NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – NATURE OF THE ORGANIZATION AND BUSINESS
Nature of the Business
NaturalShrimp
Incorporated (“NaturalShrimp” “the
Company”), a Nevada corporation, is a biotechnology company
and has developed a proprietary technology that allows the Company
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. The Company’s 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, 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 year ended March 31, 2020, the Company had a net loss available
for common stockholders of approximately $5,204,000. At March 31,
2020, the Company had an accumulated deficit of approximately
$46,427,000 and a working capital deficit of approximately
$3,598,000. 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. Additionally, on March
18, 2020, the Company’s facility, which was near completion,
was destroyed in a fire. 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 2020 fiscal year, the Company
received net cash proceeds of approximately $100,000 from the
issuance of convertible debentures, approximately $1,774,000 from
issuance of the Company’s common stock through an equity
financing agreement and $2,250,000 from the sale of Series B
Preferred stock. Subsequent to March 31, 2020, the Company received
$1,000,000 from the purchase of approximately,1,000 Series B
preferred shares. (See Note 13). Management believes that the
future funding to be received in relation to the equity financing
agreement and the sale of Series B preferred shares under the
securities purchase agreement (see Note 7), will assist in the
funding of the 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.
Management’s
plans include rebuilding the facility within the next year, and to
begin operations. The Company plans to improve the growth rate of
the shrimp and the environmental conditions of its production
facilities. Management also plans to acquire a hatchery in which
the Company can better control the environment in which to develop
the post larvaes. If management is unsuccessful in these efforts,
discontinuance of operations is possible. The consolidated
financial statements do not include any adjustments that might
result from the outcome of these uncertainties.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
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 year ended March 31, 2020, the Company
had approximately $469,000 in convertible debentures whose
approximately 12,518,000 underlying shares are convertible at the
holders’ option at conversion prices ranging from $0.01 to
$0.25 for fixed conversion rates, and 57% - 60% of the defined
trading price for variable conversion rates, and approximately
2,916,000 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. Included in the diluted EPS for the year ended March
31, 2019, the Company had approximately $1,097,000 in convertible
debentures whose approximately 66,376,000 underlying shares are
convertible at the holders’ option at conversion prices
ranging from $0.01 to $0.30 for fixed conversion rates, and 34% -
60% of the defined trading price for variable conversion rates and
approximately 444,000 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 Generally Accepted Accounting Principles in the United
States (“GAAP”) provides an option to elect fair value
accounting for these instruments. GAAP requires the disclosure of
the fair values of all financial instruments, regardless of whether
they are recognized at their fair values or carrying amounts in our
balance sheets. For financial instruments recognized at fair value,
GAAP requires the disclosure of their fair values by type of
instrument, along with other information, including changes in the
fair values of certain financial instruments recognized in income
or other comprehensive income. For financial instruments not
recognized at fair value, the disclosure of their fair values is
provided below under “Financial
Instruments.”
Nonfinancial
assets, such as property, plant and equipment, and nonfinancial
liabilities are recognized at their carrying amounts in the
Company’s balance sheets. GAAP does not permit nonfinancial
assets and liabilities to be remeasured at their fair values.
However, GAAP requires the remeasurement of such assets and
liabilities to their fair values upon the occurrence of certain
events, such as the impairment of property, plant and equipment. In
addition, if such an event occurs, GAAP requires the disclosure of
the fair value of the asset or liability along with other
information, including the gain or loss recognized in income in the
period the remeasurement occurred.
The
Company did not have any Level 1 or Level 2 assets and liabilities
at March 31, 2020 and 2019.
The
derivative and warrant liabilities are Level 3 fair value
measurements.
The
following is a summary of activity of Level 3 liabilities during
the years ended March 31, 2020 and 2019:
Derivatives
|
|
|
|
|
Derivative
liability balance at beginning of period
|
$157,000
|
$3,455,000
|
|
Additions to
derivative liability for new debt
|
-
|
2,090,000
|
|
Reclass to equity
upon conversion or redemption
|
(8,000)
|
(4,068,500)
|
|
Change in fair
value
|
27,000
|
(1,319,500)
|
|
Balance at end of
period
|
$176,000
|
$157,000
|
At
March 31, 2020, 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 $0.04; a risk-free interest rate of 0.11%, and expected
volatility of the Company’s common stock of 229.10%, and the
various estimated reset exercise prices weighted by
probability.
At
March 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 $0.21; a risk-free interest rate ranging from 2.41% to
2.63%, and expected volatility of the Company’s common stock
ranging from 335.68% to 478.31%, and the various estimated reset
exercise prices weighted by probability.
Warrant liability
|
|
|
|
|
Warrant liability
balance at beginning of period
|
$93,000
|
$277,000
|
|
Additions to
warrant liability for new warrants
|
-
|
-
|
|
Reclass to equity
upon exercise
|
|
(231,000)
|
|
Change in fair
value
|
(3,000)
|
47,000
|
|
Balance at end of
period
|
$90,000
|
$93,000
|
At
March 31, 2020, the fair value of the warrant liability was
estimated using the following weighted-average inputs: the price of
the Company’s common stock of $0.04; a risk-free interest
rate of 0.23%, and expected volatility of the Company’s
common stock ranging of 261.85%.
At
March 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 $0.21; a risk-free interest
rate of 2.21%, and expected volatility of the Company’s
common stock ranging of 285.32%.
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 March 31, 2020 and 2019.
The
Company maintains cash balances at one financial institution.
Accounts at this institution are insured by the Federal Deposit
Insurance Corporation (FDIC) up to $250,000. As of March 31, 2020,
and 2019, the Company’s cash balance did not exceed FDIC
coverage.
