
first 180 days the convertible redeemable note is in effect, the
Company may redeem the note at a prepayment percentage of 120% to
130% of the outstanding principal and accrued interest based on the
redemption date’s passage of time ranging from 60 days to 180
days from the date of issuance of the debenture. Per the agreement,
the Company is required at all times to have authorized and
reserved three times the number of shares that is actually issuable
upon full conversion of the note. In the event of default, as set
forth in the agreement, the outstanding principal balance increases
to 150%. In addition to standard events of default, an event of
default occurs if the common stock of the Company shall lose the
“bid” price for its Common Stock, on trading markets,
including the OTCBB, OTCQB or an equivalent replacement exchange.
If the Company enters into a 3(a)(9) or 3(a)(10) issuance of shares
there are liquidation damages of 25% of principal, not to be below
$15,000. The Company must also obtain the noteholder’s
written consent before issuing any new debt. The note is
convertible at a fixed conversion price of $0.01. If an event of
default occurs, the fixed conversion price is extinguished and
replaced by a variable conversion rate that is 70% of the lowest
trading prices during the 20 days prior to conversion. The fixed
conversion price shall reset upon any future dilutive issuance of
shares, options or convertible securities. The conversion feature
at issuance meets the definition of conventional convertible debt
and therefore qualifies for the scope exception in Accounting
Standards Codification (“ASC”) 815-10-15-74(a) and
would not be bifurcated and accounted for separately as a
derivative liability. The Company analyzed the conversion feature
under ASC 470-20, “Debt with conversion and other
options”, and based on the market price of the common stock
of the Company on the date of funding as compared to the conversion
price, determined there was a $88,342 beneficial conversion feature
to recognize, which will be amortized over the term of the note
using the effective interest method. There was not any amortization
expense recognized during the three months ended December 31, 2019,
as the beneficial
conversion feature was fully amortized as of September 30, 2019.
The amortization expense recognized during the nine months
ended December 31, 2019
amounted to approximately $59,000.
January 16, 2019 Debenture
On
January 16, 2019, the Company entered into an 10% convertible
promissory note for $205,436, with an OID of $18,686, for a
purchase price of $186,750, which matures on October 16, 2019. The
maturity date has been extended to March 1, 2020. During the first
180 days the convertible redeemable note is in effect, the Company
may redeem the note at a prepayment percentage of 120% to 130% of
the outstanding principal and accrued interest based on the
redemption date’s passage of time ranging from 60 days to 180
days from the date of issuance of the debenture. Per the agreement,
the Company is required at all times to have authorized and
reserved three times the number of shares that is actually issuable
upon full conversion of the note. In the event of default, as set
forth in the agreement, the outstanding principal balance increases
to 150%. In addition to standard events of default, an event of
default occurs if the common stock of the Company shall lose the
“bid” price for its Common Stock, on trading markets,
including the OTCBB, OTCQB or an equivalent replacement exchange.
If the Company enters into a 3(a)(9) or 3(a)(10) issuance of shares
there are liquidation damages of 25% of principal, not to be below
$15,000. The Company must also obtain the noteholder's written
consent before issuing any new debt. The note is convertible at a
fixed conversion price of $0.01. If an event of default occurs, the
fixed conversion price is extinguished and replaced by a variable
conversion rate that is 70% of the lowest trading prices during the
20 days prior to conversion. The fixed conversion price shall reset
upon any future dilutive issuance of shares, options or convertible
securities. The conversion feature at issuance meets the definition
of conventional convertible debt and therefore qualifies for the
scope exception in Accounting Standards Codification
(“ASC”) 815-10-15-74(a) and would not be bifurcated and
accounted for separately as a derivative liability. The Company
analyzed the conversion feature under ASC 470-20, “Debt with
conversion and other options”, and based on the market price
of the common stock of the Company on the date of funding as
compared to the conversion price, determined there was a $176,675
beneficial conversion feature to recognize, which will be amortized
over the term of the note using the effective interest method. The
amortization expense recognized during the three and nine months
ended December 31, 2019
amounted to approximately $59,000 and $128,000,
respectively.
On two
occasions during the three months ended December 31, 2019, the
holder converted $101,661 of principal into 12,000,000 shares of
common stock of the Company.
February 4, 2019 Debenture
On
February 4, 2019, the Company entered into an 10% convertible
promissory note for $85.500, with an OID of $7,500, for a purchase
price of $75,000, which matures on November 4, 2019. During the
first 180 days the convertible redeemable note is in effect, the
Company may redeem the note at a prepayment percentage of 120% to
130% of the outstanding principal and accrued interest based on the
redemption date’s passage of time ranging from 60 days to 180
days from the date of issuance of the debenture. Per the agreement,
the Company is required at all times to have authorized and
reserved three times the number of shares that is actually issuable
upon full conversion of the note. In the event of default, as set
forth in the agreement, the outstanding principal balance increases
to 150%. In addition to standard events of default, an event of
default occurs if the common stock of the Company shall lose the
“bid” price for its Common Stock, on trading markets,
including the OTCBB, OTCQB or an equivalent replacement exchange.
If the Company enters into a 3 (a)(9) or 3(a)(10) issuance of
shares there are liquidation damages of 25% of principal, not to be
below $15,000. The Company must also obtain the noteholder's
written consent before issuing any new debt. The note is
convertible at a fixed conversion price of $0.01. If an event of
default occurs, the fixed conversion price is extinguished and
replaced by a variable conversion rate that is 70% of the lowest
trading prices during the 20 days prior to conversion. The fixed
conversion price shall reset upon any future dilutive issuance of
shares, options or convertible securities. The conversion feature
at issuance meets the definition of conventional convertible debt
and therefore qualifies for the scope exception in ASC
815-10-15-74(a) and would not be bifurcated and accounted for
separately as a derivative liability. The Company analyzed the
conversion feature under ASC 470-20, “Debt with conversion
and other options”, and based on the market price of the
common stock of the Company on the date of funding as compared to
the conversion price, determined there was a $85,500 beneficial
conversion feature to recognize, which will be amortized over the
term of the note using the effective interest method.
On
August 6, 2019, the Company exercised its option to redeem the
February 4, 2019 debenture, for a redemption price of approximately
$132,000. The principal of $85,500 and interest of approximately
$5,000 was derecognized with the additional $27,000 paid upon
redemption recognized as a financing cost and $15,000 for legal
fees. As a result of the redemption, the unamortized discount
related to the redeemed balance of $38,000 was immediately
expensed.
March 1, 2019 Debenture
On
March 1, 2019, the Company entered into an 10% convertible
promissory note for $168,000, with an OID of $18,000, for a
purchase price of $150,000, which matures on November 1, 2019. The
maturity date has been extended to March 1, 2020. During the first
180 days the convertible redeemable note is in effect, the Company
may redeem the note at a prepayment percentage of 100% to 130% of
the outstanding principal and accrued interest based on the
redemption date’s passage of time ranging from 60 days to 180
days from the date of issuance of the debenture. Per the agreement,
the Company is required at all times to have authorized and
reserved three times the number of shares that is actually issuable
upon full conversion of the note. In the event of default, as set
forth in the agreement, the outstanding principal balance increases
to 150%. In addition to standard events of default, an event of
default occurs if the common stock of the Company shall lose the
“bid” price for its Common Stock, on trading markets,
including the OTCBB, OTCQB or an equivalent replacement exchange.
