Trans American Aquaculture, Inc - 10-K

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Management’s Discussion and Analysis of Financial Condition and Results of Operations contain certain forward-looking statements. Historical results may not indicate future performance. Our forward-looking statements reflect our current views about future events; are based on assumptions and are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those contemplated by these statements. We undertake no obligation to publicly update or revise any forward-looking statements, including any changes that might result from any facts, events, or circumstances after the date hereof that may bear upon forward-looking statements. Furthermore, we cannot guarantee future results, events, levels of activity, performance, or achievements.

Critical Accounting Policies

The following discussions are based upon our financial statements and accompanying notes, which have been prepared in accordance with GAAP Financial Measures of the United States.

The preparation of these financial statements requires management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingencies. We continually evaluate the accounting policies and estimates used to prepare the financial statements. We base our estimates on historical experiences and assumptions believed to be reasonable under current facts and circumstances. Actual amounts and results could differ from these estimates made by management.

Accounting for Our Shrimp Inventory

Our inventory of shrimp is divided into shrimp held for sale and broodstock shrimp. Broodstock are shrimp that are used for breeding purposes; selected for their genetic, disease-free and size attributes they can be more valuable than shrimp held for sale. We collect broodstock from the biomass just before the harvest and segregate them from the shrimp that will be harvested and sold. Broodstock, because of their higher value, may be sold to other shrimp farmers in the United States and overseas. We also keep a number of broodstock for our own restocking purposes. So, during the year, our inventory can consist of shrimp held for sale, broodstock held for sale and broodstock used for restocking purposes.

Shrimp farming is a seasonal business. On a calendar year basis, we typically use the broodstock to breed our larvae shrimp during the first quarter so that by spring the shrimp are held in large post-larvae tanks for development. Later, in early summer, the shrimp are transferred to ponds where they complete the grow out process over the next five to nine months. This can vary if we have more than one cycle of shrimp. Grow out may begin in the second in the second quarter, with a second cycle grow out beginning in early summer. The first harvest cycle can occur in early fall with the second harvest cycle occurring in November or December. During 2023, we had one cycle and harvest occurred in early November 2023. During 2024, we have not stocked, nor have we had a harvest; however, we are in process of larval development for broodstock sales, genetics families and line continuation.

Our shrimp inventory is valued at lower of cost or the net realizable value on a first-in, first-out basis.

The inventory on December 31, 2024 consists of live broodstock animals. Included in this amount are costs and charges directly and indirectly incurred in bringing shrimp inventory to its existing condition and location as noted in FASB ASC 330-10-30.

At December 31, 2024, the broodstock shrimp for the 2024 harvest had been identified and segregated from consumable shrimp in outdoor ponds to indoor tanks. The table below summarizes inventory at December 31, 2024 and 2023.

Held for Sale

Shrimp

Broodstock

Total Held for Sale

Broodstock - Restocking

Total inventory

At December 31, 2024, approximately 4,415 animals of broodstock will be used to populate our next harvest in 2025. The cost of the broodstock was reclassified to broodstock held for restocking on a pro rata basis of cost per pound of the total biomass of shrimp held for sale. Subsequent costs will be allocated in accordance with ASC 330-10-30.

Business Overview

Founded in 2017, we are a leading aquaculture company that provides premium quality, farm-raised pacific white shrimp, 100% free of antibiotics and hormones, to the U.S. domestic seafood market. We believe we are a leading aquaculture company due to Best Aquaculture Practices (“ BAP ”) guidelines, 14 considering the rarity of the standards in the U.S. Although we are not currently in full compliance with BAP guidelines, we are working towards full compliance. At the moment, we adhere to BAP guidelines as part of our operating and production model. Grown at our 1,880-acre farm located in Rio Hondo, Texas, on the largest scale aquaculture farm in the U.S., our shrimp are meticulously raised to exceed in line with industry best practices according to BAP guidelines 15 using only authentic, sustainable practices. Within our controlled facility, each harvest is responsibly raised and cultivated onsite with minimal ecological footprint, promising our customers a superior product developed from the highest standard of care.

We have and will continue to utilize superior genetic linage broodstock for cultivation of own post larvae in our onsite genetics, maturation and hatchery facilities. These facilities allow us to continually develop animals with increasing growth rates, lower mortality, and stronger disease resistance. We began formal production runs in 2018 and to date have produced almost one million lbs. of shrimp for consumption.

