Cautionary Notice Regarding Forward Looking Statements
The information contained in Item 7 contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Actual results
may materially differ from those projected in the forward-looking statements as
a result of certain risks and uncertainties set forth in this report. Although
management believes that the assumptions made and expectations reflected in the
forward-looking statements are reasonable, there is no assurance that the
underlying assumptions will, in fact, prove to be correct or that actual results
will not be different from expectations expressed in this report.
We desire to take advantage of the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995. This filing contains a number of
forward-looking statements that reflect management's current views and
expectations with respect to our business, strategies, products, future results
and events, and financial performance. All statements made in this filing other
than statements of historical fact, including statements addressing operating
performance, clinical developments which management expects or anticipates will
or may occur in the future, including statements related to our technology,
market expectations, future revenues, financing alternatives, statements
expressing general optimism about future operating results, and non-historical
information, are forward looking statements. In particular, the words "believe,"
"expect," "intend," "anticipate," "estimate," "may," variations of such words,
and similar expressions identify forward-looking statements, but are not the
exclusive means of identifying such statements, and their absence does not mean
that the statement is not forward-looking. These forward-looking statements are
subject to certain risks and uncertainties, including those discussed below. Our
actual results, performance or achievements could differ materially from
historical results as well as those expressed in, anticipated, or implied by
these forward-looking statements. We do not undertake any obligation to revise
these forward-looking statements to reflect any future events or circumstances.
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Readers should not place undue reliance on these forward-looking statements,
which are based on management's current expectations and projections about
future events, are not guarantees of future performance, are subject to risks,
uncertainties and assumptions (including those described below), and apply only
as of the date of this filing. Our actual results, performance or achievements
could differ materially from the results expressed in, or implied by, these
forward-looking statements. Factors which could cause or contribute to such
differences include, but are not limited to, the risks to be discussed in this
Annual Report on Form 10-K and in the press releases and other communications to
shareholders issued by us from time to time which attempt to advise interested
parties of the risks and factors which may affect our business. We undertake no
obligation to publicly update or revise any forward-looking statements, whether
as a result of new information, future events, or otherwise. For additional
information regarding forward-looking statements, see "Forward-Looking
Statements" at the beginning of this report and our Risk Factors under Item 1A
of this report.
Use of Generally Accepted Accounting Principles ("GAAP") Financial Measures
We use United States GAAP financial measures in the section of this report
captioned "Management's Discussion and Analysis or Plan of Operation" (MD&A),
unless otherwise noted. All of the GAAP financial measures used by us in this
report relate to the inclusion of financial information. This discussion and
analysis should be read in conjunction with our financial statements and the
notes thereto included elsewhere in this annual report. All references to dollar
amounts in this section are in United States dollars, unless expressly stated
otherwise.
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. We
changed our name to "NaturalShrimp Incorporated" in 2015.
Business Overview
We are a biotechnology company and have developed proprietary platform
technologies that allow 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. The Company's production facilities are located in La Coste, Texas
and Webster City, Iowa.
On October 16, 2015, we formed NAS. The purpose of NAS is to formalize the
business relationship between our Company and F&T Water Solutions LLC ("F&T")
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.
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On December 15, 2020, we entered into an Asset Purchase Agreement ("APA")
between VeroBlue Farms USA, Inc., a Nevada corporation ("VBF"), VBF Transport,
Inc., a Delaware corporation ("Transport"), and Iowa's First, Inc., an Iowa
corporation ("Iowa's First") (each a "Seller" and collectively, "Sellers").
Transport and Iowa's First were wholly-owned subsidiaries of VBF. The agreement
called for us to purchase all of the tangible assets of VBF, the motor vehicles
of Transport and the real property (together with all plants, buildings,
structures, fixtures, fittings, systems, and other improvements located on such
real property) of Iowa's First. The consideration was $10,000,000, consisting of
$5,000,000 in cash, paid at closing on December 17, 2020, (ii) $3,000,000
payable in 36 months with interest thereon at the rate of 5% per annuum,
interest only payable quarterly on the first day of the quarter, with the
remaining balance to be paid to VBF as a balloon payment on the maturity date,
and (iii) $2,000,000 payable in 48 months with interest thereon at the rate of
5% per annuum, interest only payable quarterly on the first day of the quarter,
with the remaining balance to be paid to VBF as a balloon payment on the
maturity date. The Company also agreed to issue 500,000 shares of Common Stock
as a finder's fee.
The facility was originally designed as an aquaculture facility, with the
company having production issues. The Company's has begun a modification process
to convert the plant to produce shrimp, which will allow them to scale faster
without having to build new facilities. The three Iowa facilities contain the
tanks and infrastructure that will be used to support the production of shrimp
with the incorporation of the Company's Electrocoagulation (EC) platform
technology.
On May 19, 2021, the Company entered into a Patents Purchase Agreement (the
"Patents Agreement") with F&T. The Company and F&T had previously jointly
developed and patented a water treatment technology used or useful in growing
aquatic species in re-circulating and enclosed environments (the "Patent") with
each party owning a fifty percent (50%) interest. Upon the closing of the
Patents Agreement, the Company would purchase F&T's interest in the Patent,
F&T's 100% interest in a second patent associated with the first Patent issued
to F&T in March 2018, and all other intellectual property rights owned by F&T
for a purchase price of $2,000,000 in cash and issue 9,900,990 shares of the
Company's common stock with a market value of $0.505 per share for a total fair
value of $5,000,000, for a total acquisition price of $7,000,000. The Company
paid the cash purchase price on May 20, 2021 and the closing of the Patents
Agreement took place on May 25, 2021.
On August 25, 2021, the Company, through its 100% owned subsidiary NAS, entered
into an Equipment Rights Agreements with Hydrenesis-Delta Systems, LLC
("Hydrenesis-Delta") and a Technology Rights Agreement, in a sub-license
agreement with Hydrenesis Aquaculture LLC ("Hydrenesis-Aqua"), The Equipment
Rights involve specialized and proprietary equipment used to produce and
control, dose, and infuse Hydrogas® and RLS® into both water and other chemical
species, while the Technology sublicense pertains to the rights to Hydrogas® and
RLS®. Both Rights agreements are for a 10 year term, which shall automatically
renew for ten year successive terms. The term can be terminated by written
notice by mutual consent, or by either party upon a breach of contract,
insolvency or filing of bankruptcy. The agreements accord the exclusive rights
to purchase or distribute the technology, or buy or rent the equipment, in the
Industry Sector, which is the primary business and revenue stream generated from
indoor aquaculture farming of any species in the Territory, defined as anywhere
in the world except for the countries in the Gulf Corporation Council.
The Company has three wholly-owned subsidiaries: NSC, NS Global, and NAS.
Evolution of Technology
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 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.
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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 nursery tank where the shrimp are acclimated,
then moved to a larger grow-out tank for the rest of the twenty-week cycle.