If the Company enters into a 3(a)(9) or 3(a)(10) issuance of shares
there are liquidation damages of 25% of principal, not to be below
$15,000. The Company must also obtain the noteholder’s
written consent before issuing any new debt. The note is
convertible at a fixed conversion price of $0.25. If an event of
default occurs, the fixed conversion price is extinguished and
replaced by a variable conversion rate that is 70% of the lowest
trading prices during the 20 days prior to conversion. The fixed
conversion price shall reset upon any future dilutive issuance of
shares, options or convertible securities. The conversion feature
at issuance meets the definition of conventional convertible debt
and therefore qualifies for the scope exception in ASC
815-10-15-74(a) and would not be bifurcated and accounted for
separately as a derivative liability. The Company analyzed the
conversion feature under ASC 470-20, “Debt with conversion
and other options”, and based on the market price of the
common stock of the Company on the date of funding as compared to
the conversion price, determined there was a $134,000 beneficial
conversion feature to recognize, which will be amortized over the
term of the note using the effective interest method. There was not
any amortization expense recognized during the three months ended
December 31, 2019, as the
beneficial conversion feature was fully amortized as of September
30, 2019. The amortization expense recognized during the
nine months ended December 31, 2019 amounted to approximately
$100,000,.
April 17, 2019 Debenture
On
April 17, 2019, the Company entered into an 10% convertible
promissory note for $110,000, with an OID of $10,000, for a
purchase price of $100,000, which matures on January 23,
2020. The maturity date
has been waived as of the date of this filing. During the
first 180 days the convertible redeemable note is in effect, the
Company may redeem the note at a prepayment percentage of 120% to
130% of the outstanding principal and accrued interest based on the
redemption date’s passage of time ranging from 60 days to 180
days from the date of issuance of the debenture. Per the agreement,
the Company is required at all times to have authorized and
reserved three times the number of shares that is actually issuable
upon full conversion of the note. In the event of default, as set
forth in the agreement, the outstanding principal balance increases
to 150%. In addition to standard events of default, an event of
default occurs if the common stock of the Company shall lose the
“bid” price for its Common Stock, on trading markets,
including the OTCBB, OTCQB or an equivalent replacement exchange.
If the Company enters into a 3 (a)(9) or 3(a)(10) issuance of
shares there are liquidation damages of 25% of principal, not to be
below $15,000. The Company must also obtain the noteholder’s
written consent before issuing any new debt. The note is
convertible at a fixed conversion price of $0.124. If an event of
default occurs, the fixed conversion price is extinguished and
replaced by a variable conversion rate that is 70% of the lowest
trading prices during the 20 days prior to conversion. The fixed
conversion price shall reset upon any future dilutive issuance of
shares, options or convertible securities. The conversion feature
at issuance meets the definition of conventional convertible debt
and therefore qualifies for the scope exception in ASC
815-10-15-74(a) and would not be bifurcated and accounted for
separately as a derivative liability. The Company analyzed the
conversion feature under ASC 470-20, “Debt with conversion
and other options”, and based on the market price of the
common stock of the Company on the date of funding as compared to
the conversion price, determined there was an approximately $59,000
beneficial conversion feature to recognize, which will be amortized
over the term of the note using the effective interest method. The
amortization expense recognized during the three and nine months
ended December 31, 2019 amounted to approximately $20,000 and
$59,000, respectively.
NOTE 6 – STOCKHOLDERS’ DEFICIT
Preferred Stock
As of
December 31, 2019 and March 31, 2019, the Company had 200,000,000
shares of preferred stock authorized with a par value of $0.0001.
Of this amount, 5,000,000 shares Series A preferred stock are
authorized and outstanding.
On
September 5, 2019, the Board authorized the issuance of 5,000
preferred shares to be designated as Series B Preferred Stock
(“Series B PS”). The Series B PS have a par value of
$0.0001, a stated value of $1,200 and no voting rights. The Series
B PS are redeemable at the Company's option, at percentages ranging
from 120% to 135% for the first 180 days, based on the passage of
time. The Series B are also redeemable at the holder’s
option, upon the occurrence of a triggering event which includes a
change of control, bankruptcy, and the inability to deliver Series
B PS requested under conversion notices. The triggering redemption
amount is at the greater of (i) 135% of the stated value or (ii)
the product of the volume-weighted average price
(“VWAP”) on the day proceeding the triggering event
multiplied by the stated value divided by the conversion price. As
the redemption feature at the holder’s option is contingent
on a future triggering event, the Series B PS is considered
contingently redeemable, and as such the preferred shares are
classified in equity until such time as a triggering event occurs,
at which time they will be classified as mezzanine.
The
Series B PS is convertible, at the discounted market price which is
defined as the lowest VWAP over last 20 days. The conversion price
is adjustable based on several situations, including future
dilutive issuances. As the Series B PS does not have a redemption
date and is perpetual preferred stock, it is considered to be an
equity host instrument and as such the conversion feature is not
required to be bifurcated as it is clearly and closely related to
the equity host instrument.
Series B Preferred Equity Offering
On
September 17, 2019, the Company entered into a Securities Purchase
Agreement (“SPA”) with GHS Investments LLC, a Nevada
limited liability company (“GHS”) for the purchase of
up to 5,000 shares of Series B PS at a stated value of $1,200 per
share, or for a total net proceeds of $5,000,000 in the event the
entire 5,000 shares of Series B PS are purchased. On September 17,
2019, the Company received an initial tranche of $250,000 under the
SPA. During the three months ended December 31, 2019 the Company
received $1,250,000 for the issuance of 1,250 Series B
PS.
Equity Financing Agreement 2019
On
August 23, 2019, the Company entered into a new Equity Financing
Agreement (“Equity Financing Agreement”) and
Registration Rights Agreement (“Registration Rights
Agreement”) with GHS. Under the terms of the Equity Financing
Agreement, GHS agreed to provide the Company with up to $11,000,000
upon effectiveness of a registration statement on Form S-1 (the
“Registration Statement”) filed with the U.S.
Securities and Exchange Commission (the
“Commission”).
Following
effectiveness of the Registration Statement, the Company shall have
the discretion to deliver puts to GHS and GHS will be obligated to
purchase shares of the Company’s common stock, par value
$0.0001 per share (the “Common Stock”) based on the
investment amount specified in each put notice. The maximum amount
that the Company shall be entitled to put to GHS in each put notice
shall not exceed two hundred percent (200%) of the average daily
trading dollar volume of the Company’s Common Stock during
the ten (10) trading days preceding the put, so long as such amount
does not exceed $500,000. Pursuant to the Equity Financing
Agreement, GHS and its affiliates will not be permitted to purchase
and the Company may not put shares of the Company’s Common
Stock to GHS that would result in GHS’s beneficial ownership
equaling more than 4.99% of the Company’s outstanding Common
Stock. The price of each put share shall be equal to eighty percent
(80%) of the Market Price (as defined in the Equity Financing
Agreement). Puts may be delivered by the Company to GHS until the
earlier of thirty-six (36) months after the effectiveness of the
Registration Statement or the date on which GHS has purchased an
aggregate of $11,000,000 worth of Common Stock under the terms of
the Equity Financing Agreement.
The
Registration Rights Agreement provides that the Company shall (i)
use its best efforts to file with the Commission the Registration
Statement within 30 days of the date of the Registration Rights
Agreement; and (ii) have the Registration Statement declared
effective by the Commission within 30 days after the date the
Registration Statement is filed with the Commission, but in no
event more than 90 days after the Registration Statement is filed.
The Registration Statement was filed on October 8, 2019 and as of
this filing has not yet been deemed effective.
Equity Financing Agreement 2018
On
August 21, 2018, the Company entered into the first Equity
Financing Agreement and Registration Rights Agreement with GHS.
