Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q includes a number of forward-looking
statements that reflect management's current views with respect to future events
and financial performance. Forward-looking statements are projections in respect
of future events or our future financial performance. In some cases, you can
identify forward-looking statements by terminology such as "may," "should,"
"expects," "plans," "anticipates," "believes," "estimates," "predicts,"
"potential" or "continue" or the negative of these terms or other comparable
terminology. These statements include statements regarding the intent, belief or
current expectations of us and members of our management team, as well as the
assumptions on which such statements are based. Prospective investors are
cautioned that any such forward-looking statements are not guarantees of future
performance and involve risk and uncertainties, and that actual results may
differ materially from those contemplated by such forward-looking statements.
These statements are only predictions and involve known and unknown risks,
uncertainties and other factors, including the risks set forth in the section
entitled "Risk Factors" in our Annual Report on Form 10-K for the fiscal year
ended March 31, 2022, as filed with the U.S. Securities and Exchange Commission
(the "SEC") on June 29, 2022, any of which may cause our company's or our
industry's actual results, levels of activity, performance or achievements to be
materially different from any future results, levels of activity, performance or
achievements expressed or implied in our forward-looking statements. These risks
and factors include, by way of example and without limitation:
? our ability on a timely basis to successfully rebuild our water treatment plant
and replace our filtration equipment that was destroyed by fire on July 3, 2022
at our La Coste, Texas facility;
? our ability to continue developing and expanding our research and development
plant in La Coste, Texas and our production facility in Webster City, Iowa;
? our ability to successfully commercialize our equipment and shrimp farming
operations to produce a market-ready product in a timely manner and in enough
quantity;
? absence of contracts with customers or suppliers;
? our ability to maintain and develop relationships with customers and suppliers;
? our ability to successfully integrate acquired businesses or new brands;
? the impact of competitive products and pricing;
? supply constraints or difficulties;
? the retention and availability of key personnel;
? general economic and business conditions;
? substantial doubt about our ability to continue as a going concern;
? our continued ability to raise funding at the pace and quantities required to
scale our plant needs to commercialize our products;
? our ability to successfully recruit and retain qualified personnel in order to
continue our operations;
? our ability to successfully implement our business plan;
? our ability to successfully acquire, develop or commercialize new products and
equipment;
? the commercial success of our products;
? business interruptions resulting from geo-political actions, including war, and
terrorism or disease outbreaks (such as the outbreak of COVID-19);
? intellectual property claims brought by third parties; and
? the impact of any industry regulation.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, or performance. Except as required by applicable law, including the
securities laws of the United States, we do not intend to update any of the
forward-looking statements to conform these statements to actual results.
Readers are urged to carefully review and consider the various disclosures made
by us in this report and in our other reports filed with the SEC. We undertake
no obligation to update or revise forward-looking statements to reflect changed
assumptions, the occurrence of unanticipated events or changes in the future
operating results over time except as required by law. We believe that our
assumptions are based upon reasonable data derived from and known about our
business and operations. No assurances are made that actual results of
operations or the results of our future activities will not differ materially
from our assumptions.
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As used in this Quarterly Report on Form 10-Q and unless otherwise indicated,
the terms "Company," "we," "us," and "our" refer to NaturalShrimp Incorporated
and its wholly-owned subsidiaries: NaturalShrimp USA Corporation ("NSC") and
NaturalShrimp Global, Inc. ("NS Global") and Natural Aquatic Systems, Inc.
("NAS"). Unless otherwise specified, all dollar amounts are expressed in United
States Dollars.
Corporate History
The Company was incorporated in the State of Nevada on July 3, 2008 under the
name "Multiplayer Online Dragon, Inc." On January 30, 2015, we acquired
substantially all of the assets of NaturalShrimp Holdings, Inc. a Delaware
corporation ("NSH"), that had developed the proprietary technology to grow and
sell shrimp potentially anywhere in the world that is now the basis of our
business. Such assets consisted primarily of all of the issued and outstanding
shares of capital stock of its subsidiaries NaturalShrimp USA Corporation
("NSC") and NaturalShrimp Global ("NS Global"), and certain real property
located outside of San Antonio, Texas, in exchange for our issuance of
75,520,240 shares of our common stock to NSC. 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 that allows us to produce a naturally grown shrimp "crop"
weekly 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 December 17, 2020, we acquired certain assets from VeroBlue Farms USA, Inc.
and its subsidiaries VBF Transport, Inc. and Iowa's First, Inc., including a
facility that was designed for the growth of barramundi fish that we are in the
process of converting so that it can produce shrimp using the Company's
propriety technology. The consideration for the purchase of these assets was (i)
$10,000,000, consisting of (i) $5,000,000 in cash paid at closing, (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 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 as a balloon payment on the maturity date.
The Company also issued 500,000 shares of common stock as a finder's fee in
connection with the transaction.
The facility was originally designed as an aquaculture facility. The Company has
begun a modification process to convert the plant to produce shrimp, which will
allow us to scale faster without having to build new facilities. The Iowa
facility contains the tanks and infrastructure that the Company will use to
support the production of shrimp with the incorporation of the Company's
electrocoagulation platform technology. The Company also plans to convert
additional square footage currently used as storage to its planned shrimp
processing plant. The development of the facility is 40% completed with full
development of the facility expected by December 31, 2022.
On May 25, 2021, the Company purchased from F&T Water Solutions LLC ("F&T") its
50% ownership interest in a water treatment technology used or useful in growing
aquatic species in re-circulating and enclosed environments that the Company and
F&T had previously jointly developed and patented (the "Patent"), as well as
F&T's 100% interest in a second patent associated with the 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 9,900,990 shares of the Company's
common stock.
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The Company has three wholly-owned subsidiaries: NSC, NS Global, and NAS.
Evolution of Technology
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, 52 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 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.
Production and Sales
On July 3, 2022, the La Coste, Texas shrimp production facility experienced a
fire that damaged the Water Treatment Plant (WTP) including the filtration
equipment within the building. The initial investigation indicated that the fire
started at an external source near the WTP building. No one was hurt and this
did not cause any damage to the main production building containing the shrimp.
