PART I – FINANCIAL INFORMATION
OCEAN SMART, INC. | | | | |
(FORMERLY EDGEWATER FOODS INTERNATIONAL, INC.) | | | | |
CONSOLIDATED BALANCE SHEETS | | | | |
| | | | | | |
| | February 28, | | | August 31, | |
| | 2009 | | | 2008 | |
| | (unaudited) | | | | |
ASSETS | | | | |
| | | | | | |
Current assets: | | | | | | |
Cash | | $ | 93,993 | | | $ | 712,298 | |
Accounts receivable, net | | | 193,342 | | | | 195,402 | |
Inventory | | | 840,199 | | | | 1,290,702 | |
Other current assets | | | 57,427 | | | | 80,011 | |
| | | | | | | | |
Total current assets | | | 1,184,961 | | | | 2,278,413 | |
| | | | | | | | |
Property, plant and equipment, net | | | 3,211,435 | | | | 3,982,336 | |
| | | | | | | | |
Long-term inventory | | | 791,022 | | | | 986,327 | |
| | | | | | | | |
Loans receivable, related party | | | 155,165 | | | | 114,079 | |
| | | | | | | | |
Other assets | | | 8,647 | | | | 3,758 | |
| | | | | | | | |
Total assets | | $ | 5,351,230 | | | $ | 7,364,913 | |
| | | | | | | | |
LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | |
| | | | | | | | |
Current liabilities: | | | | | | | | |
Short term debt | | $ | 153,776 | | | $ | 109,648 | |
Line of credit | | | 80,837 | | | | 124,766 | |
Current portion of long term debt | | | 329,713 | | | | 396,885 | |
Accounts payable and accrued liabilities | | | 897,412 | | | | 991,061 | |
| | | | | | | | |
Total current liabilities | | | 1,461,738 | | | | 1,622,360 | |
| | | | | | | | |
Long term debt, net current portion | | | 439,167 | | | | 548,004 | |
| | | | | | | | |
Total liabilities | | | 1,900,905 | | | | 2,170,364 | |
| | | | | | | | |
Stockholders' equity | | | | | | | | |
Series A Preferred stock, par $0.001, 10,000,000 | | | | | | | | |
authorized, 7,773,998 issued and outstanding | | | | | | | | |
at February 28, 2009 and August 31, 2008, respectively | | | 7,774 | | | | 7,774 | |
Series B Preferred stock, par $0.001, 100 authorized, | | | | | | | | |
207 issued and outstanding at | | | - | | | | - | |
February 28, 2009 and August 31, 2008, respectively | | | | | | | | |
Series C Preferred stock, par $0.001, 1,000,000 | | | | | | | | |
authorized, 747,870 issued and outstanding | | | | | | | | |
at February 28, 2009 and August 31, 2008, respectively | | | 748 | | | | 748 | |
Series D Preferred stock, par $0.001, 380,000 | | | | | | | | |
authorized, 304,558 issued and outstanding | | | | | | | | |
at February 28, 2009 and August 31, 2008, respectively | | | 305 | | | | 305 | |
Common stock, par $0.0001, 100,000,000 authorized, | | | | | | | | |
25,327,777 and 24,479,150 issued and outstanding at | | | | | | | | |
February 28, 2009 and August 31, 2008, respectively | | | 2,533 | | | | 2,448 | |
Additional paid in capital | | | 27,862,817 | | | | 27,497,781 | |
Accumulated deficit | | | (23,501,360 | ) | | | (22,103,314 | ) |
Accumulated other comprehensive income (loss) - | | | | | | | | |
foreign exchange adjustment | | | (922,492 | ) | | | (211,193 | ) |
| | | | | | | | |
Total stockholders' equity | | | 3,450,325 | | | | 5,194,549 | |
| | | | | | | | |
Total liabilities and stockholders' equity | | $ | 5,351,230 | | | $ | 7,364,913 | |
See accompanying notes to consolidated financial statements
OCEAN SMART, INC. | |
(FORMERLY EDGEWATER FOODS INTERNATIONAL, INC.) | |
CONSOLIDATED STATEMENTS OF OPERATIONS | |
THREE AND SIX MONTHS ENDED FEBRUARY 28, 2009 and FEBRUARY 29, 2008 | |
(unaudited) | |
| | | | | | | | | | | | |
| | THREE MONTHS ENDED | | | SIX MONTHS ENDED | |
| | FEBRUARY 28, | | | FEBRUARY 29, | | | FEBRUARY 28, | | | FEBRUARY 29, | |