Under the terms of the first Equity Financing Agreement, GHS agreed
to provide the Company with up to $7,000,000 upon effectiveness of
a registration statement on Form S-1 filed with the U.S. Securities
and Exchange Commission. The registration statement was filed and
deemed effective on September 19, 2018.
Following
effectiveness of the first registration statement, the Company had
the discretion to deliver puts to GHS and GHS was obligated to
purchase shares of the Company’s common stock, based on the
investment amount specified in each put notice. The maximum amount
that the Company was entitled to put to GHS in each put notice was
not to exceed two hundred percent (200%) of the average daily
trading dollar volume of the Company’s Common Stock during
the ten (10) trading days preceding the put, so long as such amount
did not exceed $300,000. Pursuant to the first Equity Financing
Agreement, GHS and its affiliates will not be permitted to
purchase, and the Company may not put shares of the Company’s
Common Stock to GHS that would result in GHS’s beneficial
ownership equaling more than 9.99% of the Company’s
outstanding Common Stock. The price of each put share was to be
equal to eighty percent (80%) of the Market Price (as defined in
the Equity Financing Agreement). Puts may be delivered by the
Company to GHS until the earlier of thirty-six (36) months after
the effectiveness of the Registration Statement or the date on
which GHS has purchased an aggregate of $7,000,000 worth of Common
Stock under the terms of the Equity Financing
Agreement.
During
the three months ended June 30, 2019, the Company put to GHS for
the issuance of 11,482,721 shares of common stock for a total of
$1,500,000. On July
2, 2019, the Company put to GHS for the issuance of 3,275,060
shares of common stock, at $0.09, for a total of
$274,000.
Options and Warrants
The
Company has not granted any options since inception.
The
Company granted warrants in connection with various convertible
debentures in previous periods. As of December 31, 2019 and March
31, 2019, there are 848,000 and 444,000 (after adjustment)
remaining warrants to purchase shares of common stock outstanding,
classified as a warrant liability, which expire on January 31,
2022, with an exercise price of 45% of the market value of the
common shares of the Company on the date of exercise.
The
warrant liability was revalued at December 31, 2019, resulting in
no change to the fair value of the warrant liability for the nine
months ended December 31, 2019.
NOTE 7 – RELATED PARTY TRANSACTIONS
Accrued Payroll – Related Parties
Included in other
accrued expenses on the accompanying consolidated balance sheet as
of December 31, 2019 is approximately $185,000 owing to the former
Chief Executive Officer of the Company, approximately $56,000 owing
to the President of the Company, and approximately $96,000 owing to
a key employee.
Notes Payable – Related Parties
On
April 20, 2017, the Company entered into a convertible debenture
with an affiliate of the Company whose managing member is the
Treasurer, Chief Financial Officer, and a director of the Company
(the “affiliate”), for $140,000. The convertible
debenture matures one year from date of issuance, and bears
interest at 6%. Upon an event of default, as defined in the
debenture, the principal and any accrued interest becomes
immediately due, and the interest rate increases to 24%. The
convertible debenture is convertible at the holder’s option
at a conversion price of $0.30. As of March 31, 2018, the Company
had paid $52,400 on this note, with $87,600 remaining outstanding
as of March 31, 2019. On July 26, 2019, the Company paid $47,000 on
this note and on December 17, 2019, $22,000, leaving $18,600
remaining outstanding on the note as of December 31, 2019.
Subsequent to period end, on February 4, 2020, the Company paid off
the remaining $18,600.
NaturalShrimp Holdings, Inc.
On
January 1, 2016 the Company entered into a notes payable agreement
with NaturalShrimp Holdings, Inc.(“NSH”), a
shareholder. Between January 16, 2016 and March 7, 2016, the
Company borrowed $134,750 under this agreement. An additional
$601,361 was borrowed under this agreement in the year ended March
31, 2017. The note payable has no set monthly payment or maturity
date with a stated interest rate of 2%. As of December 31, 2019 and
March 31, 2019 the outstanding balance is approximately
$735,000.
Shareholder Notes
The
Company has entered into several working capital notes payable to
multiple shareholders of NSH and Bill Williams, a former officer
and director, and a current shareholder of the Company, for a total
of $486,500. The notes are unsecured and bear interest at 8%. These
notes had stock issued in lieu of interest and have no set monthly
payment or maturity date. The balance of these notes at December
31, 2019 and March 31, 2019 was $426,404 and $426,404,
respectively, and is classified as a current liability on the
consolidated balance sheets. At December 31, 2019 and March 31,
2019, accrued interest payable was $266,616 and $241,032,
respectively.
Shareholders
In
2009, the Company entered into a note payable to Randall Steele, a
shareholder of NSH, for $50,000. The note bears interest at 6.0%
and was payable upon maturity on January 20, 2011, and is currently
in default. The note is unsecured. The balance of the note at
December 31, 2019 and March 31, 2019 was $50,000, respectively, and
is classified as a current liability on the consolidated balance
sheets.
Beginning in 2010,
the Company started entering into several working capital notes
payable with various shareholders of NSH for a total of $290,000
and bearing interest at 8%. The balance of these notes at December
31, 2019 and March 31, 2019 was $104,647 and is classified as a
current liability on the consolidated balance sheets.
NOTE 8 – LEASE
On June
24, 2019, the Company entered into a service and equipment lease
agreement for water treatment services, consumables and equipment.
The lease term is for five years, with a renewal option of an
additional five years, with a monthly lease payment of $5,000. The
Company analyzed the classification of the lease under ASC 842, and
as it did not meet any of the criteria for a financing lease it has
been classified as an operating lease. The Company determined the
Right of Use asset and Lease liability values at inception
calculated at the present value of all future lease payments for
the lease term, using an incremental borrowing rate of 5%. The
Lease Liability will be expensed each month, on a straight line
basis, over the life of the lease.
For the
three and nine months ended December 31, 2019 the lease expense was
$15,000 and $30,000, and the amortization of the Right of Use asset
was $11,702 and $23,260.
NOTE 9 – COMMITMENTS AND CONTINGENCIES
Executive Employment Agreements – Bill Williams and Gerald
Easterling
On
April 1, 2015, the Company entered into employment agreements with
each of Bill G. Williams, as the Company’s Chief Executive
Officer, and Gerald Easterling as the Company’s President,
effective as of April 1, 2015 (the “Employment
Agreements”).
The
Employment Agreements are each terminable at will and each provide
for a base annual salary of $96,000. In addition, the Employment
Agreements each provide that the employee is entitled, at the sole
and absolute discretion of the Company’s Board of Directors,
to receive performance bonuses. Each employee will also be entitled
to certain benefits including health insurance and monthly
allowances for cell phone and automobile expenses.
Each
Employment Agreement provides that in the event employee is
terminated without cause or resigns for good reason (each as
defined in their Employment Agreements), the employee will receive,
as severance the employee’s base salary for a period of 60
months following the date of termination. In the event of a change
of control of the Company, the employee may elect to terminate the
Employment Agreement within 30 days thereafter and upon such
termination would receive a lump sum payment equal to 500% of the
employee’s base salary.
Each
Employment Agreement contains certain restrictive covenants
relating to non-competition, non-solicitation of customers and
non-solicitation of employees for a period of one year following
termination of the employee’s Employment
Agreement.
On
August 15, 2019, Mr. Bill Williams resigned from his position as
Chairman of the Board and Chief Executive Officer of the Company,
effective August 31, 2019. A separation agreement is currently
being negotiated.