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.
Income Taxes
Deferred income tax
assets and liabilities are computed for differences between the
financial statement and tax basis of assets and liabilities that
will result in taxable or deductible amounts in the future based on
enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation
allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized. Income tax expense is
the tax payable or refundable for the period plus or minus the
change during the period in deferred tax assets and
liabilities.
In
addition, the Company’s management performs an evaluation of
all uncertain income tax positions taken or expected to be taken in
the course of preparing the Company’s income tax returns to
determine whether the income tax positions meet a “more
likely than not” standard of being sustained under
examination by the applicable taxing authorities. This evaluation
is required to be performed for all open tax years, as defined by
the various statutes of limitations, for federal and state
purposes.
Stock-Based Compensation
The
Company accounts for stock-based compensation to employees and
non-employees in accordance with ASC 718. “Stock-based Compensation to
Employees” is measured at the grant date, based on the
fair value of the award, and is recognized as expense over the
requisite employee service period. The Company estimates the fair
value of stock-based payments using the Black-Scholes
option-pricing model for common stock options and warrants and the
closing price of the Company’s common stock for common share
issuances. Once the stock is issued the appropriate expense account
is charged.
Impairment of Long-lived Assets and Long-lived Assets
The
Company will periodically evaluate the carrying value of long-lived
assets to be held and used when events and circumstances warrant
such a review and at least annually. The carrying value of a
long-lived 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 long-lived asset. Fair value is determined
primarily using the anticipated cash flows discounted at a rate
commensurate with the risk involved. Losses on long-lived assets to
be disposed of are determined in a similar manner, except that fair
values are reduced for the cost to dispose.
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.
Reclassifications
Certain
prior year amounts have been reclassified for consistency with the
current period presentation. These reclassifications had no effect
on the reported results of operations.
Recently Issued Accounting Standards
In June
2018, the FASB issued ASU 2018-07, Compensation—Stock
Compensation (Topic 718): Improvements to Nonemployee Share-Based
Payment Accounting, which aligns accounting for share-based
payments issued to nonemployees to that of employees under the
existing guidance of Topic 718, with certain exceptions. This
update supersedes previous guidance for equity-based payments to
nonemployees under Subtopic 505-50, Equity—Equity-Based
Payments to Non-Employees. This guidance was adopted by the Company
as of April 1, 2019, and
the adoption did not have a material impact on the Company’s
financial position or results of operations.
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
11).
During
the year ended March 31, 2020, 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 March 31, 2020, through the date which the consolidated
financial statements were issued. Based upon the review, other than
described in Note 13 – 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 – FIXED ASSETS
|
Land
|
$202,293
|
$202,293
|
|
Buildings
|
509,762
|
1,328,161
|
|
Machinery
and equipment
|
221,987
|
934,621
|
|
Autos
and trucks
|
19,063
|
14,063
|
|
Furniture
and fixtures
|
-
|
22,060
|
|
Accumulated
depreciation
|
(245,297)
|
(1,322,609)
|
|
Fixed
assets, net
|
$707,808
|
$1,178,589
|
During
January 2020, the Company reclassified approximately $886,000 of
Construction in Process into Machinery and equipment, as the assets
had begun to be put into use. The Company also wrote off certain
fixed assets which were no longer in use, resulting in a net loss
on the disposal of $71,128. The consolidated statements of
operations reflect depreciation expense of approximately $100,000
and $30,000 for the years ended March 31, 2020 and 2019,
respectively.
On March 18, 2020,
the Company’s research and development plant in La Coste,
Texas was destroyed by a fire. The Company believes that it was
caused by a natural gas leak, but the fire was so extensive that
the cause was undetermined. The majority of the damage was to their
pilot production plant, which destroyed a large portion of the
fixed assets of the Company. The property destroyed had a net book
value of $1,909,495, which was written off and recognized as Loss
due to fire. The Company filed a claim with their insurance
company, and as of June 2, 2020, received all the proceeds, which
totaled $917,210. In accordance with ASC 610-30, Other Income: Gains and Losses on Involuntary
Conversions, a loss of property due to destruction, such as
a fire, which is replaced by another asset such as cash or
insurance proceeds is defined as an involuntary conversion, and to
the extent the cost of the assets destroyed differs from the amount
of monetary assets received, the transaction results in the
realization of a gain or loss that shall be recognized.as a
separate component of income from continuing operations. Therefore,
there was a Loss due to fire of $992,285 recognized on the
accompanying Consolidated Statement of Operations. As the proceeds
were received subsequent to the year end at March 31, 2020, but
prior to the issuance of the financial statements, the $917,210 has
been recognized as Insurance settlement on the accompanying
Consolidated Balance Sheet.
NOTE 4 – SHORT-TERM NOTE AND LINES OF CREDIT
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. The balance of the line of credit
is $372,675 and $472,675 at March 31, 2020 and March 31, 2019. On
April 12, 2019, prior to the renewal, the Company paid $100,000 on
the loan. On April 30, 2020, the line of credit was renewed with a
maturity date of April 30, 2021, for a balance of
$372,675.
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. On January 8, 2020, the
Company paid off the $100,000 line of credit. 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 $178,778 and $276,958 at March 31, 2020 and
March 31, 2019, respectively. On April 30, 2020, the line of credit
was renewed with a maturity date of April 30, 2021, for a balance
of $177,778.
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 March 31, 2020 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 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 March
31, 2020 and March 31, 2019.