The Company immediately engaged its Emergency Response Team comprised of
management, engineering, production, and sales personnel organized to quickly
respond and deal with potential situations such as this. Fortunately, the
Company has the necessary backup equipment to replace the damaged equipment
which will allow continued production and sales in Texas. The Company received
$700,000 from the insurance company for the claim filed for the fire damage. Due
to the damage caused by the fire, the Company has written off approximately
$1,764,000 of the fixed assets, and $325,000 of the accumulated depreciation,
which, less the $700,000 insurance settlement, has resulted in the recognition
of a loss due to fire in the unaudited condensed consolidated statement of
operations.
Texas began selling live shrimp in late June, and Iowa has been selling since
November of 2021. The initial live shrimp sales were limited in size to
establish and train customers in shipping and handling procedures. These sales
are targeted presently in the Chicago and San Antonio areas. As previously
announced, the Company has established a partnership with US Foods, a leading
foodservice distributor, to deliver the Company's fresh never frozen shrimp to
US Foods in the South Texas area. The Company expects sales to begin in November
2022 with sales of approximately 1,000 pounds per month with expected expansion
of sales to 4,000 pounds per month in the first calendar quarter of 2023. Total
sales have also recently included the selling of shrimp at the downtown Webster
City, Iowa market for the local Chamber of Commerce.
We expect the combined output from the La Coste, Texas, and Webster City, Iowa
facilities should result in a total of 20,000 pounds of shrimp production for
the calendar quarter that will end on December 31, 2022 and 40,000 pounds of
shrimp production for the first calendar quarter of 2023. We believe that the
combined output from our La Coste, Texas and Iowa facilities will be
approximately 24,000 pounds of shrimp production per week by the fourth calendar
quarter of 2023. Also, the Company is expecting to break ground on an 80,000
square foot expansion in La Coste prior to December 31, 2022.
The Merger Agreement and the Merger
On October 24, 2022, the Company entered into a Merger Agreement (as it may be
amended, supplemented, or otherwise modified from time to time, the "Merger
Agreement"), by and among the Company, Yotta Acquisition Corporation, a Delaware
corporation ("Yotta"), and Yotta Merger Sub, Inc., a Nevada corporation and a
wholly owned subsidiary of Yotta ("Merger Sub").
The Merger Agreement and the transactions contemplated thereby (the
"Transactions") were approved by the board of directors of each of the Company,
Yotta, and Merger Sub.
25
The Merger Agreement provides, among other things, that Merger Sub will merge
with and into the Company, with the Company as the surviving company (the
"Surviving Company") in the merger and, after giving effect to such merger, the
Company shall be a wholly-owned subsidiary of Yotta (the "Merger"). In addition,
Yotta will be renamed "NaturalShrimp, Incorporated" or such other name as shall
be designated by the Company. Other capitalized terms used, but not defined,
herein have the respective meanings given to such terms in the Merger Agreement.
The Merger Agreement provides for aggregate consideration to be issued to
securityholders of the Company of 17,500,000 shares (the "Closing Merger
Consideration Shares") of Yotta's common stock, par value $0.0001 per share
("Yotta Shares"), to be issued at the effective time of the Merger (the
"Effective Time"), plus an additional (i) 5,000,000 Yotta Shares if the
Surviving Corporation has at least $15,000,000 in revenue during the fiscal year
ended March 31, 2024 and (ii) 5,000,000 Yotta Shares if the Surviving
Corporation has at least $30,000,000 in revenue during the fiscal year ended
March 31, 2025 (collectively, the "Contingent Merger Consideration Shares").
In accordance with the terms and subject to the conditions of the Merger
Agreement, at the Effective Time each share of Common Stock outstanding or
deemed outstanding pursuant to the provisions discussed immediately below as of
immediately prior to the Effective Time will be converted into the right to
receive its allocable portion of the Closing Merger Consideration Shares and the
Contingent Merger Consideration Shares (to the extent the required revenue
thresholds are met).
Pursuant to the terms of the Merger Agreement and agreements that, pursuant to
the Merger Agreement, the Company will enter into with holders of such
convertible securities, such convertible securities will be canceled in exchange
(except for the Series A Convertible Preferred Stock of the Company, par value
$0.0001 per share (the "Series A Preferred") for a cash payment or Yotta Shares
as follows: (i) at the option of the holder thereof, each outstanding warrant to
purchase shares of Common Stock will be canceled in exchange for a cash payment
based on the value thereof or treated as exercised for shares of Common Stock,
in each case based on an adjusted exercise price and as otherwise set forth in
the Merger Agreement and/or the individual agreements, and if treated as
exercised, converted into the right to receive such deemed shares of Common
Stock's allocable portion of the Closing Merger Consideration Shares and the
Contingent Merger Consideration Shares; (ii) each outstanding share of Series F
Convertible Preferred Stock of the Company, par value $0.0001 per share, will be
canceled and treated as if converted into shares of Common Stock at an adjusted
conversion rate as set forth in the Merger Agreement and/or such individual
agreements, and converted into the right to receive such deemed shares of Common
Stock's allocable portion of the Closing Merger Consideration Shares and the
Contingent Merger Consideration Shares; and (iii) each outstanding share of
Series E Convertible Preferred Stock of the Company, par value $0.0001 per share
(the "Series E Preferred"), will be canceled and treated as if converted into
shares of Common Stock at an adjusted conversion rate as set forth in the Merger
Agreement and/or such individual agreements, and converted into the right to
receive such deemed shares of Common Stock's allocable portion of the Closing
Merger Consideration Shares and the Contingent Merger Consideration Shares. In
addition, each holder of Series E Preferred will be entitled to receive at the
Effective Time an additional number of Closing Merger Consideration Shares as
are necessary to ensure that the per-share value of the Yotta Shares that such
stockholder is entitled to receive is not less than the per-share value (based
on the effective purchase price) of the aggregate Yotta Shares then held by any
Yotta stockholder after taking into account any newly-issued Yotta Shares that
such Yotta stockholder acquires directly from Yotta prior to the closing of the
Merger (the "Closing") (which will reduce the number of Closing Merger
Consideration Shares that will be issued to the Company's other securities
holders). The Series A Preferred will be cancelled and retired without any
conversion thereof and for no consideration.