Vista Capital Investments, LLC
On
April 30, 2019, a complaint was filed against the Company in the
U.S. District Court in Dallas, Texas alleging that the Company
breached a provision in a common stock purchase warrant (the
“Vista Warrant”) issued by the Company to Vista Capital
Investments, LLC (“Vista”). Vista alleges that the
Company failed to issue certain shares of the Company’s
common stock as was required under the terms of the Vista Warrant.
Vista is currently seeking money damages in the approximate amount
of $7,000,000, which the Company believes is unwarranted and
excessive, as well as costs and reimbursement of expenses. As of
the date hereof, no hearing has been scheduled, but the Company is
vigorously defending itself against these claims, preparing a
counter-claim against Vista and taking such other appropriate
action, in addition to seeking for other costs and relief as may be
appropriate. The Company is currently in discussions with Vista and
has accrued $50,000 for the settlement of this complaint, which is
recognized as “loss on warrant settlement” on the
accompanying Statement of Operations in the nine months ended
December 31, 2019.
Contingent Events
On
August 5, 2019, the Company received a formal notice from the Texas
Parks and Wildlife Department for the Company’s facility in
La Coste, Texas due to the detection of IHHNV, a viral disease of
Pacific white shrimp, from two Postlarvae (“PL”)
shipments from the Company’s Texas hatchery supplier in March
and April of this year. At the time of receipts of such shipments
from the hatchery in March and April, the Company was notified by
its supplier that the shipments were virus free. Based on the
Company’s quality control procedures during the course of the
shrimp farming process in the Company’s tanks and, in this
case the slower than normal growth rate indicating possible
compromise, the Company undertook to have lots independently tested
by the University of Arizona Pathology Laboratory in Tucson. Based
on those tests, IHHNV was detected and the Company’s facility
was placed under quarantine until further notice by Texas Parks and
Wildlife Department and the United States Department of
Agriculture/Animal and Plant Health Inspection Service. Such
quarantine notice also imposes no discharge of any culture water to
state waters (creeks, rivers, streams, bays) and no sales of any
shrimp until further notice. The Company’s system of tanks
prevents crossover contamination in order to quickly begin
restocking of PL shrimp from a different hatchery beginning in
August in different tanks. Such orders have been placed and are
expected to be placed into production as soon as inspection is
passed and the quarantine has been lifted. Furthermore, the Company
has enhanced its system to include nursery tanks that will allow
the Company to evaluate the health of the shrimp through much
earlier testing in its quality control process. While the Company
expects to incur costs associated with the proper disposal of such
batches, it does not expect it to be material.
NOTE 10 – SUBSEQUENT EVENTS
Sale of Series B PS
Subsequent to
period end, on January 7, 2020, and January 31, 2020, the Company
received further tranches of $250,000 each under the
SPA.
Issuance of Common Stock under Convertible Notes
Subsequent to
December 31, 2019, the GHS December 30, 2018 debenture and related
accrued interest was fully converted into 14,980,353 shares of the
Company’s common stock.
Notes Payable – Related Parties
On
February 4, 2020, the Company paid the remaining outstanding
balance of $18,600 of the convertible debenture owed an affiliate
of the Company whose managing member is the Treasurer, Chief
Financial Officer, and a director of the Company (Note
7).
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, 2019, as filed with the
U.S. Securities and Exchange Commission (the “SEC”) on
July 1, 2019, 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 equipment and shrimp farming
operations to produce a market-ready product in a timely manner and
in enough quantity;
●
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 retention and
availability 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 recruit and retain qualified personnel in order to
continue our operations;
●
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 the 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 the forward-looking statements to conform
these 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 wholly-owned subsidiaries: NaturalShrimp
Corporation (“NSC”), NaturalShrimp Global, Inc.
(“NS Global”) and Natural Aquatic Systems, Inc. Unless
otherwise specified, all dollar amounts are expressed in United
States dollars.
Corporate History
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.”
Business Overview
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 less than 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 2016. Medina del
Campo is approximately seventy-five miles northwest of Madrid,
Spain.
On
October 16, 2015, we formed Natural Aquatic Systems, Inc.
(“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. On December 25, 2018, we were awarded U.S.
Patent “Recirculating Aquaculture System and Treatment Method
for Aquatic Species” covering all indoor aquatic species that
utilizes proprietary art.
The
Company has two wholly-owned subsidiaries, including NSC, NS Global
and a 51% owned subsidiary, 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. Our
initial system was successful, but we 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-four 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 has provided a detailed audit to use
data to build and verify the capabilities of then initial Phase 1
prototype of a Trane-proposed three tank system at our La Coste,
Texas facility. The Company contracted F&T Water Solutions and
RGA Labs, Inc. (“RGA Labs”) to complete final
engineering and building of the initial patent-pending modified
Electrocoagulation system for the grow-out, harvesting and
processing of fully mature, antibiotic-free Pacific White Leg
shrimp. The design will present a viable pathway to begin
generating revenue and producing shrimp on a commercially viable
scale. The design is completed and was installed in early June 2018
by RGA Labs, and final financing for the system is expected to be
provided by one of the Company’s existing intuitional
investors. The first post larvae (PL) arrived from the hatchery on
July 3, 2018. The Company used the shrimp for sampling to key
potential customers and special events such as the Texas Restaurant
Association trade show. The Company also received two production PL
lots from Global Blue Technologies on March 21, 2019 and April 17,
2019 and from American Penaeid, Inc. on August 7, 2019. Because the
shrimp displayed growth that was slower than normal, the Company
had a batch tested by an independent lab at the University of
Arizona. The shrimp tested positive for Infectious hypodermal and
hematopoietic necrosis (“IHHNV”) and the Texas Parks
and Wildlife Department was notified that the facility was under
quarantine. On August 26, 2019, the Company was forced to terminate
all lots due to the infection. The Company will begin restocking on
shrimp in the refurbished facility sections. On August 30, 2019,
the Company received notice that it was in compliance again and the
quarantine had been lifted. During the aforementioned quarantine,
the Company decided to begin an approximately $1,000,000 facility
renovation demolishing the interior 16 wood structure lined tanks
(720,000 gallons). The Company would be replacing the previous
tanks with 40 new fiberglass tanks (600,000 gallons) at a cost of
approximately $400,000 allowing complete production flexibility
with more smaller tanks. The Company expects that the first shrimp
tanks harvest target date will be April 2020. In order to solidify
the existing facility production process, the Company has purchased
eight electrocoagulation units from F&T Water Solutions for a
combined purchase and installation price of approximately
$700,000.
Other Developments During the Nine Months Ended December 31,
2019
On August 15, 2019, Mr. Bill Williams resigned from his position as
Chairman of the Board and Chief Executive Officer of the Company,
effective August 31, 2019. Mr. Williams’s resignation was not
the result of any disagreement with the Company on any matter
relating to the Company’s operations, policies or
practices.
Results of Operations
Comparison of the Three Months Ended December 31, 2019 to the Three
Months Ended December 31, 2018
Revenue
We have
not earned any significant revenues since our inception and,
although we expect revenues to begin in six to nine months, we do
not expect them to be significant at that time.