14 https://www.bapcertification.org/Downloadables/pdf/BAP%20-%20BAP%20Farm%20Standard%20-%20Issue%203.1%20-%2007-February-2023.pdf

15 https://www.bapcertification.org/Downloadables/pdf/BAP%20-%20BAP%20Farm%20Standard%20-%20Issue%203.1%20-%2007-February-2023.pdf

Recent trends in the shrimp industry, including that, according to preliminary 2023 data from the National Marine Fisheries Service, shrimp prices have dropped as much as 44% since 2022. 16 Our business, prospects, revenues, profitability, and future growth are highly dependent upon the prices of and demand for shrimp. Our ability to borrow and to obtain additional capital on attractive terms is also substantially dependent upon shrimp prices. These prices have been and are likely to continue to be extremely volatile for seasonal, cyclical, and other reasons. Any substantial or extended decline in the price of shrimp will have a material adverse effect on our financing capacity and our prospects for commencing and sustaining any economic commercial production. In addition, increased availability of imported shrimp can affect our business by lowering commodity prices. This could reduce the value of inventories, held both by us and by our customers, and cause many of our customers to reduce their orders for new products until they can dispose of their higher-cost inventories.

Going Concern Uncertainty

As shown in the accompanying financial statements, during the year ended December 31, 2024, we reported a net loss of $2,808,894. As of December 31, 2024, our current liabilities exceeded its current assets by $3,351,602. As of December 31, 2024, we had $0 of cash. As shown in the accompanying financial statements, during the year ended December 31, 2023, we reported a net loss of $1,894,993. As of December 31, 2023, our current liabilities exceeded its current assets by $3,478,423. As of December 31, 2023, we had $6,600 of cash.

We will require additional funding to finance the growth of our operations and achieve our strategic objectives. These factors, as relative to capital raising activities, create doubt as to our ability to continue as a going concern. We are seeking to raise additional capital and are targeting strategic partners to accelerate the sales and marketing of our products and begin generating revenues. Our ability to continue as a going concern is dependent upon the success of future capital offerings or alternative financing arrangements, expansion of our operations and generating sales. The accompanying financial statements do not include any adjustments that might be necessary should we be unable to continue as a going concern. Management is actively pursuing additional sources of financing sufficient to generate enough cash flow to fund its operations; however, management cannot make any assurances that such financing will be secured.

Results of Operations for the Years Ended December 31, 2024 and 2023

Revenues

For the year ended December 31, 2024, total revenues were $331,645 compared to $101,574 for the same period in 2023, an increase of $213,571 or 227%. This increase primarily consisted of increases in the production of shrimp for consumption sales. In 2024, the Company focused efforts primarily on the development of genetic lines and did not produce a meaningful harvest. What shrimp revenue we did have was a result of inventory. In future periods, our focus will be on developing genetic lines, selling broodstock and producing shrimp at the appropriate time.

Cost of Goods Sold and Gross Profit

For the year ended December 31, 2024, cost of goods sold were $321,615 compared to $661,591 for the same period in 2023, a decrease of $339,976 or 51%. This decrease was primarily a result of streamlining of shrimp production and focused smaller harvest totals.

The gross profit for the year ended December 31, 2024 was $10,030 for an operating loss margin of 3% compared to a gross loss of $560,018 for the same period in 2023, producing an operating loss margin of -551%, due to significantly reduced shrimp production.

16 https://civileats.com/2023/06/20/cheap-imports-leave-us-shrimpers-struggling-to-compete/#:~:text=The%20U.S.%20Food%20and%20Drug,

before%20entering%20the%20U.S.%20market

Operating Expenses

General and administrative expenses for year ended December 31, 2024 decreased by $18,534, or 2%, to $846,234 from $864,768 for the year ended December 31, 2023. The decrease is due primarily to a reduction non-cash compensation for consultants with a slight increase in legal and professional fees to $218,194 due to legal and accounting fees.

Other Income (Expense)

For the year ended December 31, 2024, we had interest expenses of $477,964 compared to interest expenses of $490,053 for the same period in 2023, a decrease in interest expense of $12,089. This decrease in interest expense was due primarily to lower financing charges on a credit card account.