In addition, the Merger Agreement provides that, pursuant to an agreement to be
entered into between the Company and Streeterville Capital, LLC
("Streeterville") as the holder of the Secured Convertible Promissory Note in
the initial amount of $16,320,000.00 issued by the Company to Streeterville with
an effective date of December 15, 2021 (the "Convertible Note"), contingent on
and effective as of the Effective Time, the Convertible Note will be amended to
eliminate the conversion feature thereof. Also, such agreement will provide for:
(i) for the payment to Streeterville of an amount equal to the lesser of (A)
one-third of the amount retained in the Trust Account at the Effective Time or
(B) $10,000,000, in order to repay a portion of the outstanding balance of the
Convertible Note; (ii) that the remaining balance of the Convertible Note be
repaid in equal monthly installments over a 12-month period beginning on a date
after the Closing Date or the termination of such agreement; and (iii) that if
the Closing Date is after December 31, 2022, the outstanding balance of all
indebtedness owed by the Company to Streeterville will be increased
automatically by 2% and will automatically increase by 2% every 30 days
thereafter until the Closing, or substantially similar terms as approved by the
Board of Directors of the Company.
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The Company is required to enter into all of the above-described agreements with
the holders of the warrants, preferred stockholders, and Streeterville within 14
days of the date of the Merger Agreement, or November 7, 2022 (the "Convertible
Instrument Agreements").
The Merger is expected to close in the first calendar quarter of 2023, following
the receipt of the required approvals by the stockholders of the Company and
Yotta, conditional approval by the Nasdaq Stock Market of Yotta's initial
listing application filed in connection with the Merger, and the fulfillment of
other customary closing conditions.
Termination
The Merger Agreement may be terminated under certain customary and limited
circumstances at any time prior to the Closing, including, without limitation:
(i) by the mutual written consent of the parties; (ii) by either Yotta or the
Company if the Closing does not occur on or prior to July 22, 2023 or, if an
Additional Extension Period has been approved, at the expiration of such period
(the "Outside Termination Date"), unless the breach of any covenants or
obligations under the Merger Agreement by the party seeking to terminate (or, in
the case of Yotta, by Merger Sub) proximately caused the failure to consummate
the Transactions by the applicable date; (iii) by either Yotta or the Company if
any governmental authority shall have issued an order, enacted a law, or taken
any other action that has the effect of making the Transactions illegal or
permanently restraining, enjoining, or otherwise prohibiting the consummation of
the Transactions and such law or order or other action shall have become final
and nonpeelable, unless the failure by such party or its affiliates to comply
with any provision of the Merger Agreement was a substantial cause of, or
substantially resulted in, such action by such governmental authority; (iv) by
Yotta, subject to certain exceptions, if the Company has breached any of its
representations, warranties, covenants, or agreements in the Merger Agreement
and such breach cannot be cured at all or within the earlier of (A) 30 days
after written notice thereof and (B) the Outside Termination Date; (v) by Yotta,
subject to certain exceptions, if the Company does not receive the required
stockholder approval of the Merger Agreement within five business days after the
effective date of the Form S-4; (vi) by Yotta, subject to certain exceptions, if
the Company fails to enter into the Convertible Instrument Agreements by
November 7, 2022; and (vii) by the Company, subject to certain exceptions, if
Yotta or Merger Sub has breached any of its representations, warranties,
covenants, or agreements in the Merger Agreement and such breach cannot be cured
at all or within the earlier of (A) 30 days after written notice thereof and (B)
the Outside Termination Date.
If the Merger Agreement is validly terminated, none of the parties to the Merger
Agreement will have any liability or any further obligation under the Merger
Agreement other than customary confidentiality obligations, except in the case
of a willful breach of any covenant or agreement under the Merger Agreement or
fraud, provided, that (A) if Yotta terminates the Merger Agreement pursuant to
clauses (iv), (v), or (vi) of the preceding paragraph, the Company must pay to
Yotta, within two business days of such termination, a termination fee in the
amount of $3,000,000, and (B) if the Company terminates the Merger Agreement
pursuant to clause (vii) of the preceding paragraph, Yotta shall pay to the
Company, within two business days of such termination, a termination fee in the
amount of $3,000,000.
Results of Operations
Comparison of the Three Months Ended December 31, 2022 to the Three Months Ended
December 31, 2021
Revenue
We had revenue of $97,943 in the three months ended December 31, 2022, compared
to $16,640 of revenue during the quarter ended December 31, 2021. Revenues
during the 2022 period were the result of our sale of shrimp to customers. At
the beginning of fiscal 2023 these sales were made to two customers of a
consultant to the Company under the terms of a trial distribution agreement
between the consultant and the Company pursuant to which the consultant was to
introduce the Company to customers and assist it in the set-up of ancillary
materials used or useful in the delivery of live shrimp, including installation
of necessary equipment and facilities, logistical support, training of staff and
packaging necessary for shipment of live shrimp. After the trial period, the
parties could have, but decided not to, negotiate and execute a long-term
distribution agreement. We began receiving orders and billing one of these
customers directly in June 2022 and the other in September 2022.
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Operating Expenses
The following table summarizes the various components of our operating expenses
for each of the three months ended December 31, 2022 and December 31, 2021:
Three Months Ended December 31,
2022 2021
Salaries and related expenses $ 530,167 $ 332,393
Professional fees 351,053 544,684
Other general and administrative expenses 546,302 621,809
Rent 53,673 28,813
Facility operations 875,194 398,504
Research and development 14,212 20,357
Depreciation 416,377 218,134
Amortization 367,500 367,500
Total $ 3,154,478 $ 2,532,194
Operating expenses for the three months ended December 31, 2022, increased
approximately $622,000, or 24.6%, compared to the same period in 2021, primarily
due to increases in facility operations expense, depreciation, and salaries and
related expenses partially offset by decreases in professional fees and other
general and administrative expenses. Facility operations expenses increased
$476,690, or 119.6%, during the three months ended December 31, 2022 compared to
the same period in 2021, as a result of the progress of the planning of the
commercial operations in our Iowa and Texas facilities. Depreciation increased
$198,243, or 90.9%, quarter over quarter due to the progressed fixed assets as
well as the movement of construction in process to fixed assets in the two
plants. Salaries and related expenses increased by $197,774, or 86.3%, during
the quarter ended December 31, 2022 compared to the same period of 2021,
primarily due to the Company's increase in the number of employees and normal
salary increases. Finally, professional fees during the quarter ended December
31, 2022, decreased by $193,631 compared to the same period of 2021, due to
greater than normal levels of attorneys' work with the Company on acquisitions
and equity offerings and SEC filings, as well as consultant and accounting fees,
in the 2021 period.