Expenses
Our
expenses for the three months ended December 31, 2019 are
summarized as follows, in comparison to our expenses for the three
months ended December 31, 2018:
|
Three Months
Ended December 31,
|
|
|
|
|
|
|
Facility
operations
|
$41,375
|
$22,479
|
Salaries and
related expenses
|
109.733
|
109,623
|
Rent
|
4,351
|
2,953
|
Professional
fees
|
116,844
|
70,535
|
Other general and
administrative expenses
|
75,906
|
40,710
|
Research and
development
|
101,500
|
-
|
Depreciation
|
15,958
|
17,726
|
Total
|
$465,667
|
$264,026
|
Operating expenses
for the three months ended December 31, 2019 were $465,667,
representing an increase of 76.4% compared to operating expenses of
$264,026 for the same period in 2018. The overall increase in
expenses is mainly due to the Company progressing with their
testing and planning to begin commercial operations, which resulted
in a ramp up of costs, including increases for employees and
related costs, consultants, travel costs. Additionally, the
Company’s subsidiary, NAS, began activities during the
quarter, which included costs for research and development of their
technology and the treatment lab. Legal fees, included in
professional fees, also increased due to the registration statement
and other securities involvement. Depreciation expense decreased
slightly as many of the fixed assets currently in use have become
fully depreciated, and the fixed assets related to the facility are
still in construction in progress and depreciation has not yet
begun on these assets.
Comparison of the Nine Months Ended December 31, 2019 to the Nine
Months Ended December 31, 2018
Revenue
We have
not earned any significant revenues since our inception and,
although we expect revenues to begin in six to nine months, we do
not expect them to be significant at that time.
Expenses
Our
expenses for the nine months ended December 31, 2019 are summarized
as follows, in comparison to our expenses for the nine months ended
December 31, 2018:
|
Nine Months
Ended December 31,
|
|
|
|
|
|
|
Facility
operations
|
$180,934
|
$66,442
|
Salaries and
related expenses
|
337,265
|
314,788
|
Rent
|
12,163
|
8,983
|
Professional
fees
|
266,455
|
193,478
|
Other general and
administrative expenses
|
328,688
|
136,540
|
Research and
development
|
101,500
|
-
|
Depreciation
|
41,521
|
53,171
|
Total
|
$1,268,526
|
$773,402
|
Operating expenses
for the nine months ended December 31, 2019 were $1,268,526,
representing an increase of 63.9% compared to operating expenses of
$773,402 for the same period in 2018. The overall increase in
expenses is mainly the result an increase in facility operations,
as well as increases in salaries and general and administrative
costs, as the Company is progressing with their testing and
planning to begin commercial operations, and has engaged new
employees and consultants and there has been a related increase in
maintenance and repairs. Additionally, the Company’s
subsidiary, NAS, began activities during the quarter, which
included costs for research and development of their technology and
the treatment lab. Legal fees, included in professional fees, also
increased approximately $80,000 during the nine months ended
December 31, 2019 as compared to the prior year, due to the
registration statement and other securities involvement.
Depreciation expense decreased as many of the fixed assets
currently in use have become fully depreciated, and the fixed
assets related to the facility are still in construction in
progress and depreciation has not yet begun on these
assets.
Liquidity, Financial Condition and Capital Resources
As of
December 31, 2019, we had cash on hand of approximately $583,000
and a working capital deficiency of approximately
$4,015,000.
as compared to cash on hand of approximately $137,000 and a working
capital deficiency of approximately $3,773,000 as of March 31,
2019. The increase in working capital deficiency for the nine
months ended December 31, 2019 is mainly due to the increase in
cash on hand in current assets, increases in accounts payable and
accrued expenses and an increase in the current maturity of the
bank loan, discussed in further detail below, in current
liabilities.
Working Capital Deficiency
Our
working capital deficiency as of December 31, 2019, in comparison
to our working capital deficiency as of March 31, 2019, can be
summarized as follows:
|
|
|
|
|
|
Current
assets
|
$715,819
|
$178,685
|
Current
liabilities
|
4,730,365
|
3,951,811
|
Working capital
deficiency
|
$4,014,546
|
$3,773,126
|
The
increase in current assets is mainly due to the increase of
approximately $445,000 in cash on hand, which is a result of the
cash received in funding through the equity financing agreement and
sale of Series B PS as well as new convertible debentures.
Additionally, prepaid assets increased by approximately $90,000
consisting of legal retainers and expected settlement amounts. The
increase in current liabilities is primarily due to the entire
balance of the bank loan and lines of credit now being current, as
the outstanding balances are now due April 2020 or prior. Accrued
expenses increased by approximately $160,000, consisting mainly of
$50,000 for an estimated legal settlement and accrued legal fees of
approximately $70,000. Additionally, there is an increase of
approximately $135,000 in the convertible debenture balance due to
the new convertible debenture and the amortization of the existing
debt discounts.
Cash Flows
Our
cash flows for the nine months ended December 31, 2019, in
comparison to our cash flows for the three months ended December
31, 2018, can be summarized as follows:
|
Nine Months
Ended December 31,
|
|
|
|
Net cash used in
operating activities
|
$(1,503,708)
|
$(682,895)
|
Net cash used in
investing activities
|
(1,153,525)
|
(80,754)
|
Net cash provided
by financing activities
|
3,102,724
|
763,837
|
Net change in
cash
|
$634,353
|
$188
|
The
increase in net cash used in operating activities in the nine
months ended December 31, 2019, compared to the same period in
2018, mainly relates the decrease in the gain on the change in fair
value of the derivative of approximately $1,098,000 due to the
reduced amounts of convertible debt whose conversion features were
required to be bifurcated and recognized as derivative liability,
as well as the expenses in the prior year occurring in relation to
new convertible debentures for the excess financing costs of
approximately $1,372,000 and the change in fair value of the
warrant liability of $47,000, which do not occur in the current
period. Additionally, amortization of the debt discount decreased
in the current period by approximately $537,000 as compared to the
nine months ended December 31, 2018.
The net
cash used in investing activities in the nine months ended December
31, 2019 included an increase in costs paid on construction in
process on the new facility as compared to the same period in 2018,
construction on the existing facilities and the purchase of
machinery and equipment.
The net
cash provided by financing activities increased between periods,
with the increased cash provided by financing activities primarily
arising from the additional proceeds received from the equity
financing agreement of $1,774,000 and $1,500,000 for the sale of
Series B PS during the nine months ended December 31, 2019, offset
by a decrease in proceeds for new convertible debentures during
fiscal 2019 as compared to fiscal 2018 and by payments made on the
convertible debt with related party, and the credit line in fiscal
2019.
Our
cash position was approximately $583,000 as of December 31, 2019.
Management believes that our cash on hand and working capital are
not sufficient to meet our current anticipated cash requirements
for the next twelve months, 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 had a stated interest rate of 5.25%,
maturity date of December 15, 2017 and had an initial interest only
payment on February 3, 2016. On July 18, 2018, the short-term note
was replaced by a promissory note for the outstanding balance of
$25,298, which bears interest at 8% with a maturity date of July
18, 2021. The short-term note is guaranteed by an officer and
director. The balance of the note at December 31, 2019 and March
31, 2019 was $14,116 and $20,193, respectively.
The
Company also has a working capital line of credit with Extraco
Bank. On April 30, 2019, the Company renewed the line of credit for
$372,675. The line of credit bears an interest rate of 5.0% that is
compounded monthly on unpaid balances and is payable monthly. The
line of credit matures on April 30, 2020 and is secured by
certificates of deposit and letters of credit owned by directors
and shareholders of the Company. On April 12, 2019, prior to the
renewal, the Company paid $100,000 on the loan. The balance of the
line of credit is $372,675 and $472,675 at December 31, 2019 and
March 31, 2019, respectively.