During 2016, we engaged in additional engineering projects with third parties to
further enhance our indoor production capabilities. For example, through our
relationship with Trane, Inc., a division of Ingersoll-Rand Plc ("Trane"), Trane
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 working with F&T Water Solutions contracted
RGA Labs, Inc. ("RGA Labs") to build the initial NaturalShrimp patented
Electrocoagulation system for the grow-out, harvesting and processing of fully
mature, antibiotic-free Pacific White Leg shrimp. The design provided a viable
pathway to begin generating revenue and producing shrimp on a commercially
viable scale. The equipment was installed in early June 2018 by RGA Labs, and
final financing for the system was provided by one of the Company's
institutional 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. On August 30, 2019, the
Company received notice that it was in compliance again and the quarantine had
been lifted and the Company began restocking shrimp in the refurbished facility
sections. During the aforementioned quarantine, the Company decided to begin an
approximately $2,000,000 facility renovation demolishing the interior 16 wood
structure lined tanks (720,000 gallons). The Company began 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.
On March 18, 2020, our research and development plant in La Coste, Texas was
destroyed by a fire. The Company believed that it was caused by a natural gas
leak, but the fire was so extensive that the cause was undetermined. No one was
injured as a result of the fire. The majority of the damage was to our pilot
production plant, which comprised approximately 35,000 square feet of the total
size of all facilities at the La Coste location of approximately 53,000 square
feet, but the fire did not impact the separate greenhouse, reservoirs, or
utility buildings. We received total insurance proceeds in the amount of
$917,210, the full amount of our claim. These funds were utilized to rebuild a
40,000 square foot production facility at the La Coste facility and to
repurchase the equipment needed to replace what was lost in the fire. As of the
date of this report, this facility is production-ready and, while we have
experienced supply chain issues due to COVID-19, we expect the combined output
from the La Coste, Texas, and Webster City, Iowa should result in a total of
25,000 pounds of shrimp production for the calendar quarter that will end on
June 30, 2022. Also, the Company is expecting to break ground on an 80,000
square foot expansion in La Coste during the third quarter 2022.
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Recent Material Events
Securities Purchase Agreement - Secured Promissory Note
We entered into a securities purchase agreement (the "SPA") with an investor
(the "Investor") on December 15, 2021. Pursuant to the SPA, the Investor
purchased a secured promissory note (the "Note") in the aggregate principal
amount totaling approximately $16,320,000 (the "Principal Amount"). The Note
carried an original issue discount totaling $1,300,000 and a transaction expense
amount of $20,000, both of which are included in the principal balance of the
Note. The total purchase price of the Note was $15,000,000. The Note has an
interest rate of 12% per annum. The maturity date of the Note is twenty-four
(24) months from the issuance date of the Note (the "Maturity Date"). We also
issued 3,000,000 warrants to Joseph Gunnar & Co., LLC (the placement agent) as
placement agent fees.
We used the proceeds from the Note, in part, to repay the amounts currently
owing to VeroBlue Farms USA, Inc. On December 23, 2021, the Company fully repaid
the Notes with a payment of $4,556,164, of which $56,164 was interest. This
included a $500,000 prepayment discount.
Beginning on the date that is six (6) months from the issuance date of the Note,
the Investor has the right to redeem up to $1,000,000 of the outstanding balance
per month. Payments may be made by the Company, at the Company's option, (a) in
cash, or (b) by paying the redemption amount in the form of shares of the
Company's common stock, par value $0.0001 per share (the "Common Stock"), per
the following formula: the number of redemption shares equals the portion of the
applicable redemption amount divided by the Redemption Repayment Price. The
"Redemption Repayment Price" equals 90% multiplied by the average of the two
lowest volume weighted average price per share of the Common Stock during the
ten (10) trading days immediately preceding the date that the Investor delivers
notice electing to redeem a portion of the Note. The right to pay the redemption
amount in the form of shares of Common Stock is subject to there not being any
Equity Conditions Failure (as defined in the Note). The redemption amount shall
include a premium of 15% of the portion of the outstanding balance being paid.
In addition to the Investor's right of redemption, the Company has the option to
prepay the Notes at any time prior to the Maturity Date by paying a premium of
15% plus the principal, interest, and fees owed as of the prepayment date.
Within 180 days of the issuance date of the Note, we were to obtain an effective
registration statement or a supplement to any existing registration statement or
prospectus with the SEC registering at least $15,000,000 in shares of Common
Stock for the Investor's benefit such that any redemption using shares of Common
Stock could be done using registered Common Stock. Although this 180 day
deadline has passed, the Investor has not issued a notice of default with regard
to the Note, and we expect to negotiate an extension of the time to comply with
this provision.
As soon as reasonably possible following the issuance of the Note, we will cause
our Common Stock to be listed for trading on either of (a) NYSE, or (b) NASDAQ
(in either event, an "Uplist"). In the event the Company has not effectuated the
Uplist by March 1, 2022, the then-current outstanding balance will be increased
by 10%. We will make a one-time payment to the Investor equal to 15% of the
gross proceeds the Company receives from the offering expected to be effected in
connection with the Uplist (whether from the sale of shares of its Common Stock
and / or preferred stock) within ten (10) days of receiving such amount. In the
event Borrower does not make this payment, the then-current outstanding balance
will be increased by 10%.
While the original Uplist deadline was March 1, 2022, the Investor has agreed to
twice extend this deadline. The most recent extension was agreed to on May 18,
2022. In connection with the February 7, 2022 extension, the Company agreed that
a one-time extension fee amount of $249,079 (less than two percent (2%) of the
original Principal Amount) would be added to the outstanding balance of the
Note.
The Uplist deadline was June 15, 2022. To the extent any event of default under
the Note transaction documents had occurred prior to May 18, 2022, the Investor
agreed to waive such event of default. Although June 15, 2022 has passed, the
Investor has not issued a notice of default with regard to the Uplist deadline
and we expect to negotiate an extension of the time to comply with this
provision.
The Note is a secured obligation of the Company, to the extent provided for in
the Security Agreement dated as of the date of the SPA (the "Security
Agreement") entered into by and among the Company and the Investor. The Note
shall be senior in right of payment to all other Indebtedness (as defined in the
Note) of the Company subject to the terms set forth in the Security Agreement.
The Note is a direct obligation of the Company issued in accordance with the
SPA. We granted a first priority security interest in and to all of the assets
of the Company, provided, however, certain real property of the Company was to
secured in favor of the Investor. Pursuant to the terms of the Note, there has
been no increase in the Note's outstanding balance nor has there been a
notification of a Trigger Event.
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Securities Purchase Agreement - Series E Preferred Stock and Warrant
On November 22, 2021, we entered into a securities purchase agreement (the
"Purchase Agreement") with one accredited investor (the "Purchaser"), for the
offering (the "Offering") of (i) one thousand five hundred (1,500) shares of the
Company's Series E Convertible Preferred stock, par value $0.0001 (the "Series E
Preferred Stock") at a price of one thousand dollars ($1,000.00) per share and
(ii) a warrant to purchase up to one million five hundred thousand (1,500,000)
shares of the Company's common stock (the "Warrant"), with an exercise price
equal to $0.75, subject to adjustment therein. Pursuant to the Purchase
Agreement, the Purchaser is purchasing the one thousand five hundred (1,500)
shares of Series E Preferred Stock (the "Purchased Shares") and the Warrant for
an aggregate purchase price of one million five hundred thousand dollars
($1,500,000.00). The Warrant expires on November 22, 2026, the five (5)-year
anniversary of the issue date. The Offering was a private placement with the
Purchaser. The Offering closed on November 23, 2021.