Other income (expense)
The following table summarizes the various components of our Other
income(expenses) for each of the three months ended December 31, 2022 and
December 31, 2021:
Three Months Ended December 31,
2022 2021
Interest expense $ (593,331 ) $ (80,991 )
Interest expense - related parties (6,250 ) -
Amortization of debt discount (843,494 ) (340,000 )
Financing costs - (1,393,000 )
Change in fair value of derivative liability 17,738,000 -
Change in fair value of warrant liability 1,155,000 (137,000 )
Change in fair value of restructured notes (1,594,515 ) -
Gain on Vero Blue note settlement - 500,000
Gain on extinguishment of debt 2,383,088 -
Legal settlement - (29,400,000 )
Loss due to fire (6,262 ) -
Total $ 18,232,236 $ (30,850,991 )
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Other (income) expense for the three months ended December 31, 2022 changed
significantly from the three months ended December 31, 2021, the majority of
which is a result of the restructuring of the December 2021 note, with the
removal of the conversion feature resulting in a "decrease" in the fair value of
the derivative liability, as well as a legal settlement expense in December of
2021. As part of the restructuring on November 4, 2021, the conversion feature
was removed, and therefore the bifurcated derivative was valued as of the
restructuring date at $12,290,000, with a decrease in fair value of $17,738,000,
resulting in the change in fair value being income. There was no derivative
liability in the prior period. Therefore, the change in fair value is a new
recognition in the current period. The interest expense increases in the current
period, based on the two new notes issued in December of 2021 and August of
2022. The interest rate on both notes is 12%, so the interest expense on it is
approximately $592,000 for the three months ended December 31, 2022, which is
the cause of the increase in interest expense for the current period as compared
to the prior period. Additionally, prior to the restructuring and accounting
treatment as an extinguishment, so a removal of the original debt discounts for
the two notes, there was amortization of the recognized debt discounts on the
original issuance of the notes through November 4, 2022. The amortization of the
debt discount during the three months ended December 31, 2021 was only for
approximately 15 days, upon issuance of the December 2021 note.
On December 6, 2021 a final order was signed and a case was closed for a suit
filed against the Company on August 11, 2020, alleging breach of contract for
the Company's failure to exchange common shares of the Company to shareholders
of NaturalShrimp Holdings, Inc. The Company was to issue approximately 93
million shares in settlement, which had a fair value of $29,400,000, 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. The fair value of the shares was recognized as an expense in
the three months ended December 31. 2021.
As a result of the restructuring of the December 2021 and August Note, which was
determined to be accounted for as an extinguishment of debt, there was a gain on
the extinguishment of debt for $2,383,088, between the two notes, as other
income in the three months ended December 31, 2021. Additionally, as the Company
elected the fair value option under ASC 825 for the restructured notes to be
accounted for at fair value until settled, the fair value was revalued as of the
period end, with a decrease in fair value of the two notes of $1,594,515,
recognized as an expense in the three months ended December 31, 2022.
Comparison of the Nine Months Ended December 31, 2022 to the Nine Months Ended
December 31, 2021
Revenue
Revenues were $186,004 during the nine months ended December 31, 2022, compared
to $16,640 of revenue during the nine months ended December 31, 2021. Revenues
during the 2022 period were the result of our sale of shrimp to customers, as
discussed under "- Comparison of the Three Months Ended December 31, 2022 to the
Three Months Ended December 31, 2021 - Revenues."
Operating Expenses
The following table summarizes the various components of our operating expenses
for each of the nine months ended December 31, 2022 and December 31, 2021:
Nine Months Ended December 31,
2022 2021
Salaries and related expenses $ 1,514,243 $ 1,987,920
Professional fees 1,097,493 1,520,783
Other general and administrative expenses 1,509,155 1,623,887
Rent 135,928 49,768
Facility operations 1,895,357 810,260
Research and development 190,855 217,229
Depreciation 1,349,838 830,260
Amortization 1,102,500 514,000
Total $ 8,795,369 $ 7,554,256
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Operating expenses for the nine months ended December 31, 2022 increased
$1,241,113, or 16.4%, compared to the same period in 2021, primarily due to
increases in facility operations expense, depreciation, and amortization
partially offset by decreases in salaries and related expenses and professional
fees. Facility operations expenses increased $1,085,097, or 133.9%, during the
nine months ended December 31, 2022 compared to the same period in 2021,
primarily as a result of the progress of the planning of the commercial
operations in our Iowa and Texas facilities. Depreciation increased $519,429, or
62.6%, during the nine months ended December 31, 2022, compared to the same
period in 2021, as a result of the fixed assets from the new plant and the
construction in process moved to fixed assets. Amortization increased $588,500,
or 114.5%, during the nine months ended December 31, 2022, compared to the same
period of 2021, as a result of the quarterly amortization for the new patent and
license rights as discussed above with respect to the results for the quarter
ended December 31, 2022, which we began to recognize in August 2021. While there
were additional employees and normal salary increases, salaries and related
expenses decreased $473,677, or 23.8%, during the nine months ended December 31,
2022 compared to the same period of 2021, primarily due to the Company's payment
of $700,000 in bonuses to its executive officers during the 2021 period.
Professional fees decreased during the 2022 period due to greater than normal
levels of legal work, as well as consultant and accounting fees, during the nine
months ended December 31, 2021.