The
Company also has additional lines of credit with Extraco Bank for
$100,000 and $200,000, which were renewed on January 19, 2019 and
April 30, 2019, respectively, with maturity dates of January 19,
2020 and April 30, 2020, respectively. The lines of credit bear an
interest rate of 6.5% and 5%, respectively, that is compounded
monthly on unpaid balances and is payable monthly. They are secured
by certificates of deposit and letters of credit owned by directors
and shareholders of the Company. The balance of the lines of credit
was $276,958 at both December 31, 2019 and March 31, 2019. On
January 8, 2020, the Company paid off the $100,000 line of
credit.
The
Company also has a working capital line of credit with Capital One
Bank for $50,000. The line of credit bears an interest rate of
prime plus 25.9 basis points, which totaled 31.4% as of March 31,
2019. The line of credit is unsecured. The balance of the line of
credit was $9,580 at both December 31, 2019 and March 31,
2019.
The
Company also has a working capital line of credit with Chase Bank
for $25,000. The line of credit bears an interest rate of prime
plus 10 basis points, which totaled 15.5% as of March 31, 2019. The
line of credit is secured by assets of the Company’s
subsidiaries. The balance of the line of credit is $10,237 at
December 31, 2019 and March 31, 2019.
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. The balance of the CNB Note is
$222,736 at December 31, 2019 and $228,759 at March 31,
2019.
Convertible Debentures
On
December 6, 2018, the Company entered into an 10% convertible
promissory note for $210,460, which matures on September 6, 2019.
During the first 180 days the convertible redeemable note is in
effect, the Company may redeem the note at a prepayment percentage
of 120% to 130% of the outstanding principal and accrued interest
based on the redemption date’s passage of time ranging from
60 days to 180 days from the date of issuance of the debenture. Per
the agreement, the Company is required at all times to have
authorized and reserved three times the number of shares that is
actually issuable upon full conversion of the note. In the event of
default, as set forth in the agreement, the outstanding principal
balance increases to 150%. The Company did not pay the outstanding
principal and accrued interest of approximately $54,000 on the
maturity date of September 6, 2019, and therefore the principal was
increased by the default penalty of 50%, amounting to approximately
$27,000. In addition to standard events of default, an event of
default occurs if the common stock of the Company shall lose the
“bid” price for its Common Stock, on trading markets,
including the OTCBB, OTCQB or an equivalent replacement exchange.
If the Company enters into a 3(a)(9) or 3(a)(10) issuance of shares
there are liquidation damages of 25% of principal, not to be below
$15,000. The Company must also obtain the noteholder’s
written consent before issuing any new debt. The note is
convertible at a fixed conversion price of $0.01. If an event of
default occurs, the fixed conversion price is extinguished and
replaced by a variable conversion rate that is 70% of the lowest
trading prices during the 20 days prior to conversion. The fixed
conversion price shall reset upon any future dilutive issuance of
shares, options or convertible securities. On June 27, 2019 the
holder converted $30,000 of principal into 3,000,000 shares of
common stock of the Company. On three occasions during the three
months ended September 30, 2019, the holder converted $140,000 of
principal into 14,000,000 shares of common stock of the Company.
The note was fully converted on two occasions during October
2019.
On
December 31, 2018, the Company entered into an 10% convertible
promissory note for $135,910, which matures on September 30, 2019.
The maturity date has been extended to March 1, 2020. During the
first 180 days the convertible redeemable note is in effect, the
Company may redeem the note at a prepayment percentage of 120% to
130% of the outstanding principal and accrued interest based on the
redemption date’s passage of time ranging from 60 days to 180
days from the date of issuance of the debenture. Per the agreement,
the Company is required at all times to have authorized and
reserved three times the number of shares that is actually issuable
upon full conversion of the note. In the event of default, as set
forth in the agreement, the outstanding principal balance increases
to 150%. In addition to standard events of default, an event of
default occurs if the common stock of the Company shall lose the
“bid” price for its Common Stock, on trading markets,
including the OTCBB, OTCQB or an equivalent replacement exchange.
If the Company enters into a 3(a)(9) or 3(a)(10) issuance of shares
there are liquidation damages of 25% of principal, not to be below
$15,000. The Company must also obtain the noteholder's written
consent before issuing any new debt. The note is convertible at a
fixed conversion price of $0.01. If an event of default occurs, the
fixed conversion price is extinguished and replaced by a variable
conversion rate that is 70% of the lowest trading prices during the
20 days prior to conversion. The fixed conversion price shall reset
upon any future dilutive issuance of shares, options or convertible
securities.
On
January 16, 2019, the Company entered into an 10% convertible
promissory note for $205,436.60, with an OID of $18,6867, for a
purchase price of $186,750.55, which matures on October 16, 2019.
The maturity date has been extended to March 1, 2020. During the
first 180 days the convertible redeemable note is in effect, the
Company may redeem the note at a prepayment percentage of 120% to
130% of the outstanding principal and accrued interest based on the
redemption date’s passage of time ranging from 60 days to 180
days from the date of issuance of the debenture. Per the agreement,
the Company is required at all times to have authorized and
reserved three times the number of shares that is actually issuable
upon full conversion of the note. In the event of default, as set
forth in the agreement, the outstanding principal balance increases
to 150%. In addition to standard events of default, an event of
default occurs if the common stock of the Company shall lose the
“bid” price for its Common Stock, on trading markets,
including the OTCBB, OTCQB or an equivalent replacement exchange.
If the Company enters into a 3(a)(9) or 3(a)(10) issuance of shares
there are liquidation damages of 25% of principal, not to be below
$15,000. The Company must also obtain the noteholder’s
written consent before issuing any issue new debt. The note is
convertible at a fixed conversion price of $0.01. If an event of
default occurs, the fixed conversion price is extinguished and
replaced by a variable conversion rate that is 70% of the lowest
trading prices during the 20 days prior to conversion. The fixed
conversion price shall reset upon any future dilutive issuance of
shares, options or convertible securities.
On two
occasions during the three months ended December 31, 2019, the
holder converted $101,661 of principal into 12,000,000 shares of
common stock of the Company.
On
February 4, 2019, the Company issued a 10% convertible promissory
note for $85,500, with an OID of $7,500, for a purchase price of
$75,000, which matures on November 4, 2019. During the first 180
days the convertible redeemable note is in effect, the Company may
redeem the note at a prepayment percentage of 120% to 130% of the
outstanding principal and accrued interest based on the redemption
date’s passage of time ranging from 60 days to 180 days from
the date of issuance of the debenture. Per the agreement, the
Company is required at all times to have authorized and reserved
three times the number of shares that is actually issuable upon
full conversion of the note. In the event of default, as set forth
in the agreement, the outstanding principal balance increases to
150%. In addition to standard events of default, an event of
default occurs if the common stock of the Company shall lose the
"bid" price for its Common Stock, on trading markets, including the
OTCBB, OTCQB or an equivalent replacement exchange. If the Company
enters into a 3 (a)(9) or 3(a)(10) issuance of shares there are
liquidation damages of 25% of principal, not to be below $15,000.
The Company must also obtain the noteholder's written consent
before issuing any issue new debt. The note is convertible at a
fixed conversion price of $0.01. If an event of default occurs, the
fixed conversion price is extinguished and replaced by a variable
conversion rate that is 70% of the lowest trading prices during the
20 days prior to conversion. The fixed conversion price shall reset
upon any future dilutive issuance of shares, options or convertible
securities. On August 6, 2019, the Company exercised its option to
redeem the February 4, 2019 debenture, for a redemption price of
approximately $132,000. The principal of $85,500 and interest of
approximately $5,000 was derecognized with the additional $27,000
paid upon redemption recognized as a financing cost and $15,000 for
legal fees. As a result of the redemption, the unamortized discount
related to the redeemed balance of $38,000 was immediately
expensed.