NOTE 5 – BANK LOANS
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. On January 10, 2020, the loan was
modified, with certain terms amended. The modified note is for the
principal balance of $222,736, with initial monthly payments of
$1,730 through February 1, 2037, when all unpaid principal and
interest will be due and payable. The loan has an initial yearly
rate of interest of 5.75% , which may change beginning on February
1, 2023 and each 36 months thereafter, to the Wall Street Journal
Prime Rate plus 1%, but never below 4.25%. The monthly payments may
change on the same dates as the interest changes. The Company is
also allowed to make payments against the principal at any time.
The balance of the CNB Note is $222,736 at March 31, 2020, $19,200
of which was in current liabilities, and $228,725 at March 31,
2019.
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 promissory note is guaranteed by an officer and
director. The balance of the promissory note at March 31, 2020 and
2019 was $12,005 and $20,193, respectively.
Maturities on Bank
loan is as follows:
|
Years
ended:
|
|
|
March 31,
2021
|
$8,904
|
|
March 31,
2022
|
20,730
|
|
March 31,
2023
|
9,240
|
|
March 31,
2024
|
9,786
|
|
March 31,
2025
|
10,364
|
|
Thereafter
|
175,717
|
|
|
$234,741
|
NOTE 6 – CONVERTIBLE DEBENTURES
March 20, 2018 Debenture
On
March 20, 2018, the Company entered into a convertible note for the
principal amount of $84,000, convertible into shares of common
stock of the Company, which matured on December 20, 2018. On
September 20, 2018 the outstanding principal and $5,040 in accrued
interest of the note was purchased from the noteholder by a third
party, for $126,882. The additional $37,842 represented the
redemption amount owing to the original noteholder and increases
the principal amount due to the new noteholder and was recognized
as financing cost. The note bears interest at 12% for the first 180
days, which increases to 18% after 180 days, and 24% upon an event
of default. The note is convertible on the date beginning 180 days
after issuance of the note, at the lower of 60% of the lowest
trading price for the last 20 days prior to the issuance date of
this note, or 60% of the lowest trading price for the last 20 days
prior to conversion. In the event of a “DTC chill”, the
conversion rate is adjusted to 40% of the market price. Per the
agreement, the Company is required at all times to have authorized
and reserved ten times the number of shares that is actually
issuable upon full conversion of the note. The conversion feature
meets the definition of a derivative and therefore requires
bifurcation and will be accounted for as a derivative
liability.
During
the first 180 days the convertible redeemable note was in effect,
the Company was allowed to redeem the note at amounts ranging from
125% to 150% of the principal and accrued interest balance, based
on the redemption date’s passage of time ranging from the
issuance to 180 days from the date of issuance of the
debenture.
Additionally,
the Company also issued 255,675 shares of common stock of the
Company as a commitment fee. The commitment shares fair value was
calculated as $28,124, based on the market value of the shares of
common stock of the Company at the closing date of $0.11, and was
recognized as part of the debt discount.
The
Company estimated the aggregate fair value of the conversion
feature derivatives embedded in the convertible debenture at
issuance at $191,000, based on weighted probabilities of
assumptions used in the Black Scholes pricing model. The key
valuation assumptions used consist, in part, of the price of the
Company’s common stock of $0.06 at issuance date; a risk-free
interest rate of 2.09% and expected volatility of the
Company’s common stock, of 272.06%, and the various estimated
reset exercise prices weighted by probability. This resulted in the
calculated fair value of the debt discount being greater than the
face amount of the debt, and the excess amount of $144,124
(including the fair value of the shares of common stock of the
Company issued) was immediately expensed as financing
costs.
During
the third fiscal quarter of 2019, in two separate conversions, the
holder converted $91,592 of principal into 16,870,962 shares of
common stock of the Company. As a result of the conversions the
derivative liability related to the debenture was remeasured
immediately prior to the conversions with an overall increase in
the fair value of $27,000 recognized, with the fair value of the
derivative liability related to the converted portion, of $163,000
being reclassified to equity. The key valuation assumptions used
consist, in part, of the price of the Company’s common stock
on the dates of conversion, of $0.01 and $0.02; a risk-free
interest rate of 2.40% to 2.45% and expected volatility of the
Company’s common stock, of 448.43%, and the various estimated
reset exercise prices weighted by probability.
On
March 1, 2019, the holder converted $28,579 of principal and $2,021
of accrued interest into 1,000,000 shares of common stock of the
Company. As a result of the conversion the derivative liability
related to the debenture was remeasured immediately prior to the
conversion with an overall increase in the fair value of $17,000
recognized, with the fair value of the derivative liability related
to the converted portion, of $65,000 being reclassified to equity.
The key valuation assumptions used consist, in part, of the price
of the Company’s common stock on the date of conversion, of
$0.45 and $0.03; a risk-free interest rate ranging from 2.41% to
2.45% and expected volatility of the Company’s common stock,
of 478.31%, and the various estimated reset exercise prices
weighted by probability.
On
November 12, 2019, the holder converted the remaining principal and
accrued interest balance into 179,984 shares of common stock of the
Company. As a result of the conversion the derivative liability
related to the debenture was remeasured immediately prior to the
conversion with an overall decrease in the fair value of $2,000
recognized, with the fair value of the derivative liability related
to the converted portion, of $8,000 being reclassified to equity.
The key valuation assumptions used consist, in part, of the price
of the Company’s common stock on the date of conversion, of
$0.11; a risk-free interest rate of 1.59% and expected volatility
of the Company’s common stock, of 98.46%, and the various
estimated reset exercise prices weighted by
probability.