Other income (expense)
The following table summarizes the various components of our Other
income(expenses) for each of the nine months ended December 31, 2022 and
December 31, 2021:
Nine Months Ended December 31,
2022 2021
Interest expense $ (1,674,994) $ (228,190 )
Interest expense - related parties (9,772 ) -
Amortization of debt discount (5,019,883 ) (576,364 )
Financing costs - (1,502,953 )
Change in fair value of derivative liability 811,000 -
Change in fair value of warrant liability 3,031,000 (137,000 )
Change in fair value of restructured notes (1,594,515 ) -
Forgiveness of PPP loan - 103,200
Gain on Vero Blue note settlement - 500,000
Gain on extinguishment of debt 2,383,088 -
Legal settlement - (29,400,000 )
Loss due to fire (869,379 ) -
Total $ (2,953,455) $ (31,241,307 )
Other expense for the nine months ended December 31, 2022, decreased
significantly from the same period in 2021, the majority of which is a result of
the legal settlement expense of $29,400,000 in December of 2021, as noted in the
three month change above. Additionally, as noted in the three-month activity
above, the restructuring of the December 2021 and August notes, resulted in
recognition in income for the nine months ended December 31, 2022.
As part of the restructuring on November 4, 2021, the conversion feature was
removed, and therefore the bifurcated derivative was valued as of the
restructuring date at $12,290,000, with a decrease in fair value of $17,738,000,
resulting in the change in fair value of $811,000 for the nine months ending
December 31, 2022 being income. There was no derivative liability in the prior
period. Therefore, the change in fair value is a new recognition in the current
period. The interest expense increases in the current period, based on the two
new notes issued in December of 2021 and August of 2022. The interest rate on
both notes is 12%, so the interest expense on it is approximately $1,666,000 for
the nine months ended December 31, 2022, which is the cause of the increase in
interest expense for the current period as compared to the prior period.
Additionally, prior to the restructuring and accounting treatment as an
extinguishment, so a removal of the original debt discounts for the two notes,
there was amortization of the recognized debt discounts on the original issuance
of the notes through November 4, 2022. As a result, the amortization of the debt
discount is approximately $5,020,000 in the nine months ended December 31, 2022,
compared to approximately $576,000 of amortization of the debt discount during
the nine months ended December 31, 2021 based on only for approximately 15 days
upon issuance of the December 2021 note.
The warrant liability was originally recognized in December 2021, and is
revalued each period end, with a decrease in the fair value as of December 31,
2022, resulting in a $3,031,000 recognition as income, compared to an increase
in fair value as of December 31, 2021, which resulted in a $137,000 expense.
30
On July 3, 2022, the Company's building containing its water treatment and
purification system in La Coste, Texas was completely destroyed in a fire. This
resulted in the $869,379 loss due to fire recognized in the nine months ended
December 31, 2022.
On November 22, 2021, the Company entered into a waiver with a shareholder who
had the rights to participate in a subsequent filing, in which warrants to
purchase 3,739,000 shares of common stock warrants were issued with a fair value
of $1,373,000 recognized as financing costs. Additionally, in April of 2021, the
Company settled a convertible note, with a redemption fee of $109,953,
recognized as financing costs. This resulted it the recognition of a financing
cost expense of approximately $1,483,000.
The Company's Paycheck Protection Program ("PPP") loan was approved for
forgiveness on April 26, 2021 and, therefore, was recognized in the nine months
ended December 31, 2021.
Liquidity, Financial Condition and Capital Resources
As of December 31, 2022, we had cash on hand of approximately $142,000 and
working capital deficit of approximately $8,191,000, as compared to cash on hand
of approximately $1,734,000 and a working capital deficiency of approximately
$17,017,000 as of March 31, 2022. The increase in working capital for the nine
months ended December 31, 2022, is mainly due to the decrease in cash on-hand,
as well as the decrease in the fair value of the derivative liability due to the
removal of the conversion feature in the restructured December 2021 Note, and a
decrease in fair value of the warrant liability. This is offset by the new
promissory notes and related party notes, and an increase in accounts payable.
Working Capital/(Deficit)
Our working capital as of December 31, 2022, in comparison to our working
capital deficiency as of March 31, 2021, can be summarized as follows:
December 31, March 31,
2022 2022
Current assets $ 868,398 $ 4,829,141
Current liabilities 9,059,549 21,846,261
Working capital deficiency $ (8,191,151 ) $ (17,017,120 )
Current assets decreased mainly because of the release of the $1,500,000 escrow
account as of March 31, 2022 related to the proceeds from the issuance of a
convertible debenture in December 2021, which was transferred to the Company's
cash. Then there was a decrease in cash based on the use of the cash on hand,
and a decrease of approximately $1,020,000 in prepaid expenses. The decrease in
current liabilities is primarily due to the $13,101,000, decrease in the fair
value of the derivative liability, related to the removal of the conversion
feature in the restructuring of the December 2021 Note, as well as the by the
decrease in the fair value of the warrant liability. This is offset by the new
promissory note, which upon its restructuring was treated as an extinguishment
and then recognized at its fair value under ASC 825, at approximately $2,219,000
and the $250,000 notes payable-related party.
Cash Flows
Our cash flows for the nine months ended December 31, 2022, in comparison to our
cash flows for the nine months ended December 31, 2021, can be summarized as
follows:
Nine months Ended December 31,
2022 2021
Net cash used in operating activities $ (3,884,764 ) $ (12,201,031 )
Net cash used in investing activities
(1,730,186 ) (7,899,513 )
Net cash provided by financing activities 4,022,773 22,609,954
Net change in cash
$ (1,592,176 ) $ 2,509,411
31
The net cash used in operating activities in the nine months ended December 31,
2022 is approximately $8,316,000 less as compared to the same period in 2021.
The decrease in cash used is based mainly on the increase in accounts payable in
the current period compared to the decrease in accounts payable in the prior
period. Additionally, there is a decrease in prepaid expenses and an increase
accrued interest related to the August note as well as the addition for the
current period's nine months on the December 2021 note.
The net cash used in investing activities in the nine months ended December 31,
2022 decreased by approximately $6,169,000 compared to the same period in the
prior nine-month period. During the current period cash used consists of the
purchase of approximately $2,430,000 for machinery and equipment, offset by the
$700,000 received from the insurance company for the fixed assets destroyed by
the July 3, 2022 fire. The prior year's cash spent on investing activities
consisted of the $2,000,000 of cash in the patent acquisition, $2,350,000 for
the License Agreement and $1,000,000 in the acquisition of shares of the
non-controlling interest, as well as approximately $2,116,000 for machinery and
equipment and $433,000 for construction in process.
