New write up by Hapax Capital on SHMP
NaturalShrimp: Years Of Trials And Tribulations Has Led To This Moment
Mar. 05, 2021 NaturalShrimp Incorporated (SHMP)
Summary
NaturalShrimp announces increased stocking of Texas plant and initial stocking of Iowa plant as well as the acquisition of long-time technology partner Hydrenesis.
NaturalShrimp adds capital markets veteran to Advisory board.
NaturalShrimp has solved a 50-year problem in the aquaculture industry with their patented process that grows fresh, healthy, environmentally sustainable seafood without the use of antibiotics or chemicals.
NaturalShrimp has applied for listing on the NASDAQ which will be a tipping point allowing institutional investors and capital to flow into their growing business.
Massive scalability potential in the domestic shrimp growing market that currently sees only 5% of shrimp consumption coming from United States producers.
NaturalShrimp (OTCQB:SHMP) was founded in 2001 and is headquartered in Dallas, Texas. They currently have production
facilities outside San Antonio, Texas. They are an aquaculture technology company (Aquatic farming). They utilize a land-based
recirculating aquaculture system (RAS) using negative oxygen reduction potential (ORP) and anti-oxidation treatments (Gas and Plasma) in the production of fresh shrimp and seafood.
Today, we are going to dive into several topics we have not yet discussed.
First, we want to discuss ammonia and how it has plagued this industry since it began, and how NaturalShrimp feels they have “cracked the code” in combating this issue.
Then we want to address the capital structure of SHMP, the pros and cons of it, and what we expect to happen there moving forward. We will discuss the company's origin, and just want to clear up any anxiety surrounding this capital structure.
Next, we want to speculate on some potential financials and what those could look like in the short term.
We will consider what the next 6-12 months will look like with shrimp and potentially other products like salmon.
We want to update on where we feel the company is with their board appointees and expansions.
Lastly, we just want to restate that yes, NaturalShrimp is an aquaculture company, but we see them as a technology company
with huge growth potential.
Ammonia
Ammonia has plagued the shrimp aquaculture industry since its inception. The decaying process of all living things creates ammonia,
which is part of the nitrogen cycle. As we have previously stated, we are not scientists, so we are not going to go into detail about ammonia and how it affects shrimp, but we do want to EMPHASIZE that it is arguably the most difficult factor to control when trying to grow shrimp. Many producers have attempted to fix this issue, but until now, nobody has been able to “crack the code”.
The manpower, cost, and necessity to control ammonia have plagued the industry since its inception.
NaturalShrimp and their technology has “cracked the code”. They have figured out, through rigorous testing, trial and error, and technological advances, how to naturally control and eliminate the issues surrounding ammonia in their farming operations. This alone, if scalable, is a complete game-changer in the way humanity grows aquatic food, and NaturalShrimp has a global patent on this process. We will not go into depth here, because we value your time, but here is a link discussing Electrocoagulation or "EC" and how NaturalShrimp is positioned to take advantage. Fresh Shrimp Technology - Natural Shrimp From this link, you can go down the rabbit hole of this technology, process, and make up your own mind if you feel this is a revolutionary game-changer.
Capital Structure
This is perhaps the biggest question mark surrounding NaturalShrimp. Anyone who has followed this company over the years or done even a basic dive into their financial filings has probably found themselves scratching their chin at some point, attempting to make sense of it all. You have also probably noticed that the number of outstanding shares has grown substantially over the last few years. We will address this as well.
First, let us address the massive increase in outstanding shares. Yes, it is not ideal, but we believe that it was necessary for them to grow and survive. NaturalShrimp has been around for a long time, and they have gone through many iterations and trials of development, been faced with a disaster such as the La Coste fire back in early 2020, and have been on the verge of shutting down numerous times due to lack of financing. There are complex allocations of preferred shares, consisting of Series A preferred, Series B Preferred, Series D Preferred, and an Equity Financing Agreement. I will not go into the specifics of each (however we have provided a table below with basics), as this is available in their financial filings, but I want to point out that GHS Investments LLC is the primary beneficiary in these deals. They have and will continue to make some serious money from their investments, and in our opinion, they should.
They took a lot of risk by funding NaturalShrimp over the years, and they could have walked away at any time. Their continued support has granted them a sizable interest in the company, one we believe will be rewarded; however, we also believe that NaturalShrimp will clean this up in the near term. They will need to clean up this cluttered equity structure to meet listing requirements and clean up the view for shareholders and future institutional investors.