On
March 1, 2019, the Company entered into an 10% convertible
promissory note for $168,000, with an OID of $18,000, for a
purchase price of $150,000, which matures on November 1, 2019. The
maturity date has been extended to March 1, 2020. During the first
180 days the convertible redeemable note is in effect, the Company
may redeem the note at a prepayment percentage of 100% to 130% of
the outstanding principal and accrued interest based on the
redemption date’s passage of time ranging from 60 days to 180
days from the date of issuance of the debenture. Per the agreement,
the Company is required at all times to have authorized and
reserved three times the number of shares that is actually issuable
upon full conversion of the note. In the event of default, as set
forth in the agreement, the outstanding principal balance increases
to 150%. In addition to standard events of default, an event of
default occurs if the common stock of the Company shall lose the
“bid” price for its Common Stock, on trading markets,
including the OTCBB, OTCQB or an equivalent replacement exchange.
If the Company enters into a 3 (a)(9) or 3(a)(10) issuance of
shares there are liquidation damages of 25% of principal, not to be
below $15,000. The Company must also obtain the noteholder’s
written consent before issuing any new debt. The note is
convertible at a fixed conversion price of $0.25. If an event of
default occurs, the fixed conversion price is extinguished and
replaced by a variable conversion rate that is 70% of the lowest
trading prices during the 20 days prior to conversion. The fixed
conversion price shall reset upon any future dilutive issuance of
shares, options or convertible securities.
On
April 17, 2019, the Company entered into an 10% convertible
promissory note for $110,000, with an OID of $10,000, for a
purchase price of $100,000, which matures on January 23, 2020.
During the first 180 days the convertible redeemable note is in
effect, the Company may redeem the note at a prepayment percentage
of 120% to 130% of the outstanding principal and accrued interest
based on the redemption date’s passage of time ranging from
60 days to 180 days from the date of issuance of the debenture. Per
the agreement, the Company is required at all times to have
authorized and reserved three times the number of shares that is
actually issuable upon full conversion of the note. In the event of
default, as set forth in the agreement, the outstanding principal
balance increases to 150%. In addition to standard events of
default, an event of default occurs if the common stock of the
Company shall lose the "bid" price for its Common Stock, on trading
markets, including the OTCBB, OTCQB or an equivalent replacement
exchange. If the Company enters into a 3 (a)(9) or 3(a)(10)
issuance of shares there are liquidation damages of 25% of
principal, not to be below $15,000. The Company must also obtain
the noteholder's written consent before issuing any new debt. The
note is convertible at a fixed conversion price of $0.124. If an
event of default occurs, the fixed conversion price is extinguished
and replaced by a variable conversion rate that is 70% of the
lowest trading prices during the 20 days prior to
conversion.
Sale and Issuance of Common Stock
During
the nine months ended December 31, 2019, the Company issued
37,601,461 shares of the Company’s common stock upon
conversion of approximately $383,000 of their outstanding
convertible debt and accrued interest.
Equity Financing Agreement
On
August 21, 2018, the Company entered into an Equity Financing
Agreement (“Equity Financing Agreement”) and
Registration Rights Agreement (“Registration Rights
Agreement”) with GHS Investments LLC, a Nevada limited
liability company (“GHS”). Under the terms of the
Equity Financing Agreement, GHS agreed to provide the Company with
up to $7,000,000 upon effectiveness of a registration statement on
Form S-1 (the “Registration Statement”) filed with the
U.S. Securities and Exchange Commission (the
“Commission”). The Registration Statement was filed,
and deemed effective on September 19, 2018.
Following
effectiveness of the Registration Statement, the Company has the
discretion to deliver puts to GHS and GHS will be obligated to
purchase shares of the Company’s common stock, par value
$0.0001 per share (the “Common Stock”) based on the
investment amount specified in each put notice. The maximum amount
that the Company shall be entitled to put to GHS in each put notice
shall not exceed two hundred percent (200%) of the average daily
trading dollar volume of the Company’s Common Stock during
the ten (10) trading days preceding the put, so long as such amount
does not exceed $300,000. Pursuant to the Equity Financing
Agreement, GHS and its affiliates will not be permitted to purchase
and the Company may not put shares of the Company’s Common
Stock to GHS that would result in GHS’s beneficial ownership
equaling more than 9.99% of the Company’s outstanding Common
Stock. The price of each put share shall be equal to eighty percent
(80%) of the Market Price (as defined in the Equity Financing
Agreement). Puts may be delivered by the Company to GHS until the
earlier of thirty-six (36) months after the effectiveness of the
Registration Statement or the date on which GHS has purchased an
aggregate of $7,000,000 worth of Common Stock under the terms of
the Equity Financing Agreement. Additionally, in accordance with
the Equity Financing Agreement, the Company shall issue GHS a
promissory note in the principal amount of $15,000 to offset
transaction costs (the “Note”). The Note bears interest
at the rate of 8% per annum, is not convertible and is due 180 days
from the issuance date of the Note. Through the year ended March
31, 2019, the Company put to GHS for the issuance of approximately
22,132,000 shares of common stock, for a total of approximately
$465,000.
During
the nine months ended December 31, 2019, the Company put to GHS for
the issuance of 14,744,646 shares of common stock for a total of
$1,774,000.
Series B Preferred Equity Offering
On
September 5, 2019, the Board authorized the issuance of 5,000
preferred shares to be designated as Series B Preferred Stock. The
Series B PS have a par value of $0.0001, a stated value of $1,200
and no voting rights. The Series B PS are redeemable at the
Company's option, at percentages ranging from 120% to 135% for the
first 180 days, based on the passage of time. The Series B are also
redeemable at the holder’s option, upon the occurrence of a
triggering event which includes a change of control, bankruptcy,
and the inability to deliver Series B PS requested under conversion
notices. The triggering redemption amount is at the greater of (i)
135% of the stated value or (ii) the product of the volume-weighted
average price (“VWAP”) on the day proceeding the
triggering event multiplied by the stated value divided by the
conversion price. As the redemption feature at the holder’s
option is contingent on a future triggering event, the Series B PS
is considered contingently redeemable, and as such the preferred
shares are classified in equity until such time as a triggering
event occurs, at which time they will be classified as
mezzanine.
The
Series B PS is convertible, at the discounted market price which is
defined as the lowest VWAP over last 20 days. The conversion price
is adjustable based on several situations, including future
dilutive issuances. As the Series B PS does not have a redemption
date and is perpetual preferred stock, it is considered to be an
equity host instrument and as such the conversion feature is not
required to be bifurcated as it is clearly and closely related to
the equity host instrument.
On
September 17, 2019, the Company entered into a Securities Purchase
Agreement with GHS for the purchase of up to 5,000 shares of Series
B PS at a stated value of $1,200 per share, or for a total net
proceeds of $5,000,000 in the event the entire 5000 shares of
Series B PS are purchased. During the nine months ended
December 31, 2019, the Company received $1,500,000 for the issuance
of 1,500,000 Series B PS.
Shareholder Note Payable
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. As of December 31,
2019, the Company has paid $121,400 on this note, with $18,600
remaining outstanding as of March 31, 2019.
Going Concern
The
audited consolidated financial statements contained in this annual
report on Form 10-K have been prepared, assuming that the Company
will continue as a going concern. The Company has accumulated
losses through the period to December 31, 2019 of approximately
$43,745,000 as well as negative cash flows from operating
activities of approximately $1,153,000. Presently, the Company does
not have sufficient cash resources to meet its plans in the twelve
months following December 31, 2019. These factors raise substantial
doubt about the Company’s ability to continue as a going
concern. Management is in the process of evaluating various
financing alternatives in order to finance the continued build-out
of our equipment and for general and administrative expenses. These
alternatives include raising funds through public or private equity
markets and either through institutional or retail investors.