The net cash provided by financing activities decreased by approximately
$18,587,000 between periods. For the current period, the Company received
$1,380,000 from the financing agreement for the sale of shares of common stock,
as well as $1,465,000 net proceeds on a new promissory note, and $250,000 from a
promissory note with related parties. Additionally, the $1,500,000 that had been
held in escrow from the convertible note the Company entered into in December of
2021 has been transferred into its cash on hand. In the same period in the prior
year, the Company received approximately $17,277,000 from the sale of common
stock and warrants, and $8,905,000 of net proceeds from entering into the
December 2021 note, offset by amounts paying off the previous convertible note,
notes payable with related parties and bank loans, and the amount paid on the
redemption of Series D Preferred Shares.
Our cash position was approximately $142,000 as of December 31, 2022. Management
believes that our cash on hand and working capital deficit are not sufficient to
meet our current anticipated cash requirements for additional anticipated
capital expenditures, operating expenses and scale-up of operations for the next
twelve months .
Recent Financing Arrangements and Developments During the Period
Short-Term Debt and Lines of Credit
The Company also has a working capital line of credit with Capital One Bank for
$50,000. The line of credit bears an interest rate of prime plus 25.9 basis
points, which totaled 33.17% as of December 31, 2022. The line of credit is
unsecured. The balance of the line of credit was $9,580 at both December 31,
2022 and March 31, 2021.
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 17.27% as of December 31, 2022. The line of credit is
secured by assets of the Company's subsidiaries. The balance of the line of
credit is $10,237 at December 31, 2022 and March 31, 2022.
Promissory Note
The Company entered into a securities purchase agreement (the "SPA") with an
investor (the "Investor") on August 17, 2022. Pursuant to the SPA, the Investor
purchased a secured promissory note (the "Note") in the aggregate principal
amount totaling approximately $5,433,333 (the "Principal Amount"). The Note has
an interest rate of 12% per annum, with a maturity date nine months from the
issuance date of the Note (the "Maturity Date"). The Note carried an original
issue discount totaling $433,333 and a transaction expense amount of $10,000,
both of which are included in the principal balance of the Note. On the Closing
Date the Company received $1,100,000, with $3,900,000 put into escrow to be held
until certain terms are met, which includes $3,400,000 upon the completion of a
successful uplist to NYSE or NASDAQ. The SPA includes a Security Agreement,
whereby the note is secured by the collateral set forth in the agreement,
covering all of the assets of the Company. All payments made by the Company
under the terms in the note, including upon repayment of this Note at maturity,
shall be subject to an exit fee of 15% of the portion of the Outstanding Balance
being paid (the "Exit Fee").
32
As soon as reasonably possible, the Company will cause the 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 November
15, 2022, the then-current outstanding balance will be increased by 10%.
Following the Uplist, while the Note is still outstanding, ten days after the
Company may have a sale of any of its shares of common stock or preferred stock,
there shall be a Mandatory Prepayment equal to the greater of $3,000,000 or
thirty-three percent of the gross proceeds of the equity sale.
In conjunction with the Merger Agreement, entered into on October 24, 2022, with
Yotta Acquisition Corporation (Note 10), on November 4, 2022, the Company
entered into a Restructuring Agreement for an Amended and Restated Secured
Promissory Note (the "August Note"), through which the August Note was amended
and restated in its entirety. The Restructuring Agreement included key
modifications, in which i) the Uplist terms were removed, ii) in the event that
the Closing of the Merger does not occur on or before December 31, 2022, the
then-current Outstanding Balance will be increased by 2% and shall increase by
2% every 30 days thereafter until the Closing or termination of the Merger
Agreement, and iii) the outstanding balance of the Convertible Note may be
increased by 5% to 15% upon the occurrence of an event of default or failure to
obtain the Lender's consent or notify the Lender for certain major equity
related transactions ("Trigger Events"). The Merger has not yet closed, and
therefore the 2% of the outstanding balance was increased as of December 31,
2022, in the amount of approximately $35,000.
The Restructured August Note was analyzed under ASC 470-50 as to if the change
in terms qualified as a modification or an extinguishment of the note. The
changes in terms were considered an extinguishment as the present value of the
cash flows under the terms of the new debt instrument was evaluated to be a
substantial change, as over 10% difference from the present value of the
remaining cash flows under the terms of the original instrument. As such, with
the removal of the original note and its debt discount and accrued interest as
compared to the restructured note with a fair value of approximately $1,933,000,
there was a loss in extinguishment of approximately $157,000. As a result of the
extinguishment and at the Company's election of the fair value option under ASC
825, the August Note will be accounted for at fair value until they are settled.
In accordance with ASC 815- 15-25-1(b) a hybrid instrument that is measured at
fair value under ASC 825 fair value option each period with changes in fair
value reported in earnings as they occur should not be evaluated for embedded
derivatives. Therefore, the provisions in the August Note were not evaluated as
to if they fell under the guidance of embedded derivatives and were required to
be bifurcated. The August Note was revalued as of December 31, 2022 at
approximately $2,219,000, with a change in fair value of approximately $286,000
recognized in the Statement of Operations.
Promissory Note - related parties
On August 10, 2022, the Company issued a loan agreement for $300,000, with
related parties, which is to be considered priority debt of the Company. As of
this filing, five of the related parties have entered into promissory notes
under the loan agreement for $50,000 each, for a total of cash received of
$250,000. The notes bear interest at a 10% per annum and are due in one year
from the date of the note.
Convertible Debentures
The Company entered into a securities purchase agreement (the "December 2021
SPA") with an investor (the "December 2021 Investor") on December 15, 2021.
Pursuant to the December 2021 SPA, the December 2021 Investor purchased a
secured promissory note (the "December 2021 Note") in the aggregate principal
amount totaling approximately $16,320,000. The December 2021 Note has an
interest rate of 12% per annum, with a maturity date 24 months from the issuance
date of the December 2021 Note (the "Maturity Date"). The December 2021 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
December 2021 Note. The December 2021 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 warrant fair value was
estimated using the Black Scholes Model, with the following inputs: the price of
the Company's common stock of $0.32; a risk-free interest rate of 1.19%, the
expected volatility of the Company's common stock of 209.9%; the estimated
remaining term, a dividend rate of 0%. 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.