August 24, 2018 Debenture
On
August 24, 2018, the Company entered into a 10% convertible note in
the principal amount of $55,000, convertible into shares of common
stock of the Company, which matures August 24, 2019. The interest
rate increases to 24% per annum upon an event of default, as set
forth in the agreement, including a cross default to all other
outstanding notes, and if the debenture is not paid at maturity the
principal due increases by 10%. If the Company loses its bid price
the principal outstanding on the debenture increases by 20%, and if
the Company’s common stock is delisted, the principal
increases by 50%.
The
notes are convertible into shares of the Company’s common
stock at a price per share equal to 57% of the lowest closing bid
price for the last 20 days. The discount is increased an additional
10%, to 47%, upon a “DTC chill". The conversion feature meets
the definition of a derivative and therefore requires bifurcation
and will be accounted for as a derivative liability.
During
the first 180 days the convertible redeemable note is in effect,
the Company may redeem the note at amounts ranging from 130% to
145% of the principal and accrued interest balance, based on the
redemption date’s passage of time ranging from 60 days to 180
days from the date of issuance of the debenture. On January 10,
2019 the outstanding principal of $55,000 and accrued interest of
$1,974 was purchased from the noteholder by a third party, for
$82,612. The additional $25,638 represents the redemption amount
owing to the original noteholder and increases the principal amount
due to the new noteholder and was recognized as financing
cost.
The
Company estimated the aggregate fair value of the conversion
feature derivatives embedded in the debenture at issuance at
$375,000, based on weighted probabilities of assumptions used in
the Black Scholes pricing model. The key valuation assumptions used
consist, in part, of the price of the Company’s common stock
of $0.02 at issuance date; a risk-free interest rate of 2.44% and
expected volatility of the Company’s common stock, of
295.23%, and the various estimated reset exercise prices weighted
by probability. This resulted in the calculated fair value of the
debt discount being greater than the face amount of the debt, and
the excess amount of $95,750 was immediately expensed as financing
costs.
During
the fourth fiscal quarter of 2019, in three separate conversions,
the holder converted $57,164 of principal into 9,291,354 shares of
common stock of the Company. As a result of the conversions the
derivative liability related to the debenture was remeasured
immediately prior to the conversions with an overall increase in
the fair value of $65,000 recognized, with the fair value of the
derivative liability related to the converted portion, of $171,000
being reclassified to equity. The key valuation assumptions used
consist, in part, of the price of the Company’s common stock
on the dates of conversion, of $0.28 to $0.40; a risk-free interest
rate of 2.36% to 2.41% and expected volatility of the
Company’s common stock, of 343.98% to 374.79%, and the
various estimated reset exercise prices weighted by probability.
There were no further conversions during the year ended March 31,
2020, with a remaining outstanding principal balance of $23,474 as
of March 31, 2020.
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. 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
additional $70,070 representing the default principal and accrued
interest which increased the principal amount due to the new
noteholder has been recognized as financing cost. 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 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.
Additionally, in
connection with the debenture the Company also issued 3,000,000
shares of common stock of the Company as a commitment fee. The fair
value of the commitment shares was calculated as $34,500, based on
the market value of the shares of common stock at the closing date
of $0.012, and was recognized as part of the debt discount. The
shares are to be returned to the Treasury of the Company in the
event the debenture is fully repaid prior to the date which is 180
days following the issue date but are not required to be returned
if there is an event of default.
The
Company estimated the aggregate fair value of the conversion
feature derivatives embedded in the debenture at issuance at
$189,000, based on weighted probabilities of assumptions used in
the Black Scholes pricing model. The key valuation assumptions used
consist, in part, of the price of the Company’s common stock
of $0.01 at issuance date; a risk-free interest rate of 2.33% and
expected volatility of the Company’s common stock, of
224.70%, and the various estimated reset exercise prices weighted
by probability. This resulted in the calculated fair value of the
debt discount being greater than the face amount of the debt, and
the excess amount of $121,000 was immediately expensed as financing
costs.
On
December 13, 2018 the holder converted $11,200 of principal into
4,000,000 shares of common stock of the Company. As a result of the
conversion the derivative liability related to the first debenture
was remeasured immediately prior to the conversion with an overall
increase in the fair value of $26,000 recognized, with the fair
value of the derivative liability related to the converted portion,
of $20,000 being reclassified to equity. The key valuation
assumptions used consist, in part, of the price of the
Company’s common stock on the date of conversion, of $0.02; a
risk-free interest rate of 2.43% and expected volatility of the
Company’s common stock of 448.43% , and the various estimated
reset exercise prices weighted by probability. There were no
further conversions during the year ended March 31, 2020 with a
remaining outstanding principal balance of $171,620 as of March 31,
2020.
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%. In addition to standard events of
default, an event of default occurs if the common stock of the
Company shall lose the “bid” price for its Common
Stock, on trading markets, including the OTCBB, OTCQB or an
equivalent replacement exchange. If the Company enters into a
3(a)(9) or 3(a)(10) issuance of shares there are liquidation
damages of 25% of principal, not to be below $15,000. The Company
must also obtain the noteholder's written consent before issuing
any new debt. The note is convertible at a fixed conversion price
of $0.01. If an event of default occurs, the fixed conversion price
is extinguished and replaced by a variable conversion rate that is
70% of the lowest trading prices during the 20 days prior to
conversion. The fixed conversion price shall reset upon any future
dilutive issuance of shares, options or convertible securities. The
conversion feature at issuance meets the definition of conventional
convertible debt and therefore qualifies for the scope exception in
Accounting Standards Codification (“ASC”)
815-10-15-74(a) and would not be bifurcated and accounted for
separately as a derivative liability. The Company analyzed the
conversion feature under ASC 470-20, “Debt with conversion
and other options”, and based on the market price of the
common stock of the Company on the date of funding as compared to
the conversion price, determined there was a $136,799 beneficial
conversion feature to recognize, which will be amortized over the
term of the note using the effective interest method. The amortization expense recognized
during the year ended March 31, 2020 amounted to approximately
$91,000. The amortization expense recognized during the year
ended March 31, 2019 amounted to
approximately $46,000.