We received approximately one million three hundred fifty thousand dollars
($1,350,000.00) in net proceeds from the Offering before exercise of the Warrant
and after deducting the commission of Joseph Gunnar & Co., LLC (the placement
agent) and other estimated offering expenses payable by the Company. We issued
267,429 warrants as placement agent fees.
The Purchase Agreement contains customary representations, warranties and
agreements by the Company and the other parties thereto, customary conditions to
closing, indemnification obligations of the parties, including for liabilities
under the Securities Act of 1933, as amended (the "Securities Act") and other
obligations of the parties.
Pursuant to the Purchase Agreement, from the date thereof until the date when
the Purchaser no longer holds any of the Purchased Shares or the Warrant (the
"Securities"), upon any issuance by the Company of its securities for cash
consideration (a "Subsequent Financing"), the Purchaser may elect, in its sole
discretion, to exchange (in lieu of conversion), if applicable, all or some of
the Securities then held for any securities or units issued in a Subsequent
Financing on a $1.00-for-$1.00 basis and under the same terms and conditions as
provided for in the Subsequent Financing.
The shares of Series E Preferred Stock have a stated value of $1,200 per share
(the "Series E Stated Value") and are convertible into shares of the Company's
common stock, par value $0.0001 per share (the "Common Stock") at the election
of the holder of the Series E Preferred Stock at any time at a price of $0.35
per share, subject to adjustment (the "Conversion Price"). The Series E
Preferred Stock is convertible into that number of shares of Common Stock
determined by dividing the Series E Stated Value (plus any and all other amounts
which may be owing in connection therewith) by the Conversion Price, subject to
certain beneficial ownership limitations.
We have the right to redeem the Series E Preferred Stock shares by paying, in
cash, a premium rate (with such rate ranging from 1.15 to 1.25) multiplied by
the sum of (a) the Stated Value and (b) all amounts owed pursuant the Series E
Preferred Stock Certificate of Designation (the "Certificate of Designation")
(included any accrued but unpaid dividends). The Company is required to redeem
the Series E Preferred Stock shares on the one year anniversary of the date of
issuance.
In addition, we shall, at the holder's sole option, upon the occurrence of a
Triggering Event and following a five (5) day opportunity to cure following
written notice, to require the Company to redeem all of the Series E Preferred
Stock shares for a redemption price, in cash, equal to the Triggering Redemption
Amount ((a) 150% of the Stated Value and (b) all amounts owed pursuant the
Certificate of Designation (included any accrued but unpaid dividends)). The
Certificate of Designation defines Triggering Events as one of eleven (11) items
including, a failure to deliver conversion shares, a failure to have a
sufficient amount of authorized but unreserved shares available to issue to a
holder upon a conversion, a bankruptcy event, a monetary judgment of over
$500,000, and an event of default as defined in the Certificate of Designation.
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Each holder of Series E Preferred Stock shall be entitled to receive, with
respect to each share of Series E Preferred Stock then outstanding and held by
such holder, dividends at the rate of twelve percent (12%) per annum, payable
quarterly (the "Preferred Dividends").
The holders of Series E Preferred Stock rank senior to the Common Stock and
Common Stock Equivalents (as defined in the Certificate of Designation) with
respect to payment of dividends and rights upon liquidation and will vote
together with the holders of the Common Stock on an as-converted basis, subject
to beneficial ownership limitations, on each matter submitted to a vote of
holders of Common Stock (whether at a meeting of shareholders or by written
consent).
Registration Rights Agreement
On November 22, 2021, in connection with the Purchase Agreement, the Company and
the Purchaser entered into a registration rights agreement (the "Rights
Agreement") pursuant to which we agreed to, within fifteen (15) calendar days of
November 22, 2021, the date of execution of the Rights Agreement, use its best
efforts to file a registration statement or registration statements (as is
necessary) with the SEC on Form S-1 (or, if such a form is unavailable, on such
other form as is available for such registration) covering the resale of the
Securities and the shares of Common Stock underlying the Securities, and
pursuant to which the Company agreed that such registration statement will
state, according to Rule 416 promulgated under the Securities Act, that such
registration statement also covers such indeterminate number of additional
shares of Common Stock as may become issuable upon stock splits, dividends, or
similar transactions.
The Warrant's cashless exercise provision will go into effect if the Company
violates the Rights Agreement.
Waiver
On April 14, 2021, the Company entered into a securities purchase agreement (the
"April SPA") to sell: (a) 9,090,909 shares of Common Stock at a price per share
of $0.55; (b) warrants to purchase up to 10,000,000 shares of Common Stock, at
an exercise price of $0.75 per share (the "April Warrants"); and (c) 1,000,000
shares of Common Stock with a value (although no purchase price will be paid) of
$0.65 per share, with GHS Investments LLC ("GHS"), an accredited investor.
Pursuant to the April SPA, until April 14, 2022, GHS has a right to participate
in any subsequent financing that the Company conducts.
On November 22, 2021, GHS entered into a Waiver (the "Waiver") whereby GHS
agreed to waive its right to participate in the Offering and to participate in a
possible $16.32 million debt financing for which the Company is still
negotiating definitive documentation. There is no guarantee the Company will be
able to secure such debt financing at all or on favorable terms to the Company.
GHS also agreed to waive its right, pursuant to the Certificate of Designation,
to exchange shares of Series E Preferred Stock held by GHS for securities issued
in the debt financing, if the Company enters into such financing.
In consideration for GHS entering into the Waiver, the Company agreed to lower
the exercise price of the April Warrants to $0.35 per share (the Conversion
Price) and to issue warrants to purchase 3,739,000 shares of Common Stock with
an exercise price of $0.75 per share with such warrants being substantially in
the form of the Warrants. The shares of Common Stock underlying the warrant
issued to GHS are being registered in the registration statement of which this
prospectus forms a part.
The foregoing descriptions of the Purchase Agreement, the Warrant, the
Certificate of Designation, the Rights Agreement, and the Waiver are qualified
in their entirety by reference to the full text of such Purchase Agreement,
Warrant, Certificate of Designation, Rights Agreement, and Waiver
The shares of Series E Preferred Stock, the Warrants and the GHS warrant were
not registered for sale under the Securities Act of 1933, as amended (the
"Securities Act"), and may not be offered or sold in the United States absent
registration under the Securities Act or an applicable exemption from the
registration requirements. The issuance and sale of the Securities was made in
reliance upon the exemption provided in Section 4(a)(2) of the Securities Act
and/or Rule 506(b) of Regulation D promulgated thereunder. No form of general
solicitation or general advertising was conducted in connection with the
issuance. The Securities contain (or will contain, where applicable) restrictive
legends preventing the sale, transfer, or other disposition of such securities,
unless registered under the Securities Act, or pursuant to an exemption
therefrom.