Although there is no assurance that the Company will be successful
with our fund raising initiatives, management believes that the
Company will be able to secure the necessary financing as a result
of ongoing financing discussions with third party investors and
existing shareholders.
The
consolidated financial statements do not include any adjustments
that may be necessary should the Company be unable to continue as a
going concern. The Company’s continuation as a going concern
is dependent on its ability to obtain additional financing as may
be required and ultimately to 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 the rights, preferences and privileges of the Company’s
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
its future plans for developing its business and achieving
commercial revenues. If the Company is 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 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. Subsequent to period end
we have raised $500,000 from the sale of Series B Preferred shares.
However, not including funds needed for capital expenditures or to
pay down existing debt and trade payables, we anticipate that we
will need to raise an additional $2,500,000 to cover all of our
operational expenses over the next 12 months, not including any
capital expenditures needed as part of any commercial scale-up of
our equipment. 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 such financing can be obtained on
commercially reasonable terms. If we are not able to obtain the
additional necessary financing on a timely basis, or if we are
unable to generate significant revenues from operations, we will
not be able to meet our other 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.
Effects of Inflation
We do
not believe that inflation has had a material impact on our
business, revenues or operating results during the periods
presented.
Critical Accounting Policies and Estimates
Our
significant accounting policies are more fully described in the
notes to our financial statements included in this Quarterly Report
on Form 10-Q and in our Annual Report on Form 10-K for the fiscal
year ended March 31, 2019. We believe that the accounting policies
below are critical for one to fully understand and evaluate our
financial condition and results of operations.
Fair Value Measurement
The
fair value measurement guidance clarifies that fair value is an
exit price, representing the amount that would be received to sell
an asset or paid to transfer a liability in an orderly transaction
between market participants. As such, fair value is a market-based
measurement that should be determined based on assumptions that
market participants would use in the valuation of an asset or
liability. It establishes a fair value hierarchy that prioritizes
the inputs to valuation techniques used to measure fair value. The
hierarchy gives the highest priority to unadjusted quoted prices in
active markets for identical assets or liabilities (Level 1
measurements) and the lowest priority to unobservable inputs (Level
3 measurements). The three levels of the fair value hierarchy under
the fair value measurement guidance are described
below:
Level 1
- Unadjusted quoted prices in active markets that are accessible at
the measurement date for identical assets or
liabilities;
Level 2
- Quoted prices in markets that are not active, or inputs that are
observable, either directly or indirectly, for substantially the
full term of the asset or liability; or
Level 3
- Prices or valuation techniques that require inputs that are both
significant to the fair value measurement and unobservable
(supported by little or no market activity).
The
Company did not have any Level 1 or Level 2 assets and liabilities
at December 31, 2019 and March 31, 2019.
The
Derivative and warrant liabilities are Level 3 fair value
measurements.
Basic and Diluted Earnings/Loss per Common Share
Basic
and diluted earnings or loss per share (“EPS”) amounts
in the consolidated financial statements are computed in accordance
with ASC 260 – 10 “Earnings per Share”, which
establishes the requirements for presenting EPS. Basic EPS is based
on the weighted average number of shares of common stock
outstanding. Diluted EPS is based on the weighted average number of
shares of common stock outstanding and dilutive common stock
equivalents. Basic EPS is computed by dividing net income or loss
available to common stockholders (numerator) by the weighted
average number of shares of common stock outstanding (denominator)
during the period. For the nine months ended December 31, 2019, the
Company had approximately $709,000 in convertible debentures whose
approximately 22,895,000 underlying shares are convertible at the
holders’ option at conversion prices ranging from $0.01 to
$0.30 for fixed conversion rates, and 57% - 60% of the defined
trading price for variable conversion rates and approximately
848,000 warrants with an exercise price of 45% of the market price
of the Company’s common stock, which were not included in the
calculation of diluted EPS as their effect would be anti-dilutive.
For the nine months ended December 31, 2018, the Company had
approximately $1974,000 in principal on convertible debentures
whose approximately 96,842,000 underlying shares are convertible at
the holders’ option at conversion prices ranging from 34% -
75% of the defined trading price and approximately 10,637,000
warrants with an exercise price of 45% of the market price of the
Company’s common stock, which were not included in the
calculation of diluted EPS as their effect would be
anti-dilutive.
Impairment of Long-lived Assets and Long-lived Assets
The
Company will periodically evaluate the carrying value of
longlived assets to be held and used when events and
circumstances warrant such a review and at least annually. The
carrying value of a longlived asset is considered impaired
when the anticipated undiscounted cash flow from such asset is
separately identifiable and is less than its carrying value. In
that event, a loss is recognized based on the amount by which the
carrying value exceeds the fair value of the longlived asset.
Fair value is determined primarily using the anticipated cash flows
discounted at a rate commensurate with the risk involved. Losses on
longlived assets to be disposed of are determined in a
similar manner, except that fair values are reduced for the cost to
dispose.
Recently Adopted Accounting Pronouncements
Our
recently adopted accounting pronouncements are more fully described
in Note 2 to our financial statements included herein for the
quarter ended December 31, 2019.
Recently Issued Accounting Standards
In
February 2016, 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
adopted ASU 2016-02 on April 1, 2019, and the adoption resulted in
the recognition of a Right of Use Asset (“ROU”) and a
Lease Liability for a new equipment lease entered into on June 24,
2019.
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, 2019
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, 2019 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.
Management’s Report on Internal Control Over Financial
Reporting
Our
management is responsible for establishing and maintaining adequate
internal control over financial reporting as defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act. Under the
supervision and with the participation of our management, which
currently consists of our Chief Executive Officer and Treasurer, we
conducted an evaluation of the effectiveness of our internal
control over financial reporting based on criteria established in
the framework in Internal Control
– Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission
(“COSO” - 2013) and SEC guidance on conducting such
assessments. Our management concluded, as of December 31, 2019,
that our internal control over financial reporting was not
effective. Management realized there were deficiencies in the
design or operation of the Company’s internal control that
adversely affected the Company’s internal controls which
management considers to be material weaknesses.
In
performing the above-referenced assessment, management had
concluded that as of December 31, 2019, there were deficiencies in
the design or operation of our internal control that adversely
affected our internal controls, which management considers to be
material weaknesses, including those described below:
(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, including identifying specific areas
within our governance, accounting and financial reporting processes
to add adequate resources to potentially mitigate 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 allow.
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, 2019 that have materially
affected, or are reasonably likely to materially affect our
internal control over financial reporting. We believe that a
control system, no matter how well designed and operated, cannot
provide absolute assurance that the objectives of the control
system are met, and no evaluation of controls can provide absolute
assurance that all control issues and instances of fraud, if any,
within any company have been detected.
PART II – OTHER
INFORMATION
ITEM 1. LEGAL
PROCEEDINGS
Except
as described below, we are currently not involved in any litigation
that we believe could have a material adverse effect on our
financial condition or results of operations. There is no action,
suit, proceeding, inquiry or investigation before or by any court,
public board, government agency, self-regulatory organization or
body pending or, to the knowledge of the executive officers of our
Company or any of our subsidiaries, threatened against or affecting
our company, our common stock, any of our subsidiaries or of our
companies or our subsidiaries’ officers or directors in their
capacities as such, in which an adverse decision could have a
material adverse effect.