On June
27, 2019 the holder converted $18,410 of principal and $15,590 of
interest 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 $137,000 of principal and $3,000 of interest
into 14,000,000 shares of common stock of the Company. The note was
fully converted on two occasions during October 2019, into
8,420,477 shares of common stock of the Company.
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.
During the first 180 days the convertible redeemable note is in
effect, the Company may redeem the note at a prepayment percentage
of 120% to 130% of the outstanding principal and accrued interest
based on the redemption date’s passage of time ranging from
60 days to 180 days from the date of issuance of the debenture. Per
the agreement, the Company is required at all times to have
authorized and reserved three times the number of shares that is
actually issuable upon full conversion of the note. In the event of
default, as set forth in the agreement, the outstanding principal
balance increases to 150%. In addition to standard events of
default, an event of default occurs if the common stock of the
Company shall lose the “bid” price for its Common
Stock, on trading markets, including the OTCBB, OTCQB or an
equivalent replacement exchange. If the Company enters into a
3(a)(9) or 3(a)(10) issuance of shares there are liquidation
damages of 25% of principal, not to be below $15,000. The Company
must also obtain the noteholder’s written consent before
issuing any new debt. The note is convertible at a fixed conversion
price of $0.01. If an event of default occurs, the fixed conversion
price is extinguished and replaced by a variable conversion rate
that is 70% of the lowest trading prices during the 20 days prior
to conversion. The fixed conversion price shall reset upon any
future dilutive issuance of shares, options or convertible
securities. The conversion feature at issuance meets the definition
of conventional convertible debt and therefore qualifies for the
scope exception in Accounting Standards Codification
(“ASC”) 815-10-15-74(a) and would not be bifurcated and
accounted for separately as a derivative liability. The Company
analyzed the conversion feature under ASC 470-20, “Debt with
conversion and other options”, and based on the market price
of the common stock of the Company on the date of funding as
compared to the conversion price, determined there was a $88,342
beneficial conversion feature to recognize, which will be amortized
over the term of the note using the effective interest method. The
amortization expense recognized during the year ended March 31,
2020 amounted to approximately $59,000. The amortization expense
recognized during the year ended March 31, 2019 amounted to
approximately $29,000. On January 6, 2020 the holder converted the
entire principal balance of $135,910, plus accrued interest of
$13,893 into 14,980,353 shares of the common stock of the
Company.
January 16, 2019 Debenture
On
January 16, 2019, the Company entered into an 10% convertible
promissory note for $205,436, with an OID of $18,686, for a
purchase price of $186,750, which matures on October 16, 2019.
During the first 180 days the convertible redeemable note is in
effect, the Company may redeem the note at a prepayment percentage
of 120% to 130% of the outstanding principal and accrued interest
based on the redemption date’s passage of time ranging from
60 days to 180 days from the date of issuance of the debenture. Per
the agreement, the Company is required at all times to have
authorized and reserved three times the number of shares that is
actually issuable upon full conversion of the note. In the event of
default, as set forth in the agreement, the outstanding principal
balance increases to 150%. In addition to standard events of
default, an event of default occurs if the common stock of the
Company shall lose the "bid" price for its Common Stock, on trading
markets, including the OTCBB, OTCQB or an equivalent replacement
exchange. If the Company enters into a 3(a)(9) or 3(a)(10) issuance
of shares there are liquidation damages of 25% of principal, not to
be below $15,000. The Company must also obtain the noteholder's
written consent before issuing any new debt. The note is
convertible at a fixed conversion price of $0.01. If an event of
default occurs, the fixed conversion price is extinguished and
replaced by a variable conversion rate that is 70% of the lowest
trading prices during the 20 days prior to conversion. The fixed
conversion price shall reset upon any future dilutive issuance of
shares, options or convertible securities. The conversion feature
at issuance meets the definition of conventional convertible debt
and therefore qualifies for the scope exception in Accounting
Standards Codification (“ASC”) 815-10-15-74(a) and
would not be bifurcated and accounted for separately as a
derivative liability. The Company analyzed the conversion feature
under ASC 470-20, “Debt with conversion and other
options”, and based on the market price of the common stock
of the Company on the date of funding as compared to the conversion
price, determined there was a $176,675 beneficial conversion
feature to recognize, which will be amortized over the term of the
note using the effective interest method. The amortization expense
recognized during the year ended March 31, 2020 amounted to approximately
$128,000. The amortization expense recognized during the
year ended March 31, 2019 amounted to
approximately $49,000.
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 March 11, 2020, the holder
converted the remaining $103,775 of principal and $2,681 of accrued
interest into 10,645,636 of shares of the 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,
after amortization expense in fiscal year 2020 of $28,500, related
to the redeemed balance of $38,000 was immediately expensed,
resulting in a total of $65,500. The amortization expense
recognized during the year ended March 31, 2019 amounted to
approximately $19,000.
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.