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Resolution of Gary Shover Litigation
A shareholder of NaturalShrimp Holdings, Inc. ("NSH"), Gary Shover, filed suit
against the Company on August 11, 2020 in the Northern District of Texas, Dallas
Division, alleging breach of contract for the Company's failure to exchange
common shares of the Company for shares Mr. Shover owns in NSH. On November 15,
2021, a hearing was held before the US District Court for the Northern District
of Texas, Dallas Division at which time Mr. Shover and the Company presented
arguments as to why the Court should approve a joint motion for settlement.
After considering the argument of counsel and taking questions from those NSH
shareholders who were present through video conferencing link, the Court
approved the motion of the parties to allow Mr. Shover and all like and
similarly situated NSH shareholders to exchange each share of NSH held by a NSH
shareholder for a share of the Company. A final Order was signed on December 6,
2021 and the case was closed by an Order of the Court of the same date. The
Company is to issue approximately 93 million shares in settlement, which has
been recognized as stock payable on the Company's balance sheet, and its fair
value of $29,388,000, based on the market value of the Company's common shares
of $0.316 on the date the case was closed, has been recognized in the Company's
statement of operations as legal settlement. As of March 31, 2022, the NSH
shareholders have received 28,454,901 of the common shares of the Company issued
for the settlement. As of the date of this report, 89,296,550 shares of common
stock have been issued to the NSH shareholders.
Designation and Issuance of Series F Preferred Stock
On February 23, 2022, the Secretary of State of the State of Nevada delivered
confirmation of the effective filing by the Company of its Certificate of
Designation of Series F Convertible Preferred Stock (the "Series F
Designation"). The Series F Designation authorized the issuance of up to 750,000
shares of the Company's Series F Convertible Preferred Stock ("Series F
Preferred Stock"), having such designations, rights and preferences as set forth
therein.
The number of shares of Series F Preferred Stock authorized or outstanding shall
not be affected by a subdivision of the Common Stock (by any forward stock
split, stock dividend, recapitalization or otherwise) into a greater number of
shares, or by a combination of the Common Stock (by combination, reverse stock
split or otherwise) into a smaller number of shares.
On March 1, 2022, the Board of the Directors of the Company (the "Board") issued
250,00 shares of Series F Preferred Stock to each of Gerald Easterling, William
Delgado and Thomas Untermeyer in consideration for their past and future
services as executive officers of the Company.
At any time after the three year anniversary of each respective date of the
issuance of any share of Series F Preferred Stock (in each case, the "Issuance
Date"), each individual holder shall have the right, at each individual holder's
sole option, to convert all of the shares of Series F Preferred Stock that such
individual holds into shares of fully paid and nonassessable shares of Common
Stock in an amount equal to 8% (eight percent) of the Company's issued and
outstanding shares of Common Stock as of the close of business on the day the
Notice of Conversion (as defined in the Series F Designation) is sent to the
Company. For the sake of clarity: (i) each individual holder cannot convert a
portion of such holder's shares of Series F Preferred Stock; rather, each
individual holder must convert all of such holder's holdings at the same time;
and (ii) a reverse or forward stock split of the Common Stock will not affect
the conversion rate.
Each individual holder of Series F Preferred Stock may only convert all of their
shares of Series F Preferred Stock in one transaction. If the holder elects to
convert all of its shares of the Series F Preferred Stock, it shall deliver
three (3) days' written notice thereof via email or overnight mail a notice of
conversion (the "Notice of Conversion") to the Company, listing the conversion
date (the "Conversion Date") which Notice of Conversion shall indicate (i) the
holder is electing to convert all of their shares of Series F Preferred Stock,
(ii) the Conversion Date, and (iii) the manner and the place designated for the
surrender of the certificate or certificates representing the shares to be
converted.
33
On any matter presented to the stockholders of the Company for their action or
consideration at any meeting of stockholders of the Company (or by written
consent of stockholders in lieu of meeting), the Series F Designation authorizes
each holder of outstanding shares of Series F Preferred Stock to cast one
thousand (1,000) votes per each share of Series F Preferred Stock held by such
holder as of the record date for determining stockholders entitled to vote on
such matter.
Other than a change in par value or as a result of a stock dividend or
subdivision, forward stock split, reverse stock split, split-up or combination
of shares, at any time after the Issuance Date, in the case of any capital
reorganization, any reclassification of the stock of the Company, or a Change in
Control (as defined in the Series F Designation), the shares of Series F
Preferred Stock shall, at the effective time of such reorganization,
reclassification, or Change in Control, be automatically converted into the kind
and number of shares of stock or other securities or property of the Company or
of the entity resulting from such reorganization, reclassification, or Change in
Control to which such holder would have been entitled if immediately prior to
such reorganization, reclassification, reorganization, reclassification, or
Change in Control it had converted its shares of Series F Preferred Stock into
Common Stock.
The Series F holders will not be entitled to dividends, nor any distribution
rights in the event of any liquidation, dissolution, or winding up of the
Company.
Results of Operations
Comparison of the Year Ended March 31, 2022 to the Year Ended March 31, 2021
Revenue
We have not earned any significant revenues since our inception and, although we
expect revenues to begin in fiscal year 2023, we can provide no assurances as to
how significant they will be at that time.
Expenses
Our expenses for the fiscal year ended March 31, 2022 are summarized as follows,
in comparison to our expenses for the fiscal year ended March 31, 2021:
Years Ended March 31,
2022 2021
Salaries and related expenses $ 2,292,849 $ 499,280
Stock compensation 43,704,900 -
Professional fees 2,044,001 1,121,371
Other general and administrative expenses 2,666,651 836,069
Rent 72,417 15,518
Facility operations 1,097,745 403,029
Research and development 407,874 79,550
Depreciation 1,307,038 346,437
Amortization 881,500 -
Total $ 54,474,975 $ 3,301,254Operating expenses for the fiscal year ended March 31, 2022 were $54,474,975, an
increase of approximately 1,550% as compared to operating expenses for the same
period in 2021. The overall change in expenses is mainly due to the granting of
stock compensation as well as the increase in salary, professional services,
facility operations and other general and administrative expenses, as well as
depreciation, and the amortization of the intangible assets. The Company's
issuance of 250,000 shares of Series F Preferred Stock on March 1, 2022, to each
of the three executive officers of the Company, for a total of 750,000 shares of
Series F Preferred Stock, $43,612,000 was recognized as stock compensation. The
fair value of the stock compensation has been recognized based on the estimated
value of the instruments we would be obligated to provide to the holders upon
their conversion to common shares, which for all three holders of Series F
Preferred Stock would reflect 24% of the fair value of the outstanding common
shares as of the grant date. The increase in professional fees is due to an
increase in legal services related to the Gary Shover legal settlement, the
redemption of the Series D Preferred Stock, the new Series E and F Preferred
Stock and services in connection with the expected listing of our common shares
to Nasdaq, as well as an increase in accounting and consulting fees over the
same period in the previous year. The increase in the other expenses were mostly
based on the progress of the plants as well as the operations to begin the
production of shrimp, including additional employees and maintenance. The
increase in depreciation is due to the increase in fixed assets, including the
acquisition with VeroBlue Farms USA, Inc. during December 2020, for which the
depreciation for the year ending March 31, 2022 is for a full fiscal year. The
new amortization expense is for the patents acquired and the rights agreements
entered into in the current year.