Net Income (Loss)

As a result of the above, we reported a net loss of $2,808,894 for the year ended December 31, 2024 compared to a net loss of $1,894,993 for the year ended December 31, 2023. The main reason for the increased loss is the expense recognition for the difference in the asset value to the debt owed on the property

Liquidity and Capital Resources

As of December 31, 2024, we had a cash balance of $0, compared to cash balance of $6,600 as of December 31, 2023. We currently do not have sufficient cash to fund our operations for the next 12 months and we will require working capital to complete development and production, testing and marketing of our products and to pay for ongoing operating expenses. We anticipate adding management positions for corporate development and the corresponding operations of the Company, but this will not occur prior to obtaining additional capital. Currently, competitively priced loans from banks or other lending sources for lines of credit or similar short-term borrowings are not available to us. We have been able to raise working capital to fund operations through the issuances of convertible preferred stock to GHS, factoring our receivables, and borrowing funds from employees of the Company. As of December 31, 2024, our current liabilities exceeded our current assets by $3,351,602 as compared to 2023 when current liabilities exceeded current assts by $3,478,423, a decrease of $126,821.

On December 2, 2024, Kings Aqua Farm LLC filed a Deed in Lieu (“ DIL ”) of Foreclosure due to non-payment by Trans American Aquaculture. The land was conveyed back to Kings Aqua Farm because of the DIL filing. Over the next two weeks, various threats were made by Kings Aqua Farm on the assets of TAA, which are paramount to the survival and future of the company. To protect those key assets and any future business, TAA elected to file a voluntary Chapter 11  Bankruptcy .

The Company is also a party to an SBA Loan through a bank in the original amount of $150,000 bearing interest at 3.75% per annum, due in 2050, yielding a monthly payment amount of $719.

Liquidity is also affected by notes to our shareholders. At December 31, 2024, shareholders have loaned the Company approximately $1,646,636 which notes accrue interest at ranging from 12.0% to 18% per annum and were due July 1, 2024. No additional extensions have been completed as of yet, and the note are in default, however, to date, no one has called them due.

Cash Flows from Operating Activities

During the year ended December 31, 2024, net cash used in operating activities was $2,996,776, an increase usage of $1,888,864 resulting largely from $2,808,894 in net operating loss and a decrease in accrued interest expense of 379,956 in connection with the Deed in Lieu of Foreclosure and resulting settlement of the debt and recognition of the expense.

By comparison, during the year ended December 31, 2023, net cash used in operating activities was $1,107,912, an increase usage of $602,009 resulting largely from $1,894,993 in net operating loss and an increase of $85,833 in inventory due to a build in preparation for our annual harvest, offset by an increases in accounts payable and accrued expenses of $387,549 in connection with our harvest preparation and accrued interest expense of $342,395 due mainly to falling into arrears on the note payable covering our farm property and increased interest expense on notes payable to shareholders, and an increase of $100,000 in common stock issued for consulting services.

Cash Flows from Investing Activities

During the year ended December 31, 2024, we had $6,717,292 net cash used in investing activities. During the year ended December 31, 2023, we had $15,132 net cash used in investing activities. The difference was in removal of the farm note and land improvements related to the Deed in Lieu of Foreclosure.

Cash Flows from Financing Activities

During the year ended December 31, 2024, net cash provided by financing activities was $4,774,987 which was mainly comprised of which was mainly comprised of debt extinguishment of the farm note due to the deed in Lieu of Foreclosure. During the year ended December 31, 2023, net cash provided by financing activities was $1,129,644 which was mainly comprised of purchases of Series D Preferred Stock of $1,028,000 by GHS, additional borrowings from our shareholders of $255,227, offset by $103,266 of payments to shareholder noteholders.

Factors That May Affect Future Results

Management’s Discussion and Analysis contains information based on management’s beliefs and forward-looking statements that involve several risks, uncertainties, and assumptions. There can be no assurance that actual results will not differ materially from the forward-looking statements as a result of various factors, including but not limited to, our ability to obtain the equity/debt funding or borrowings necessary to produce, market and launch our products, our ability to successfully serially produce and market our products; our success establishing and maintaining production lines; the acceptance of our products by customers; our continued ability to pay operating costs; our ability to meet demand for our products; the amount and nature of competition from our competitors; the effects of technological changes on products and product demand; and our ability to successfully adapt to market forces and technological demands of our customers.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our consolidated financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity capital expenditures or capital resources.

Recent Accounting Pronouncements

We have provided a discussion of recent accounting pronouncements in NOTE 2 to the Audited Annual Consolidated Financial Statements for 2024.