| | 2009 | | | 2008 | | | 2009 | | | 2008 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Revenue | | $ | 432,977 | | | $ | 365,763 | | | $ | 1,010,082 | | | $ | 794,965 | |
Cost of goods sold | | | 728,919 | | | | 493,421 | | | | 1,369,238 | | | | 1,028,271 | |
| | | | | | | | | | | | | | | | |
Gross profit (loss) | | | (295,942 | ) | | | (127,658 | ) | | | (359,156 | ) | | | (233,306 | ) |
| | | | | | | | | | | | | | | | |
Expenses: | | | | | | | | | | | | | | | | |
General and administrative expenses | | | 337,966 | | | | 760,772 | | | | 525,533 | | | | 1,484,699 | |
Salaries and benefits | | | 83,009 | | | | 93,258 | | | | 167,934 | | | | 188,492 | |
| | | | | | | | | | | | | | | | |
Total operating expenses | | | (420,975 | ) | | | (854,030 | ) | | | (693,467 | ) | | | (1,673,191 | ) |
| | | | | | | | | | | | | | | | |
Loss from operations | | | (716,917 | ) | | | (981,688 | ) | | | (1,052,623 | ) | | | (1,906,497 | ) |
| | | | | | | | | | | | | | | | |
Other income (expense): | | | | | | | | | | | | | | | | |
Interest income (expense), net | | | (11,788 | ) | | | 2,693 | | | | (23,028 | ) | | | 6,699 | |
Other income (expense) | | | - | | | | (35,798 | ) | | | - | | | | 28,310 | |
| | | | | | | | | | | | | | | | |
Total other income (expense), net | | | (11,788 | ) | | | (33,105 | ) | | | (23,028 | ) | | | 35,009 | |
| | | | | | | | | | | | | | | | |
Net loss | | | (728,705 | ) | | | (1,014,793 | ) | | | (1,075,651 | ) | | | (1,871,488 | ) |
| | | | | | | | | | | | | | | | |
Dividend on preferred stock | | | (322,395 | ) | | | (310,476 | ) | | | (322,395 | ) | | | (310,476 | ) |
| | | | | | | | | | | | | | | | |
Deemed dividend for beneficial | | | | | | | | | | | | | | | | |
conversion feature | | | - | | | | - | | | | - | | | | (163,386 | ) |
| | | | | | | | | | | | | | | | |
Net loss applicable to | | | | | | | | | | | | | | | | |
common shareholders | | | (1,051,100 | ) | | | (1,325,269 | ) | | | (1,398,046 | ) | | | (2,345,350 | ) |
| | | | | | | | | | | | | | | | |
Foreign currency translation | | | (13,220 | ) | | | 50,279 | | | | (711,299 | ) | | | 298,335 | |
| | | | | | | | | | | | | | | | |
Comprehensive loss | | $ | (1,064,320 | ) | | $ | (1,274,990 | ) | | $ | (2,109,345 | ) | | $ | (2,047,015 | ) |
| | | | | | | | | | | | | | | | |
Net loss applicable to common shareholder per share | | | | | | | | | | | | | | | | |
Basic and diluted | | $ | (0.04 | ) | | $ | (0.06 | ) | | $ | (0.06 | ) | | $ | (0.10 | ) |
| | | | | | | | | | | | | | | | |
Weighted average shares outstanding | | | | | | | | | | | | | | | | |
Basic and diluted | | | 25,173,250 | | | | 23,903,501 | | | | 24,890,581 | | | | 23,811,678 | |
OCEAN SMART, INC. | | | | |
CONSOLIDATED BALANCE SHEETS | | | | |
NOVEMBER 30 and AUGUST 31, 2009 | | | | |
| | | | | | |
| | November 30, | | | August 31, | |
| | 2009 | | | 2009 | |
| | (unaudited) | | | | |
ASSETS | | | | |
| | | | | | |
Current assets: | | | | | | |
Cash | | $ | 17,777 | | | $ | 12,356 | |
Accounts receivable, net | | | 207,598 | | | | 233,376 | |
Inventory | | | 554,216 | | | | 553,311 | |
Other current assets | | | 47,045 | | | | 52,056 | |
| | | | | | | | |
Total current assets | | | 826,636 | | | | 851,099 | |
| | | | | | | | |
Property, plant and equipment, net | | | 3,285,291 | | | | 3,350,709 | |
| | | | | | | | |
Long-term inventory | | | 1,099,448 | | | | 1,075,463 | |
| | | | | | | | |
Investments in other assets | | | 25,063 | | | | 9,335 | |
| | | | | | | | |
Total assets | | $ | 5,236,438 | | | $ | 5,286,606 | |
| | | | | | | | |
LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | |
| | | | | | | | |
Current liabilities: | | | | | | | | |
Short term debt | | $ | 165,624 | | | $ | 161,932 | |
Line of credit | | | 76,940 | | | | 75,194 | |
Current portion of long term debt | | | 345,222 | | | | 354,318 | |
Accounts payable and accrued liabilities | | | 1,211,188 | | | | 1,111,503 | |
| | | | | | | | |
Total current liabilities | | | 1,798,975 | | | | 1,702,947 | |
| | | | | | | | |
Long term debt, net of current portion | | | 615,556 | | | | 598,306 | |
| | | | | | | | |
Total liabilities | | | 2,414,531 | | | | 2,301,253 | |
| | | | | | | | |
Stockholders' equity | | | | | | | | |
Series A Preferred stock, par $0.001, 10,000,000 | | | 7,774 | | | | 7,774 | |
authorized, 7,773,998 issued and outstanding | | | | | | | | |
at November 30 and August 31, 2009, respectively | | | | | | | | |
Series B Preferred stock, par $0.001, 220 | | | - | | | | - | |
authorized, 207 issued and outstanding at | | | | | | | | |
November 30 and August 31, 2009, respectively | | | | | | | | |
Series C Preferred stock, par $0.001, 1,000,000 | | | 748 | | | | 748 | |
authorized, 747,870 issued and outstanding | | | | | | | | |
at November 30 and August 31, 2009, respectively | | | | | | | | |
Series D Preferred stock, par $0.001, 380,000 | | | 305 | | | | 305 | |
authorized, 304,558 issued and outstanding | | | | | | | | |
at November 30 and August 31, 2009, respectively | | | | | | | | |
Common stock, par $0.0001, 100,000,000 authorized, | | | 2,592 | | | | 2,592 | |
25,920,296 issued and outstanding at November 30 | | | | | | | | |
and August 31, 2009, respectively | | | | | | | | |
Additional paid in capital | | | 28,378,004 | | | | 28,372,640 | |
Accumulated deficit | | | (25,274,455 | ) | | | (25,008,570 | ) |
Accumulated other comprehensive income (loss) - | | | | | | | | |
foreign exchange adjustment | | | (293,061 | ) | | | (390,136 | ) |
| | | | | | | | |
Total stockholders' equity | | | 2,821,907 | | | | 2,985,353 | |
| | | | | | | | |
Total liabilities and stockholders' equity | | $ | 5,236,438 | | | $ | 5,286,606 | |
See accompanying notes to consolidated financial statements
OCEAN SMART, INC. | |
(FORMERLY EDGEWATER FOODS INTERNATIONAL, INC.) | |
CONSOLIDATED STATEMENTS OF CASHFLOWS | |
SIX MONTHS ENDED FEBRUARY 28, 2009 and FEBRUARY 29, 2008 | |
(unaudited) | |
| | | | | | |
| | 2009 | | | 2008 | |
| | | | | | |
Cash flows from operating activities: | | | | | | |
| | | | | | |
Net loss | | $ | (1,075,651 | ) | | $ | (1,871,488 | ) |
| | | | | | | | |
Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | | | |
Depreciation and amortization | | | 240,858 | | | | 286,956 | |
Stock option expense | | | 10,726 | | | | 1,032,845 | |
Common stock issued for services | | | - | | | | 49,900 | |
Inventory impairment | | | 75,000 | | | | - | |
| | | | | | | | |
Changes in current assets and liabilities: | | | | | | | | |
Accounts receivable | | | 2,060 | | | | (24,187 | ) |
Prepaid expenses | | | 22,584 | | | | - | |
Other current assets | | | - | | | | (16,587 | ) |
Loan receivable | | | (62,153 | ) | | | (33,887 | ) |
Inventory | | | 282,564 | | | | (321,797 | ) |
Accounts payable | | | (98,049 | ) | | | 172,304 | |
| | | | | | | | |
Net cash used in operating activities | | | (602,061 | ) | | | (725,941 | ) |
| | | | | | | | |
Cash flows from investing activities: | | | | | | | | |
Other assets | | | (5,473 | ) | | | - | |
Purchase of property, plant and equipment | | | (89,268 | ) | | | (813,761 | ) |
| | | | | | | | |
Net cash used in investing activities | | | (94,741 | ) | | | (813,761 | ) |