34
Liquidity, Financial Condition and Capital Resources
As of March 31, 2022, we had cash on hand of approximately $1,734,000 and a
working capital deficiency of approximately $17,017,000, as compared to cash on
hand of approximately $156,000 and a working capital deficiency of approximately
$3,614,000 as of March 31, 2021. The increase in the working capital deficiency
for the fiscal year ended March 31, 2022 as compared to 2021 is mainly due to an
approximate $4,018,000 increase in current assets, offset by approximately
$17,421,000 increase in current liabilities, as discussed in further detail
below.
The increase in current assets is based on the increase in cash on hand and the
remaining $1,500,000 held in an escrow account from the proceeds of the
convertible debenture, as well as an approximately $856,000 increase in prepaid
expenses. The change in current liabilities is mainly a result of additions of
the derivative liability of $13,101,000 fair value as of the year end, and the
warrant liability fair value of $3,923,000 as of the end of the year, and,
additionally, the increase in accounts payable and accrued interest.
Working Capital Deficiency
Our working capital deficiency as of March 31, 2022, in comparison to our
working capital deficiency as of March 31, 2021, can be summarized as follows:
March 31, March 31,
2022 2021
Current assets $ 4,829,141 $ 811,134
Current liabilities 21,846,261 4,425,512
Working capital deficiency $ 17,017,120 $ 3,614,378The increase in current assets is due to the remainder of the receipt of the
cash for the December 15, 2021 convertible debenture including the $1,500,000 in
escrow, as well as an approximately $856,000 increase in prepaid expense. The
increase in the prepaid expense is mainly due to approximately $965,000 related
to work being done at the Iowa facilities. The increase in current liabilities
is primarily due to the addition of the derivative related to the new
convertible note, with a fair value of $13,101,000 as of the year end.
Additionally, due to the derivative, the existing warrants were classified as a
liability, with a fair value of $3,923,000 as of the current fiscal year end.
Lastly, there also is an increase of approximately $1,839,000 in accounts
payable and $427,000 in accrued interest mostly related to the new convertible
debenture. The increases in liabilities are offset by the settlement of bank
loans and lines of credit and non-current short term notes and notes payable to
related parties, as well as accrued expenses of approximately $316,000 related
to the Vero Blue acquisition recognized in the gain on Vero Blue debt
settlement.
Cash Flows
Our cash flows for the year ended March 31, 2022, in comparison to our cash
flows for the year ended March 31, 2021, can be summarized as follows:
Years Ended March 31,
2022 2021
Net cash used in operating activities $ (13,393,373 ) $ (2,377,377 )
Net cash used in investing activities (7,614,337 ) (7,537,630 )
Net cash provided by financing activities 22,585,954 9,961,311
Net change in cash
$ 1,734,040 $ 46,304
35
The increase in net cash used in operating activities in the year ended March
31, 2022 compared to the same period in 2021 is attributable mainly due to the
approximately $80,673,000 increase in the net loss being offset by the fair
value of the shares issued for the legal settlement of $29,388,000 and the
Series F Preferred Stock issued to the executive officers for a fair value of
approximately $43,705,000. The offset of the increase in the net loss also
consists of the addition this period of amortization of the new intangible
assets, as well as the approximate $2,616,000 amortization of the debt discount
related to the new convertible debenture. Furthermore, the offset includes the
financing costs related to the transactions in connection with the new
convertible note, which contains approximately $1,373,000 and $249,000,
respectively, for an extension fee. In addition to the offsets, there also was
an increase in accounts payable and prepaid expenses and the change in fair
value of the warrant liability, which occurred in the current year.
The net cash used in investing activities in the year ended March 31, 2022
includes approximately $2,264,000 in cash paid for machinery and equipment and
construction in process to continue to build our facilities. We paid cash of
$2,000,000 towards the patent acquisition with F&T, and $1,000,000 in cash
towards the acquisition of the shares of the non-controlling interest in NAS.
Additionally, there was $2,350,000 in cash paid for the license agreement. In
the same period in 2021, the Company had $5,000,000 in cash paid for the
VeroBlue Farms USA, Inc. asset acquisition, as well as $3,455,000 paid for
machinery and equipment and construction in process to rebuild our La Coste
facility and was offset by the $917,210 of cash proceeds received from the
insurance settlement for the fire to the pilot production plant.
The net cash provided by financing activities increased by approximately
$12,625,000 between years. For the current period, we received approximately
$17,277,000 in net proceeds from the issuance of common shares under an equity
agreement, $13,905,000 in net proceeds from the new convertible debenture, as
well as $1,348,000 from the sale of Series E Redeemable Convertible Preferred
Stock. The Company paid off bank loans and lines of credit for approximately
$768,000, and notes payable and convertible debentures of approximately
$5,673,000 (which included $655,750 to a related party). In the same period in
the prior year, we received $3,250,000 from the sale of Series B Convertible
Preferred Stock, $6,050,000 from the sale of Series D Redeemable Convertible
Preferred Stock, and $600,000 from a new convertible debenture, as well as
$103,200 from a Paycheck Protection Program ("PPP") loan, which was forgiven in
the current fiscal year, and $50,000 connected to the Vista Capital Investments,
LLC warrant settlement.
Our cash position was approximately $1,734,000 as of March 31, 2022. 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 more
fully described below.
Recent Financing Arrangements and Developments During the Period
The Company has a working capital line of credit with Extraco Bank. 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 line of credit bears an interest rate of 5.0%, that
is compounded monthly and to be paid with the principal on the maturity date.
The line of credit matures on April 30, 2021 and is secured by certificates of
deposit and letters of credit owned by directors and shareholders of the
Company. On May 5, 2021, the Company paid off the line of credit.
The Company also has an additional line of credit with Extraco Bank for
$200,000, which was renewed with a maturity date of April 30, 2021, for a
balance of $177,778. The lines of credit bear interest at a rate of 5%, that is
compounded monthly and to be paid with the principal on the maturity date. The
line of credit is secured by certificates of deposit and letters of credit owned
by directors and shareholders of the Company. On April 15, 2021, the line of
credit was paid off in full.
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 29.15% as of March 31, 2021. The line of credit is
unsecured. The balance of the line of credit was $9,580 at March 31, 2022.
36
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 13.25% as of March 31, 2021. The line of credit is secured
by assets of the Company's subsidiaries. The balance of the line of credit is
$10,237 as of March 31, 2022 .
Bank Loan
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"). On April 16, 2021, the Company filed
for the forgiveness of the PPP loan and was approved for forgiveness of such
loan on April 26, 2021.
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 note was paid off in full on December 20, 2021.
On November 3, 2015, the Company entered into a short-term note agreement with
Community National Bank for a total value of $50,000, with a maturity date of
December 15, 2017. 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 note is guaranteed by an officer
and director. The note was paid off in full in July of 2021.
Convertible Debentures
The Company entered into a securities purchase agreement (the "SPA") with an
investor (the "Investor") on December 15, 2021. Pursuant to the SPA, the
Investor purchased a secured promissory note (the "Note") in the aggregate
principal amount totaling approximately $16,320,000 (the "Principal Amount").