Of course, we could be wrong in our assumption, but based on what we are seeing and reading, NaturalShrimp is on the doorstep of up listing
and becoming a major technological player in the aquaculture industry.
*We do want to note that we expect more capital raising and potential share issuing in the short term. The market could receive this in a positive or negative light, but even with short-term volatility, we still feel that the moves NaturalShrimp continues to make will set them up to be extremely successful moving forward. Any significant drop that could potentially happen due to more dilution may be a welcome “buy the dip” opportunity.*
One more item of note on equity structure is the infamous “Multiplayer Online Dragon” shell. Multiplayer Online Dragon was an operations entity that was listed OTC and owned by current CFO William Delgado. The path of least resistance for Natural Shrimp to initially list on the OTC markets was to merge with Multiplayer Online Dragon, which they did.
Multiplayer Online Dragon became NaturalShrimp. We basically equate this to something like a SPAC merger that is all the rage right now. We researched this up and down and could not find anything shady or any potential issues coming out of this combination, but feel it is always
worth addressing because Multiplayer Online Dragon is a unique and fantastic company name.
Income Projections
Next, we want to look at some potential financials surrounding the company in its current state. These are estimates and speculations and are based on their current footprint. We do feel that it will appreciate to a much greater value in time, as it continues to expand, develop, and move into shrimp markets across the United States and this does not even consider the potential of other species such as salmon that are coming down the road.
*Would also like to note that we are being EXTREMELY conservative with these estimates. It takes 24 weeks for shrimp to fully mature which assumes scaled production and revenue in Q4 of this year*
Natural Shrimp just announced additional stocking at their Texas plant NaturalShrimp, Inc. Ramping Up Production Both in Texas and Iowa - Natural Shrimp and that they would do their initial test stocking in Iowa on March 24.
Assuming they achieve successful test results, Natural Shrimp potentially could see full production at the end of Q3 assuming a 6-month growth cycle from post-larvae to market weight. At the La Coste plant, Natural Shrimp expects to produce over 3,000 lbs. per week. The newly acquired Iowa plant, which has over 2.7mm gallons, is estimated to be capable of producing over 3 times the weekly volume of the La Coste plant-based on size comparison between the two plants. Combined, both sites should produce and market 12,300 lbs. of shrimp weekly. Once production reaches full capacity, it is expected that harvests will take place weekly.
Based on the interior markets they expect to serve, Natural Shrimp should realize a wholesale price of $12.99/lbs., leading to $2.07mm in quarterly gross revenue. The technology developed by Natural Shrimp does not require the entire water volume to pass through their water treatment system. This significantly reduces the power requirements leading to lower operating costs which are estimated to be $4.49/lbs.
Looking at the seafood industry, SG&A typically falls within 10-15% of revenue. Since Natural Shrimp will be a newer entrant in the market, we expect that selling costs will be towards the higher end of the range to account for initial market penetration. Before the La Coste plant fire, the infrastructure was valued at $1.9 mm and the Iowa facility was purchased at $10.1mm. Utilizing straight-line depreciation and expecting some additional investments needed to reach production, we estimated depreciation to be $305,000.
Currently, quarterly interest expense is $180,000. To finance working capital needs, we expect Natural Shrimp to draw on its two available 5% credit lines which total $550,453 of available credit. This could potentially increase their quarterly interest expense to $207,522. R&D is not expected to increase since the technology has proven to be viable and will require minimal additional research.
With these production projections and cost assumptions, we expect $525,814 in net income for Q4 of this year.
Below summarizes our income forecast for 2021
Based on our calculations, you can piece together your valuation. We do want to acknowledge that we feel SHMP is currently overvalued based on traditional fundamental analysis, however, we feel that the potential upside to this company is many times greater than the downside risk. We continue to hold a very bullish expectation for the share price; however, we do expect some shorter-term dips and volatility as the equity structure shakes out and initial production expenses are realized.
Current and Future State: shrimp, salmon, and more?
It is no secret that a company that carries the symbol “SHMP” is probably involved in the shrimp industry, however, the company’s involvement in salmon production has been quietly growing over the last several quarters. They have been involved recently in two big studies centered around salmon. First was a phase-I technology trial in Australia that was meant to combat Amoebic Gill Disease or "AGD" in Atlantic salmon. AGD is a major hurdle in salmon aquaculture and a fix for this will be extremely valuable for NaturalShrimp’s efforts and could potentially be licensed to salmon farmers across the globe. This was in partnership with Hydrenesis. Yes, the same Hydrenesis they announced a joint venture with earlier this year and are now acquiring outright. Hydrenesis brings another patented technology to the table that will not only further improve shrimp capabilities but will also potentially solve a long-standing problem in the salmon industry. Please visit the links below to learn more.