33
Beginning on the date that is 6 months from the issuance date of the December
2021 Note, the December 2021 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
December 2021 Investor delivers notice electing to redeem a portion of the
December 2021 Note. The redemption amount shall include a premium of 15% of the
portion of the outstanding balance being paid (the "Exit Fee"). In addition to
the December 2021 Investor's right of redemption, the Company has the option to
prepay the December 2021 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 December 2021 Note, the Company will
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 December 2021 Investor's benefit
such that any redemption using shares of Common Stock could be done using
registered Common Stock. Additionally, as soon as reasonably possible following
the issuance of the December 2021 Note, the Company will cause the 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%. On
February 7, 2022, the Company and the December 2021 Investor entered into an
amendment to the SPA, which extended the date by which the Uplist must be
completed to April 15, 2022. In consideration of the grant of the extension
there was an extension fee of $249,079 added to the principal balance, which has
been recognized as a financing cost in the accompanying unaudited condensed
consolidated financial statement. Subsequently, the date by which the Uplist had
to be completed was further extended to June 15, 2022, and again to November 15,
2022, with no additional fee included. The Company will make a one-time payment
to the December 2021 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%. The December 2021 Note also contains certain negative covenants and Events
of Default. Upon an Event of a Default, at its option and sole discretion, the
December 2021 Investor may consider the December 2021 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 December 2021 Note increases from 5% to
15%, depending upon the specific Event of Default.
On November 4, 2022, the Company entered into a Restructuring Agreement for an
Amended and Restated Secured Promissory Note (the "Senior Note") with the
December 2021 Investor through which the December 2021 Note was amended and
restated in its entirety. These amendments were made in conjunction with the
Merger Agreement, entered into on October 24, 2022, with Yotta Acquisition
Corporation (Note 10), The main modification of the terms of the Senior Note was
that the conversion feature was eliminated. Second, a Mandatory Payment was
added whereby within 3 trading days of the closing upon the Merger an amount
equal to the lesser of (A) one-third of the amount retained in the Trust Account
at the Effective Time or (B) $10,000,000, in order to repay a portion of the
outstanding balance of the Convertible Note; after which the remaining balance
of the Convertible Note is to be repaid in equal monthly installments over a
12-month period beginning on a date after the Closing Date or the termination of
such agreement. Additionally, if the Closing Date is after December 31, 2022,
the outstanding balance of all indebtedness owed by the Company to December 2021
Investor will be increased automatically by 2% and will automatically increase
by 2% every 30 days thereafter until the Closing, or substantially similar terms
as approved by the Board of Directors of the Company. Additional key
modifications include i) the Uplist terms were removed, ii) Maturity date was
modified from December 15, 2023 to December 4, 2023, and iii) the outstanding
balance of the Convertible Note may be increased by 5% to 15% upon the
occurrence of an event of default or failure to obtain the Lender's consent or
notify the Lender for certain major equity related transactions ("Trigger
Events"). As of December 31, 2022, the Merger has not yet closed, and therefore
the 2% of the outstanding balance was increased as of December 31, 2022, in the
amount of approximately $1,309,000.
34
The Restructured Senior Note was analyzed under ASC 470-50 as to if the change
in terms qualified as a modification or an extinguishment of the note. The
changes in terms were considered an extinguishment as the conversion feature has
been eliminated and therefore the modified August Note is determined to be
fundamentally different from the original convertible note. As such, with the
removal of the original note and its debt discount and accrued interest as
compared to the restructured note with a fair value of approximately
$18,914,000, there was a gain in extinguishment of approximately $2,540,000. As
a result of the extinguishment and at the Company's election of the fair value
option under ASC 825, the Senior Note will be accounted for at fair value until
it is settled. In accordance with ASC 815- 15-25-1(b) a hybrid instrument that
is measured at fair value under ASC 825 fair value option each period with
changes in fair value reported in earnings as they occur should not be evaluated
for embedded derivatives. Therefore, the provisions in the Senior Note were not
evaluated as to if they fell under the guidance of embedded derivatives and were
required to be bifurcated. The Senior Note was revalued as of December 31, 2022
at approximately $20,223,000, with a change in fair value of approximately
$1,309,000 recognized in the Statement of Operations.
GHS Purchase Agreement
On November 4, 2022, the Company entered into a purchase agreement (the "GHS
Purchase Agreement") with GHS Investments LLC ("GHS"), an accredited investor,
pursuant to which, the Company may require GHS to purchase a maximum of up to
64,000,000 shares of the Company's common stock ("GHS Purchase Shares") based on
a total aggregate purchase price of up to $5,000,000 over a one-year term that
ends on November 4, 2023. Notwithstanding the foregoing dollar limitations, the
Company and GHS may, from time to time, mutually agree in writing to waive the
aforementioned limitations for a relevant Purchase Notice, which waiver, shall
not exceed the 4.99% beneficial ownership limitation contained in the GHS
Purchase Agreement. The Company is to control the timing and amount of any sales
of GHS Purchase Shares to GHS. The Company intends to use the net proceeds from
this offering for working capital and general corporate purposes.
The "Purchase Price" means, with respect to a purchase made pursuant to the GHS
Purchase Agreement, 90% of the lowest VWAP during the 10 consecutive business
days immediately preceding, but not including, the applicable purchase date. The
Company shall deliver a number of GHS Purchase Shares equal to 112.5% of the
aggregate purchase amount for such GHS Purchase divided by the Purchase Price
per share for such GHS Purchase.
If there are any default events, as set forth in the GHS Purchase Agreement, has
occurred and is continuing, the Company shall not deliver to GHS any Purchase
Notice.
Further, pursuant to the terms of the GHS Purchase Agreement, from November 4,
2022 until the date that is the later of (i) the closing of the transactions
whereby Yotta Merger Sub, Inc. will merge with and into the Company, with the
Company as the surviving company (the "Merger"); and (ii) the 12 month
anniversary of the first delivery of GHS Purchase Shares, upon any issuance by
the Company or any of its subsidiaries of Common Stock or Common Stock
equivalents for cash consideration, indebtedness or a combination of units
thereof (a "Subsequent Financing"), GHS shall have the right to participate in
any financing, up to an amount of the Subsequent Financing equal to 100% of the
Subsequent Financing (the "Participation Maximum") on the same terms, conditions
and price provided for in the Subsequent Financing. Following the Merger, the
Participation Maximum shall be 50% of the Subsequent Financing.