The Note has an interest rate of 12% per annum, with a maturity date 24 months
from the issuance date of the Note (the "Maturity Date"). The Note carried an
original issue discount totaling $1,300,000 and a transaction expense amount of
$20,000, both of which are included in the principal balance of the Note. The
Note had $2,035,000 in debt issuance costs, including fees paid in cash of
$1,095,000 and 3,000,000 warrants issued to placement agents with a fair value
of $940.000. The warrants were classified as a liability, as it is not known if
there will be sufficient authorized shares to be issued upon settlement, based
on the conversion terms of the convertible debt. The conversion feature meets
the definition of a derivative and therefore requires bifurcation and will be
accounted for as a derivative liability. The Company estimated the fair value of
the conversion feature derivative embedded in the debenture at issuance at
$12,985,000, based on assumptions used in a bi-nomial option pricing model.
Beginning on the date that is 6 months from the issuance date of the Note, the
Investor has the right to redeem up to $1,000,000 of the outstanding balance per
month. Payments may be made by the Company, at the Company's option, (a) in
cash, or (b) by paying the redemption amount in the form of shares of the
Company's common stock, par value $0.0001 per share (the "Common Stock"), per
the following formula: the number of redemption shares equals the portion of the
applicable redemption amount divided by the Redemption Repayment Price. The
"Redemption Repayment Price" equals 90% multiplied by the average of the two
lowest volume weighted average price per share of the Common Stock during the
ten (10) trading days immediately preceding the date that the Investor delivers
notice electing to redeem a portion of the Note. The redemption amount shall
include a premium of 15% of the portion of the outstanding balance being paid
(the "Exit Fee"). As the Exit Fee is to be included in every settlement of the
Note, an additional 15% of the principal balance, which totals $2,448,000, was
recognized along with the principal balance, and offset by a contra account in a
manner similar to a debt discount. In addition to the Investor's right of
redemption, the Company has the option to prepay the Notes at any time prior to
the Maturity Date by paying a premium of 15% plus the principal, interest, and
fees owed as of the prepayment date.
37
The Note also contains certain negative covenants and Events of Default, which
in addition to common events of default, include a failure to deliver conversion
shares, the Company fails to maintain the share reserve, the occurrence of a
Fundamental Transaction without the Lenders written consent, the Company
effectuates a reverse split of its common stock without 20 trading days written
notice to Lender, fails to observe or perform or breaches any covenant, and, the
Company or any of its subsidiaries, breaches any covenant or other term or
condition contained in any Other Agreements in any material. Upon an Event of a
Default, at its option and sole discretion, the Investor may consider the Note
immediately due and payable. Upon such an Event of Default, the interest rate
increases to 18% per annum and the outstanding balance of the Note increases
from 5% to 15%, depending upon the specific Event of Default.
On February 26, 2021, the Company entered into a convertible note for the
principal amount of $720,000, with an original issue discount of $120,000,
convertible into shares of common stock of the Company. The note bears interest
of 12% and is due six months from the date of issuance. The note is convertible
from the date of issuance, at a fixed conversion rate of $0.36. The conversion
rate shall change to $0.10 upon the event of default. 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 $164,000 beneficial conversion feature to recognize, which will
be amortized over the term of the note using the effective interest method. The
amortization of the beneficial conversion feature was $27,273 and the original
issuance discount was $20,000, for the year ended March 31, 2021. In April 2021
the Company paid off approximately $422,000 of the convertible note. On April
16, 2021, the Company settled the convertible note, consisting of $720,000 in
principal, approximately $13,000 in accrued interest, and approximately $110,000
in redemption fee, for a total of $842,972. The Company paid $421,486 in cash,
and settled the remaining balance through the conversion into the issuance of
1,303,982 common shares.
Notes Payable
On December 15, 2020, in connection with the asset acquisition with VBF (Note
3), the Company entered into two notes payable with a third party. The first
note, Promissory Note A, is for principal of $3,000,000, which is payable in 36
months with interest thereon at the rate of 5% per annum, interest only payable
quarterly on the first day of the quarter, with the remaining balance to be paid
to VBF as a balloon payment on the maturity date. Promissory Note B, is for
principal of $2,000,000, which is payable in 48 months with interest thereon at
the rate of 5% per annum, interest only payable quarterly on the first day of
the quarter, with the remaining balance to be paid to VBF as a balloon payment
on the maturity date. On December 23, 2021, the Company paid off the two notes,
for a discount of $4,500,000, and recognized a gain on settlement of note,
including accrued interest, of $815.943.
On July 15, 2020, the Company issued a promissory note to Ms. Williams in the
amount of $383,604 to settle the amounts that had been recognized per the
separation agreement with the late Mr. Bill Williams dated August 15, 2019 (Note
14) for his portion of the related party notes and related accrued interest
discussed above, and accrued compensation and allowances. The note bears
interest at one percent per annum and calls for monthly payments of $8,000 until
the balance is paid in full. The balance as of March 31, 2022 and 2021 was
$215,604 and $311,604, with $96,000 classified in current liabilities for both
year ends on the consolidated balance sheets.
Sale and Issuance of Common Stock
During the year ended March 31, 2022, the Company issued 35,772,729 shares of
the Company's common stock upon of the sale of common shares and warrants for
net cash proceeds of approximately $17,274,000.
During the year ended March 31, 2022, the Company issued 1,329,246 shares of the
Company's common stock upon conversion of approximately $421,000 of their
outstanding convertible debt and accrued interest.
During the year ended March 31, 2022, the Company has converted 839 shares of
Series B Preferred Stock including dividends-in-kind into 10,068,000 shares of
the Company's common stock.
During the year ended March 31, 2022, the Company has converted 125 shares of
Series D Preferred Stock including dividends-in-kind into 428,572 shares of the
Company's common stock.
38
During the year ended March 31, 2022, the Company issued 12,871,287 shares of
the Company's common stock to Hydrenesis Aquaculture LLC in relation to a
Technical Rights Agreement and 13,861,386 shares of the Company's common stock
to F&T for the acquisition of Patent Rights and the non-controlling interest of
NAS .
Common Shares Issued to Consultants
During the three months ended December 31, 2021, three consultants were issued a
total of approximately 430,000 shares of common stock, with a total fair value
of approximately $158,000, based on the market price of $0.36 on the grant date.
On April 14, 2021, 500,000 shares of common stock were issued to a consultant
per an agreement entered into on January 20, 2021 for advisory services for a
two-year period. The shares had a fair value of $195,000, based on the market
price of $0.39 on the grant date. 62,500 common shares shall vest each quarter
through October 1, 2022, at $24,275, with $121,875 vested through March 31,
2022.
On May 24, 2021, the Company entered into an agreement with a consultant, with a
three-month term, that shall automatically renew each three months unless one
party terminates the agreement. The compensation shall be $12,500 in cash per
month for the first six months and $15,000 per month thereafter. Also included
in compensation are 200,000 shares of common stock, with a fair value of $99,600
based upon the market price of $0.50 upon the grant date. The shares of common
stock will vest in quarterly installments, with 50,000 to vest immediately, and
50,000 each quarter at $24,900, and was fully vested by the year end March 31,
2022.