NaturalShrimp's Amoebic Gill Disease Technology Completes Successful Phase-I Testing
NaturalShrimp, Inc. and Hydrenesis Form Joint Venture in Florida
NaturalShrimp Signs Letter of Intent to Acquire Aquaculture Assets of Hydrenesis Aquaculture, LLC
The second study is also in partnership with Hydrenesis. This one is taking place currently in Bergen, Norway, and is testing the technology on the raising of freshwater salmon. Although there are no official test results yet, rumors point towards attractive results across these tests.
NaturalShrimp to study fish health in RAS
We feel that with the momentum being seen thus far, NaturalShrimp could realistically introduce salmon into their product line within the next 6 to 12 months, opening an entirely new revenue channel.
As mentioned before, shrimp is the number one consumed seafood in the United States by far and only 5% is produced domestically.
Salmon is the number two most consumed seafood in the United States and roughly 35% is produced domestically. Of that, roughly 60% is farmed. Having a patented, efficient, revolutionary, and most important, CLEAN and HEALTHY process to produce the two most consumed seafood products in the United States is something that genuinely excites us on the potential of NaturalShrimp.
We feel this is just the beginning of the company’s potential. We have scoured the market for a company with a technology that could be a potential competitor to NaturalShrimp, and we have not been able to locate anything.
Footprint
NaturalShrimp hopes to cover the bulk of the US population with regionalized production facilities. Imagine NaturalShrimp NYC, NaturalShrimp LA, NaturalShrimp Disney World. These are assumptions, but we feel that it is highly likely that their expansion plays out this way. NaturalShrimp Iowa is a perfect example of what we expect moving forward. The beauty of their technology and growing process is that all they need is access to water. With access to water, they can grow natural, healthy shrimp and they can distribute without ever having to freeze them. They could license their technology to bigger companies or new companies, but we do not feel that this is what they want to do. They have a distinct technological advantage that has taken over a decade to build, and we feel that they will take full advantage of this opportunity as they scale and build facilities across the country.
Bureaucratic Stuff
We feel it is important to discuss recent additions and moves across NaturalShrimp’s boards and executive suite. First, it is impossible to ignore the appointment of Peter Najarian to its Advisory Board. There are few CNBC personalities bigger than Pete, and his involvement is another big move by the NaturalShrimp team. Pete is highly sought after in the capital markets and we assume he does not join boards just for fun. His involvement, we assume, will be instrumental in evolving the capital structure of the company and should play a role in attracting institutional capital in the future.
NaturalShrimp, Inc. Appoints Peter Najarian to its Advisory Board
We are still awaiting the company to name the final two independent board members that are necessary for NASDAQ listing requirements. As of their last press release, they said they believe they had a few chosen. We expect these to be announced over the next several months based on press releases from CEO Gerald Easterling.
We also feel (this is just our speculation from our time spent following the company) that NaturalShrimp will make some additions across their executive group in the coming months and years. The current executive team, led by Mr. Easterling has done a fantastic job getting NaturalShrimp to the precipice of success, but as a company grows, so do its needs for experience and operations. We feel at this point, they could benefit from some experienced additions to the operations and marketing team. Any industry veterans
or even business veterans with expertise in these areas could join the current team and really put NaturalShrimp in a position to thrive.
What is NaturalShrimp
We just wanted to once again make it known that we view NaturalShrimp as a technology company, not just a shrimp farming aquaculture company. They have patented and acquired patents on some serious technological advancements that have the potential to revolutionize aquaculture as we know it. This has potential ramifications that will benefit humanity for decades to come, as food scarcity and sustainable food production become bigger issues.
Our Position and how we are Managing It
We have been long SHMP since last year and have continued to accumulate on most down moves, no matter how minor. At this time, we feel like we have acquired a position size we are comfortable with and hope to be rewarded upon increased interest from institutional investors.
Conclusion
NaturalShrimp continues to make all the right moves. They have "risen from the ashes", and now they are at the fulcrum of operations. Revenue generation is set to begin this year and the team has been working diligently to prepare for their initial launch.
We remain bullish on NaturalShrimp and believe there will be explosive growth in their future.
This article was written by
Hapax Capital
Veteran, CFP(R), Hedge Fund Manager, Former Financial Planner/Advisor
Disclosure: I am/we are long SHMP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation
for it. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: We have been long SHMP since 2020.