During the first 180 days the convertible redeemable note is in
effect, the Company may redeem the note at a prepayment percentage
of 100% to 130% of the outstanding principal and accrued interest
based on the redemption date’s passage of time ranging from
60 days to 180 days from the date of issuance of the debenture. Per
the agreement, the Company is required at all times to have
authorized and reserved three times the number of shares that is
actually issuable upon full conversion of the note. In the event of
default, as set forth in the agreement, the outstanding principal
balance increases to 150%. In addition to standard events of
default, an event of default occurs if the common stock of the
Company shall lose the "bid" price for its Common Stock, on trading
markets, including the OTCBB, OTCQB or an equivalent replacement
exchange. If the Company enters into a 3(a)(9) or 3(a)(10) issuance
of shares there are liquidation damages of 25% of principal, not to
be below $15,000. The Company must also obtain the noteholder's
written consent before issuing any new debt. The note is
convertible at a fixed conversion price of $0.25. If an event of
default occurs, the fixed conversion price is extinguished and
replaced by a variable conversion rate that is 70% of the lowest
trading prices during the 20 days prior to conversion. The fixed
conversion price shall reset upon any future dilutive issuance of
shares, options or convertible securities. The conversion feature
at issuance meets the definition of conventional convertible debt
and therefore qualifies for the scope exception in ASC
815-10-15-74(a) and would not be bifurcated and accounted for
separately as a derivative liability. The Company analyzed the
conversion feature under ASC 470-20, “Debt with conversion
and other options”, and based on the market price of the
common stock of the Company on the date of funding as compared to
the conversion price, determined there was a $134,000 beneficial
conversion feature to recognize, which will be amortized over the
term of the note using the effective interest method. The amortization expense recognized
during the year ended March 31, 2020 amounted to approximately
$100,000. The amortization expense recognized during the
year ended March 31, 2019 amounted to approximately
$34,000.
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 year ended March 31,
2020 amounted to approximately $59,000.
The
derivative liability arising from all of the above discussed
debentures was revalued at March 31, 2020, resulting in an increase
of the fair value of the derivative liability of $27,000 for the
year ended March 31, 2020. The key valuation assumptions used
consist, in part, of the price of the Company’s common stock
of $0.04; a risk-free interest rate of 0.11%, and expected
volatility of the Company’s common stock of 229.10%, and the
various estimated reset exercise prices weighted by probability.
The derivative liability arising from all of the above discussed
debentures was revalued at March 31, 2019, resulting in an increase
of the fair value of the derivative liability of $1,319,500,
including upon conversions, for the year ended March 31, 2019. The
key valuation assumptions used consist, in part, of the price of
the Company’s common stock of $0.06; a risk-free interest
rate ranging from 1.73% to 2.09%, and expected volatility of the
Company’s common stock ranging from 272.06% to 375.93%, and
the various estimated reset exercise prices weighted by
probability.
The
warrant liability relating to all of the warrant issuances
discussed above was revalued at March 31, 2020, resulting in an
decrease to the fair value of the warrant liability of $3,000 for
the year ended March 31, 2020. The key valuation assumptions used
consists, in part, of the price of the Company’s common stock
of $0.04; a risk-free interest rate of 0.23%, and expected
volatility of the Company’s common stock of 261.85%. The
warrant liability relating to all of the warrant issuances
discussed above was revalued at March 31, 2019, resulting in an
increase to the fair value of the warrant liability of $47,000 for
the year ended March 31, 2019. The key valuation assumptions used
consists, in part, of the price of the Company’s common stock
of $0.21; a risk-free interest rate of 2.21%, and expected
volatility of the Company’s common stock of
285.32%
NOTE 7 – STOCKHOLDERS’ DEFICIT
Preferred Stock
As of
March 31, 2019 and 2018, the Company had 200,000,000 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, and 5,000 shares Series B preferred stock are
authorized and 2,250 outstanding, respectively.
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
(“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 include 10% cumulative dividends, payable quarterly. Upon the
dissolution, liquidation or winding up of the Company, the holders
of Series B PS shall be entitled to receive out of the assets of
the Company an amount equal to the stated value, plus any accrued
and unpaid dividends and any other fees or liquidated damages then
due and owing for each share of Series B PS before any payment or
distribution shall be made to the holders of any Junior securities.
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 (“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. During the year
ended March 31, 2020, the Company issued 2,250 Series B Preferred
Shares in various tranches of the SPA, totaling $2,250,000. The
intrinsic value of the beneficial conversion option on several of
the tranches was calculated at a total of $475,000, which was fully
amortized upon issuance, as the Series B PS is immediately
convertible into common stock.
Series A Preferred Shares
On
August 15, 2018, the Company authorized 5,000,000 of their
Preferred Stock to be designated as Series A Convertible Preferred
Stock (“Series A PS”), with a par value of $0.0001. The
Series A PS shall have 60 to 1 voting rights such that each share
shall vote as to 60 shares of common stock. The Series A PS holders
shall not be entitled to receive dividends, if and when declared by
the Board. Upon the dissolution, liquidation or winding up of the
Company, the holders of Series A PS shall be entitled to receive
out of the assets of the Company the sum of $0.00l per share before
any payment or distribution shall be made on the common stock, or
any other class of capital stock of the Company ranking junior to
the Series A PS. The Series A PS is convertible, after two years
from the date of issuance, with the consent of a majority of the
Series A PS holders, into the same number of shares of common stock
of the Company as are outstanding at the time.
On
August 21, 2018, the NaturalShrimp Holdings,
Inc.(“NSH”) shareholders exchanged 75,000,000 of the
shares of common stock of the Company which they held, into
5,000,000 newly issued Series A PS. The shares of common stock were
returned to the treasury and cancelled. The Series A PS do not have
any redemption feature and are therefore classified in permanent
equity. The conversion feature was evaluated, and as at the
commitment date the fair value of the shares of common stock
exchanged was greater than the fair value of the shares into which
they would be converted, it was determined there was no beneficial
aspect to the conversion feature.