Common Shares Issued to Employees
During the three months ended December 31, 2021, a number of new employees were
issued a total of 175,000 shares of common stock as signing bonuses, with a
total fair value of $68,300, based on the market price of $0.395 on the grant
date.
Series D Preferred Equity Offering
On December 16, 2020, the Board authorized the issuance of 20,000 preferred
shares to be designated as Series D Preferred Stock ("Series D PS"). The Series
D PS have a par value of $0.0001, a stated value of $1,200 and will vote
together with the common stock on an as-converted basis. In addition, as further
described in the Series D Designation, as long as any of the shares of Series D
Preferred Stock are outstanding, the Company will not take certain corporate
actions without the affirmative vote at a meeting (or the written consent with
or without a meeting) of the majority of the shares of Series D Preferred Stock
then outstanding. On December 18, 2020, the Company entered into securities
purchase agreements (the "Purchase Agreement") with GHS Investments LLC,
Platinum Point Capital LLC and BHP Capital NY (collectively, the "Purchaser") ,
whereby, at the closing, each Purchaser agreed to purchase from the Company, up
to 5,000 shares of the Company's Series D Convertible Preferred Stock, at a
purchase price of $1,000 per share of Series D Preferred Stock. The aggregate
purchase price per Purchaser for the Series D Preferred Stock is $5,000,000. In
connection with the sale of the Series D Preferred Stock, the Purchasers
received 6,000,000 shares of the Company's common stock, par value $0.0001 (the
"Commitment Shares"), which have a fair value of $1,616,250 based on the market
price of the common shares of $0.27 on the date of the Series D PS purchase. On
January 8 and 10, 2021, the Company entered into additional securities purchase
agreements with the Purchaser, for 1,050 shares of Series D PS, at an aggregate
purchase price of $1,050,000.
Each holder of Series D Preferred Stock shall be entitled to receive, with
respect to each share of Series D Preferred Stock then outstanding and held by
such holder, dividends at the rate of twelve percent (12%) per annum (the
"Preferred Dividends"). Dividends may be paid in cash or in shares of Preferred
Stock at the discretion of the Company.
The Series D PS are convertible into Common Stock at the election of the holder
of the Series D PS at any time following five days after a qualified offering
(as defined in the Purchase Agreement) at a 35% discount to the offering price,
or, if a qualified offering has not occurred, at a price of $0.10 per share,
subject to adjustment as set forth in the designation.
39
The Series D PS were to be redeemed by the Corporation on the date that is no
later than one calendar year from the date of its issuance. The Series D PS 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 shares of the Company's common stock requested under conversion notices.
The triggering redemption amount was 150% of the stated value.
We used the proceeds of an offering that closed on April 14, 2021 to redeem
2,450 shares of Series D Preferred Stock held by two holders for a total of
$3,658,000. In a concurrent private placement, we exchanged 3,600 shares of
Series D Convertible Preferred Stock held by GHS for 3,739.63 shares of the
Company's newly designated Series E Preferred Stock. As of April 14, 2021, there
were no shares of Series D Preferred Stock outstanding.
Series E Preferred Stock
On April 14, 2021, the Board authorized the issuance of 10,000 shares of the
Company's Series E Preferred Stock. The shares of Series E Preferred Stock have
a stated value of $1,200 per share and are convertible into shares of common
stock at the election of the holder of the Series E Preferred Stock at any time
at a price of $0.35 per share, subject to adjustment (the "Conversion Price").
The Series E Preferred Stock is convertible into that number of shares of common
stock determined by dividing the Series E Stated Value (plus any and all other
amounts which may be owing in connection therewith) by the Conversion Price,
subject to certain beneficial ownership limitations. Each holder of Series E
Preferred Stock shall be entitled to receive, with respect to each share of
Series E Preferred Stock then outstanding and held by such holder, dividends at
the rate of twelve percent (12%) per annum, payable quarterly. Each share of
Series E Preferred Stock shall be redeemed by the Company on the date that is no
later than one calendar year from the date of its issuance. The Series E
Preferred Stock are also redeemable at the Company's option, at percentages
ranging from 115% to 125% for the first 180 days, based on the passage of time.
The holders of Series E Preferred Stock rank senior to the Common Stock and
Common Stock Equivalents (as defined in the Series E Designation) with respect
to payment of dividends and rights upon liquidation and will vote together with
the holders of the Common Stock on an as-converted basis, subject to beneficial
ownership limitations, on each matter submitted to a vote of holders of Common
Stock (whether at a meeting of shareholders or by written consent). Based upon a
subsequent financing, the holder has the option to exchange (in lieu of
conversion), all or some of the shares of Series E Preferred Stock then held for
any securities or units issued in a subsequent financing on a $1.00 for $1.00
basis. In the event of a Fundamental Transaction, the holder has the option to
request that the Company or the successor entity shall purchase the Preferred
Stock from the Holder on the date of such request by paying to the Holder cash
in an amount equal to the Black Scholes value. Upon any triggering event,
including a change in control or the Company shall fail to have available a
sufficient number of authorized and unreserved shares of common stock to issue
to such holder upon a conversion, each holder shall have the right, exercisable
at the sole option of such holder, to require the Company to redeem all of the
Series E Preferred Stock then held by such holder for a redemption price, in
cash, equal to the Triggering Redemption Amount (150% of the Stated Value and
all accrued but unpaid dividends and all liquidated damages, late fees and other
costs), and increase the dividend rate on all of the outstanding Preferred Stock
held by such Holder to 18% per annum thereafter. Upon any liquidation,
dissolution or winding-up of the Company, the holders 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 Preferred Stock, before any distribution or
payment shall be made to the holders of any Junior Securities, and if the assets
of the Corporation shall be insufficient to pay in full such amounts, then the
entire assets to be distributed to the holders shall be ratably distributed
among the holders in accordance with the respective amounts that would be
payable on such shares if all amounts payable thereon were paid in full.
On April 14, 2021, the Company, entered into a share exchange agreement (the
"Exchange Agreement") with a holder of the Series D Preferred Stock, whereby, at
the closing of the Offering, the Holder agreed to exchange an aggregate of 3,600
shares of the Company's Series D Preferred Stock, par value $0.0001 per share
(the "Series D Preferred Stock") into 3,739.63 shares of the Company's Series E
Convertible Preferred stock, par value $0.0001 (the "Series E Preferred Stock").
The Company analyzed the conversion feature of the Series E Preferred Stock
issued on April 14, 2021, 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 dates of funding as compared to the conversion price, determined there was a
beneficial conversion feature of approximately $3,270.000 to recognize, which
will be amortized over the term of the note using the effective interest method.
During the year ended March 31, 2022, the total Series E Preferred Stock BCF
amortization, including the November 22, 2021, SPA, was $3,326,172.