In the three months ended December 31, 2022, the Company sold 17,175,675 shares
of common stock at a net amount of approximately $1,378,000, at share prices
ranging from $0.08 to $0.10. There were 11,306.351 additional shares of common
stock sold after the period end (see Note 11).
Common Shares Issued to Consultant
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 shares of common stock shall vest each
quarter through October 1, 2022, at $24,275, with approximately $171,000 vested
through December 31, 2022.
Common Stock Issued in Relation to Business Agreement
On August 1, 2022, the Company issued 250,000 shares of common stock to a
consultant per the terms of an agreement from June 2021, to be issued upon the
approval of a patent.
35
As of June 22, 2022, 250,000 common shares were issued in relation to a trial
distribution agreement, which after the result of the trial period, both parties
may negotiate and execute a long-term distribution agreement. The shares will be
paid by the Company withholding sufficient profits from the sale by the other
party of the live shrimp
Going Concern and Management Liquidity Plans
The unaudited condensed consolidated financial statements contained in this
quarterly report on Form 10-Q have been prepared, assuming that the Company will
continue as a going concern. The Company has accumulated losses through the
period to December 31, 2022 of approximately $163,038,000 as well as negative
cash flows from operating activities of approximately $4,754,000. 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 unaudited condensed 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 $2,500,000 to
cover all of our capital and 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.
36
Critical Accounting Policies and Estimates
Our significant accounting policies are more fully described in the notes to our
financial statements included in this Quarterly Report on Form 10-Q and in our
Annual Report on Form 10-K for the fiscal year ended March 31, 2020. We believe
that the accounting policies below are critical for one to fully understand and
evaluate our financial condition and results of operations.
Fair Value Measurement
The fair value measurement guidance clarifies that fair value is an exit price,
representing the amount that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants. As
such, fair value is a market-based measurement that should be determined based
on assumptions that market participants would use in the valuation of an asset
or liability. It establishes a fair value hierarchy that prioritizes the inputs
to valuation techniques used to measure fair value. The hierarchy gives the
highest priority to unadjusted quoted prices in active markets for identical
assets or liabilities (Level 1 measurements) and the lowest priority to
unobservable inputs (Level 3 measurements). The three levels of the fair value
hierarchy under the fair value measurement guidance are described below:
Level 1 - Unadjusted quoted prices in active markets that are accessible at the
measurement date for identical assets or liabilities;
Level 2 - Quoted prices in markets that are not active, or inputs that are
observable, either directly or indirectly, for substantially the full term of
the asset or liability; or
Level 3 - Prices or valuation techniques that require inputs that are both
significant to the fair value measurement and unobservable (supported by little
or no market activity).
The 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 unaudited
condensed consolidated financial statements are computed in accordance with ASC
260 - 10 "Earnings per Share", which establishes the requirements for presenting
EPS. Basic EPS is based on the weighted average number of 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 three months ended December 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 751,385,000
underlying common shares, 170 shares of Series E Redeemable Convertible
Preferred shares whose approximately 2,775,000 underlying shares are convertible
at the investors' option at conversion price of 90% of the average of the two
lowest market prices over the last 10 days, 750,000 shares of Series F Preferred
Stock which would be converted at the holders' option into approximately
180,333,000 underlying common shares, whose shares were included in the
calculation of diluted EPS. For the three months ended December 31, 2022, the
Company had 1,500 shares of Series E Redeemable Convertible Preferred shares
whose approximately 5,143,000 underlying shares are convertible at the
investors' option at a fixed conversion price of $0.35, and 18,573,116 warrants
outstanding which were not included in the calculation of diluted EPS as their
effect would be anti-dilutive as their conversion and exercise prices were
greater than the market price of the Company's common shares. For the nine
months ended December 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 768,561,000 underlying common shares, 1,500 shares of Series E
Redeemable Convertible Preferred shares whose approximately 5,143,000 underlying
shares are convertible at the investors' option at a fixed conversion price of
$0.35, and 170 shares of Series E Redeemable Convertible Preferred shares whose
approximately 2,775,000 underlying shares are convertible at the investors'
option at conversion price of 90% of the average of the two lowest market prices
over the last 10 days, 750,000 shares of Series F Preferred Stock which would be
converted at the holders' option into approximately 184,387,000 underlying
common shares, and 18,573,116 warrants outstanding which were not included in
the calculation of diluted EPS as their effect would be anti-dilutive. For the
three and nine months ended December 31, 2021, the Company had Redeemable
Convertible Preferred stock with approximately 9,842,000 underlying common
shares, $18,768,000 in a convertible debenture whose approximately 67,816,000
underlying shares 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.
37
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.
Revenue Recognition
The Company recognizes revenue in accordance with Accounting Standards
Codification (ASC) 606, Revenue from Contracts with Customers, as such, the
Company records revenue when their customers obtain control of the promised
goods or services in an amount that reflects the consideration which the Company
expects to receive in exchange for those goods or services. The Company will
sell primarily to food service distributors, as well as to wholesalers, retail
establishments and seafood distributors.
To determine revenue recognition for the arrangements that the Company
determines are within the scope of Topic 606, the Company performs the following
five steps: (1) identify the contract(s) with a customer by receipt of purchase
orders and confirmations sent by the Company which includes a required line of
credit approval process, (2) identify the performance obligations in the
contract which includes shipment of goods to the customer FOB shipping point or
destination, (3) determine the transaction price which initiates with the
purchase order received from the customer and confirmation sent by the Company
and will include discounts and allowances by customer if any, (4) allocate the
transaction price to the performance obligations in the contract which is the
shipment of the goods to the customer and transaction price determined in step 3
above and (5) recognize revenue when (or as) the entity satisfies a performance
obligation which is when the Company transfers control of the goods to the
customers by shipment or delivery of the products.
Recently Adopted Accounting Pronouncements
Our recently adopted accounting pronouncements are more fully described in Note
2 to our financial statements included herein for the quarter ended December 31,
2022.
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.
38
During the period ending December 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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