Common Stock
On
September 20, 2018, the Company increased their authorized common
shares to 900,000,000.
For
shares of common stock issued upon conversion of outstanding
convertible debentures see Note 5.
On
April 12, 2018, the Company sold 220,000 shares of its common stock
at $0.077 per share, for a total financing of $15,400.
On
February 14, 2019, the Company issued 225,000 shares of its common
stock to the original noteholder of the March 20, 2018 convertible
debenture. The fair value of the shares of $72,450 based on the
market price of $0.32 on the date of issuance, have been recognized
as a financing cost.
The
Company issued 6,719,925 shares of their common stock on July 17,
2018, upon cashless exercise of the warrants granted in connection
with a convertible debenture entered into in July of 2017, and on
August 28, 2018, 4,494,347 shares were issued upon cashless
exercise of the warrants granted in connection with the second
closing of the same convertible debenture.
The
Company issued 10,000,000 and 6,093,683 shares of their common
stock on January 11, 2019 and February 8, 2019, respectively, upon
cashless exercise of the warrants granted in connection with a
convertible debenture entered into in September of 2017 Debenture
(Note 8).
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 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.
During
the year ended March 31, 2020, the Company put to GHS for the
issuance of 14,744,646 shares of common stock for a total of
$1,774,000, at prices ranging from $0.15 to $0.09. During the year
ended March 31, 2019, the Company put to GHS for the issuance of
22,131,893 shares of common stock for a total of $464,516, at
prices ranging from $0.14 to $0.0046.
NOTE 8 – 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 March 31, 2020 and March 31,
2019, there are 2,917,000 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 March 31, 2020 and March 31, 2019
resulting in a $3,000 increase and $47,000 decrease to the fair
value of the warrant liability, respectively, for the years ended
March 31, 2020 and 2019. The warrants were cancelled in connection
with the legal settlement in April of 2020 (see Note
13).
The
Company issued 10,000,000 and 6,093,683 shares of their common
stock on January 11, 2019 and February 8, 2019, respectively, upon
cashless exercise of the warrants granted in connection with the
September 11, 2017 Debenture. The Company issued approximately
13,078,000 additional shares upon the cashless exercise, and as
such, based on the fair value of the common shares of the Company,
recognized a loss on exercise of approximately
$3,745,000.
NOTE 9 – RELATED PARTY TRANSACTIONS
Accrued Payroll – Related Parties
Included in other
accrued expenses on the accompanying consolidated balance sheet as
of March 31, 2020 and 2019 is approximately $176,000 and $217,000
owing to the former Chief Executive Officer of the Company,
approximately $84,000 and $69,000 owing to the President and
current Chief Executive Officer of the Company, and approximately
$166,000 and $96,000 (which includes $50,000 in both fiscal years,
from consulting services prior to his employment) owing to the
Chief Operating Officer, respectively. These amounts include both
accrued payroll and accrued allowances and expenses.
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.
During
the year ending March 31, 2019, the Company had paid $52,400 on
this note, with $87,600 remaining outstanding as of March 31, 2019.
During the year ending March 31, 2020, on three separate dates, the
Company paid the remaining balance in full.
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 March 31, 2020 and
March 31, 2019 the outstanding balance is approximately $735,000.
At March 31, 2020 and March 31, 2019, accrued interest payable was
$21,570 and $36,174, respectively.
Shareholder Notes
The
Company has entered into several working capital notes payable to
multiple shareholders of NSH and Bill Williams, an officer, a
director, and a shareholder of the Company, for a total of
$486,500. The notes are unsecured and bear interest at 8%. These
notes have no set monthly payment or maturity date. The balance of
these notes at both March 31, 2020 and March 31, 2019 was $426,404,
and is classified as a current liability on the consolidated
balance sheets. At March 31, 2020 and March 31, 2019, accrued
interest payable was $275,054 and $266,616,
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 was in
default. The note is unsecured. On January 22, 2020, the Company
paid the note payable in full.
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 March 31,
2020 and March 31, 2019 was $54,647 and is classified as a current
liability on the consolidated balance sheets.
NOTE 10 – FEDERAL INCOME TAX
The
Company accounts for income taxes under ASC 740-10, which provides
for an asset and liability approach of accounting for income taxes.
Under this approach, deferred tax assets and liabilities are
recognized based on anticipated future tax consequences, using
currently enacted tax laws, attributed to temporary differences
between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts calculated for income
tax purposes.
The
components of income tax expense for the years ended March 31, 2020
and 2019 consist of the following:
|
|
|
|
|
Federal Tax
statutory rate
|
21.00%
|
21.00%
|
|
Permanent
differences
|
3.52%
|
10.23%
|
|
Valuation
allowance
|
(24.52)%
|
(31.23)%
|
|
Effective
rate
|
0.00%
|
0.00%
|
Significant
components of the Company’s deferred tax assets as of March
31, 2020 and 2019 are summarized below.
|
|
|
|
|
Deferred tax
assets:
|
|
|
|
Net operating loss
carryforwards
|
$1,970,000
|
$1,126,000
|
|
Deferred tax
benefit
|
5,000
|
287,000
|
|
Total deferred tax
asset
|
1,975,000
|
1,413,000
|
|
Valuation
allowance
|
(1,975,000)
|
(1,413,000))
|
|
|
$-
|
$-
|
As of
March 31, 2020, the Company had approximately $9,377,000 of federal
net operating loss carry forwards. These carry forwards are allowed
to be carried forward indefinitely and are to be limited to 80% of
the taxable income. Future utilization of the net operating loss
carry forwards is subject to certain limitations under Section 382
of the Internal Revenue Code. The Company believes that the
issuance of its common stock in exchange for Multiplayer Online
Dragon, Inc. January 30, 2015 resulted in an “ownership
change” under the rules and regulations of Section 382.