40
On November 22, 2021, the Company entered into a securities purchase agreement
("SPA") for 1,500 shares of the Company's Series E Preferred Stock, at a price
of $1,000 per share and (ii) a warrant to purchase up to 1,500,000 shares of the
Company's common stock, with an exercise price equal to $0.75, which expires in
five years, for a purchase price of $1,500,000. The warrant has a fair value of
$561,000, estimated using the Black Scholes Model. The Company also issued
267,429 warrants as placement agent fees, with a fair value of $101,000,
estimated with the same assumptions. All of the warrants were classified as a
liability, as it is not known if there will be sufficient authorized shares to
be issued upon settlement, based on the conversion terms of the convertible
debt. 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 dates of funding as compared to the conversion price,
determined there was a beneficial conversion feature of approximately $170.000
to recognize, which will be amortized over the term of the note using the
effective interest method. The Company will accrete the carrying value,
reflecting the discount of $300,000 between the stated value and purchase price
and the fair value of the warrants issued of $662,000, of the Series E Preferred
Stock in temporary equity up to the redemption value over the period until its
redemption.
During the year ended March 31, 2022, 2,400 shares of Series E Preferred Stock
were converted into 8,228,572 shares of common stock. As of March 31, 2022,
there are 2,840 shares of Series E Preferred Stock outstanding.
Series F Preferred Stock
On February 22, 2022, the Board of Directors authorized Series F Preferred
Stock. The Series F Preferred Stock have a par value of $0.0001. The Series F
Designation authorized the issuance of up to 750,000 shares of the Company's
Series F Convertible Preferred Stock. At any time after the three year
anniversary of the issuance of the shares of Series F Preferred Stock (the
"Issuance Date"), each individual holder shall have the right, at each
individual holder's sole option, to convert all of the shares of Series F
Preferred Stock that such individual holds into shares of fully paid and
nonassessable shares of common stock in an amount equal to 8% of the Company's
issued and outstanding shares of common stock. Each individual holder of Series
F Preferred Stock may only convert all of their shares of Series F Preferred
Stock in one transaction. On any matter presented to the stockholders of the
Company for their action or consideration at any meeting of stockholders of the
Company each holder of outstanding shares of Series F Preferred Stock will cast
1,000 votes per each share of Series F Preferred Stock held by such holder. The
holders are not entitled to receive dividends, nor are they entitled to receive
any distributions in the event of any liquidation, dissolution or winding down
of the Company, either voluntarily or involuntarily. The Company determined that
the conversion feature was not required to be bifurcated as the conversion
provision was determined to be clearly and closely related to the Series F
Preferred Stock host instrument.
In the case of any capital reorganization, any reclassification of the stock of
the Company, or a Change in Control, the shares of Series F Preferred Stock
shall, at the effective time of such reorganization, reclassification, or Change
in Control, be automatically converted into the kind and number of shares of
stock or other securities or property of the Company or of the entity resulting
from such reorganization, reclassification, or Change in Control to which such
holder would have been entitled if immediately prior to such reorganization,
reclassification, or Change in Control it had converted its shares of Series F
Preferred Stock into common stock.
On March 1, 2022, the Board of Directors of the Company issued 250,00 shares of
Series F Preferred Stock to each of Gerald Easterling, William Delgado and
Thomas Untermeyer in consideration for their past and future services as
executive officers of the Company, for a total of 750,000 shares of Series F
Preferred Stock. The fair value of the stock compensation has been recognized
based on the estimated value of the instruments the Company would be obligated
to provide to the holders upon conversion to common shares, which for all three
Series F PS holders would reflect 24% of the fair value of the outstanding
common shares as of the grant date of March 1, 2022. Based on the number of
outstanding shares of common stock plus shares payable, of 738,687,135, and the
market value of the common stock of $0.246 on that date, the total stock
compensation was $43,612,000. In accordance with ASC 718, as the shares are
fully vested on the grant date, as well as all services required to be provided
have occurred, the stock compensation was immediately recognized.
41
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 March 31, 2022
of approximately $150 million, as well as negative cash flows from operating
activities of approximately $13 million. Presently, the Company does not have
sufficient cash resources to meet its plans in the twelve months following the
date of issuance of this filing. 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. 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 $5,000,000 to
$7,000,000 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 Annual Report on Form 10-K for the fiscal
year ended March 31, 2022. We believe that the accounting policies below are
critical for one to fully understand and evaluate our financial condition and
results of operations.
42
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 as of
March 31, 2022 and March 31, 2021.
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 year ended March 31, 2022, the Company had 5,000,000
shares of Series A Convertible Preferred Stock which would be converted at the
holder's option into approximately 674,832,000 underlying common shares, 2,840
shares of Series E Redeemable Convertible Preferred shares with approximately
9,737,000 underlying shares of common stock that are convertible at the
investors' option at a fixed conversion price of $0.35, 750,000 shares of Series
F Preferred Stock which would be converted at the holders' option into
approximately 162,080,000 underlying common shares, and approximately
$18,768,000 in a convertible debenture with approximately 98,779,000 underlying
shares of common stock that are convertible at the holders' option at conversion
price of 90% of the average of the two lowest market prices over the last 10
days and 18,506,429 warrants outstanding which were not included in the
calculation of diluted EPS as their effect would be anti-dilutive. For the year
ended March 31, 2021, the Company had 5,000,000 shares of Series A Convertible
Preferred Stock which would be converted at the holder's option into
approximately 560,745,000 underlying common shares, 607 shares of Series B
Preferred shares with approximately 1,202,000 underlying shares of common stock
that are convertible at the investors' option at a conversion price based on the
lowest market price over the last 20 trading days, and 6,050 of shares of Series
D Preferred shares with approximately 60,050,000 underlying shares of common
stock that are convertible at the investors' option at a fixed conversion price
of $0.10, 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 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 the fair values are reduced for the cost to dispose.
43
Recently Issued Accounting Standards
In August 2020, the FASB issued ASU 2020-06, Debt - Debt with Conversion and
Other Options (Subtopic 470- 20) and Derivatives and Hedging - Contracts in
Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments
and Contracts in an Entity's Own Equity ("ASU 2020-06"), which simplifies the
accounting for certain financial instruments with characteristics of liabilities
and equity. This ASU (1) simplifies the accounting for convertible debt
instruments and convertible preferred stock by removing the existing guidance in
ASC 470-20, Debt: Debt with Conversion and Other Options, that requires entities
to account for beneficial conversion features and cash conversion features in
equity, separately from the host convertible debt or preferred stock; (2)
revises the scope exception from derivative accounting in ASC 815-40 for
freestanding financial instruments and embedded features that are both indexed
to the issuer's own stock and classified in stockholders' equity, by removing
certain criteria required for equity classification; and (3) revises the
guidance in ASC 260, Earnings Per Share, to require entities to calculate
diluted earnings per share (EPS) for convertible instruments by using the
if-converted method. In addition, entities must presume share settlement for
purposes of calculating diluted EPS when an instrument may be settled in cash or
shares. For SEC filers, excluding smaller reporting companies, ASU 2020-06 is
effective for fiscal years beginning after December 15, 2021 including interim
periods within those fiscal years. Early adoption is permitted, but no earlier
than fiscal years beginning after December 15, 2020. For all other entities, ASU
2020-06 is effective for fiscal years beginning after December 15, 2023,
including interim periods within those fiscal years. Entities should adopt the
guidance as of the beginning of the fiscal year of adoption and cannot adopt the
guidance in an interim reporting period. The Company is currently evaluating the
impact that ASU 2020-06 may have on its consolidated financial statements and
related disclosures.
As of March 31, 2022, 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.
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