Accordingly, the Company’s ability to utilize their net
operating losses generated prior to this date is limited to
approximately $282,000 annually.
To the
extent that the tax deduction is included in a net operating loss
carry forward and is in excess of amounts recognized for book
purposes, no benefit will be recognized until the loss carry
forward is recognized. Upon utilization and realization of the
carry forward, the corresponding change in the deferred asset and
valuation allowance will be recorded as additional paid-in
capital.
The
Company provides for a valuation allowance when it is more likely
than not that it will not realize a portion of the deferred tax
assets. The Company has established a valuation allowance against
the net deferred tax asset due to the uncertainty that enough
taxable income will be generated in those taxing jurisdictions to
utilize the assets. Therefore, we have not reflected any benefit of
such deferred tax assets in the accompanying financial statements.
Our net deferred tax asset and valuation allowance increased by
$562,000 in the year ended March 31, 2020.
The
Company reviewed all income tax positions taken or that they expect
to be taken for all open years and determined that the income tax
positions are appropriately stated and supported for all open
years. The Company is subject to U.S. federal income tax
examinations by tax authorities for years after 2012 due to
unexpired net operating loss carryforwards originating in and
subsequent to that year. The Company may be subject to income tax
examinations for the various taxing authorities which vary by
jurisdiction.
NOTE 11 – 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. As of March 31, 2020, the lease
is on hold while the Company waits for new equipment to be
delivered and installed. As the lease is on hold there has been no
lease expense or amortization of the Right of Use asset for the
year ended March 31, 2020.
NOTE 12 – 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, the late Mr. Bill Williams resigned from his
position as Chairman of the Board and Chief Executive Officer of
the Company, effective August 31, 2019. The separation agreement
calls for the continued payment of salary, at $8,000 semi-monthly,
until his accrued compensation in the amount of approximately
$217,000 is paid off, as well as his monthly rent, medical and
automobile payments to continue to be paid and deducted against the
accrued compensation and debt. After the accrued compensation is
fully paid, the payments shall be $10,000 per month against the
remaining debt balance, which is $223,000 as of date of settlement,
until such balance is paid in full.
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 alleged that the Company failed
to issue certain shares of the Company’s Common Stock as was
required under the terms of the Warrant. Vista sought money damages
in the approximate amount of $7,000,000, as well as costs and
reimbursement of expenses.
On
April 9, 2020, the Company, Vista and David Clark
(“Clark’), a principal of Vista, (the
“Parties”) entered into a Settlement Agreement and
Release (the “Settlement Agreement”) whereby the
Company shall (i) pay to Vista the sum of $75,000, which the
Company wired on April 10, 2020, and (ii) issue to Vista 17,500,000
shares of the Company’s Common Stock (the “Settlement
Shares”). For a period of time equal to 90-days from the date
of the settlement, or July 8, 2020, the Company shall have the
right, but not the obligation, to purchase back from Vista
8,750,000 of the Settlement Shares at a price equal to the greater
of (i) the volume weighted-average trading price of the
Company’s common shares over the five preceding trading days
prior to the date of the delivery of the Company’s written
notice of such repurchase or (ii) $0.02 per share. The Vista
warrants outstanding were also cancelled as part of the Settlement
Agreement. The $75,000, as well as the fair market value of the
17,500,000 common shares, which is $560,000 based on the market
value of the Company’s common stock on the settlement date of
$0.32, has been accrued in Accrued expenses on the accompanying
Balance Sheet and recognized as Loss on Warrant settlement on the
accompanying Statement of Operations, as of March 31,
2020.
NOTE 13 – SUBSEQUENT EVENTS
Subsequent to year
end, the Company has converted approximately $226,000 of their
outstanding convertible debt as of March 31, 2020, into 37,926,000
shares of the Company’s common stock.
Subsequent to year end, the Company issued
1,000 Series B Preferred Shares in various tranches of the SPA,
totaling $1,000,000.
Subsequent to year
end, the Company has converted approximately 750 Series B PS plus
50 Series B PS dividends into 33,570,000 shares of the
Company’s common stock, of which approximately 5,059,000
shares have not yet been issued as of the date of this
filing.
On April 10, 2020, the Company obtained a Paycheck
Protection Program (“PPP”) loan in the amount of
$103,200 pursuant to the Coronavirus Aid, Relief, and Economic
Security Act (the “CARES Act”). Interest on the loan is
at the rate of 1% per year, and all loan payments are deferred for
six months, at which time the balance is payable in 18 monthly
installments if not forgiven in accordance with the CARES Act and
the terms of the promissory note executed by the Company in
connection with the loan. The promissory note
contains events of default and other provisions customary for a
loan of this type. As required,
the Company intends to use the PPP loan proceeds for payroll,
healthcare benefits, and utilities. The program provides
that the use of PPP Loan amount shall be limited to certain
qualifying expenses and may be partially or wholly forgiven in
accordance with the requirements set forth in the CARES
Act
The
complaint with Vista Capital Investments, LLC was settled
subsequent to the year end, on April 9, 2020. See discussion above
in Note 12. On May 18, 2020, the Company received $50,000 as
consideration for waiving the purchase option on the Settlement
Shares, thereby allowing Vista Capital Investments, LLC to retain
all of the Settlement Shares.