| | | | | | | | |
Cash flows from financing activities: | | | | | | | | |
| | | | | | | | |
Net proceeds (payments) from line of credit | | | (25,978 | ) | | | 32,877 | |
Proceeds from short term debt | | | 40,813 | | | | - | |
Payment of short term debt | | | (30,713 | ) | | | (829 | ) |
Proceeds from long term debt | | | - | | | | 30,082 | |
Payment of long term debt | | | - | | | | (96,713 | ) |
Preferred stock issued for cash | | | - | | | | 800,648 | |
| | | | | | | | |
Net cash provided (used in) by financing activities | | | (15,878 | ) | | | 766,065 | |
| | | | | | | | |
Foreign currency translation effect | | | 94,375 | | | | 141,031 | |
| | | | | | | | |
Net decrease in cash | | | (618,305 | ) | | | (632,606 | ) |
| | | | | | | | |
Cash, beginning of period | | | 712,298 | | | | 1,656,868 | |
| | | | | | | | |
Cash, end of period | | $ | 93,993 | | | $ | 1,024,262 | |
| | | | | | | | |
Supplemental disclosure of cash flow information | | | | | | | | |
| | | | | | | | |
Non cash transactions | | | | | | | | |
Issuance of stock for dividends | | $ | 322,395 | | | $ | 310,476 | |
Acqusition of Granscal assets for debt and common stock | | $ | 85,759 | | | $ | - | |
| | | | | | | | |
Net cash paid | | | | | | | | |
Interest | | $ | - | | | $ | - | |
Income taxes | | $ | - | | | $ | - | |
OCEAN SMART, INC. | |
CONSOLIDATED STATEMENTS OF OPERATIONS | |
THREE MONTHS ENDED NOVEMBER 30, 2009 and 2008 | |
(unaudited) | |
| | | | | | |
| | 2009 | | | 2008 | |
| | | | | | |
| | | | | | |
Revenue | | $ | 573,088 | | | $ | 577,105 | |
Cost of goods sold | | | 523,472 | | | | 640,319 | |
| | | | | | | | |
Gross profit (loss) | | | 49,616 | | | | (63,214 | ) |
| | | | | | | | |
Expenses: | | | | | | | | |
General and administrative expenses | | | 186,211 | | | | 187,567 | |
Salaries and benefits | | | 109,495 | | | | 84,925 | |
| | | | | | | | |
Total operating expenses | | | (295,706 | ) | | | (272,492 | ) |
| | | | | | | | |
Loss from operations | | | (246,090 | ) | | | (335,706 | ) |
| | | | | | | | |
Other income (expense): | | | | | | | | |
Interest (expense), net | | | (18,061 | ) | | | (11,240 | ) |
Other income (expense) | | | (1,734 | ) | | | - | |
| | | | | | | | |
Total other income (expense), net | | | (19,795 | ) | | | (11,240 | ) |
| | | | | | | | |
Net loss | | $ | (265,885 | ) | | $ | (346,946 | ) |
| | | | | | | | |
Net loss applicable to | | | | | | | | |
common shareholders | | $ | (265,885 | ) | | $ | (346,946 | ) |
| | | | | | | | |
Foreign currency translation | | | 97,076 | | | | (698,079 | ) |
| | | | | | | | |
Comprehensive loss | | $ | (168,809 | ) | | $ | (1,045,025 | ) |
| | | | | | | | |
Net loss per Share | | | | | | | | |
Basic and diluted | | $ | (0.01 | ) | | $ | (0.01 | ) |
| | | | | | | | |
Weighted average shares outstanding | | | | | | | | |
Basic and diluted | | | 25,920,296 | | | | 24,479,150 | |
See accompanying notes to consolidated financial statements
OCEAN SMART, INC. | |
CONSOLIDATED STATEMENTS OF CASHFLOWS | |
THREE MONTHS ENDED NOVEMBER 30, 2009 and 2008 | |
(unaudited) | |
| | | | | | |
| | 2009 | | | 2008 | |
| | | | | | |
Cash flows from operating activities: | | | | | | |
| | | | | | |
Net loss | | $ | (265,885 | ) | | $ | (346,946 | ) |
| | | | | | | | |
Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | | | |
Depreciation and amortization | | | 139,741 | | | | 121,713 | |
Stock option expense | | | 5,363 | | | | 5,363 | |
| | | | | | | | |
Changes in current assets and liabilities: | | | | | | | | |
Accounts receivable | | | 25,778 | | | | (30,046 | ) |
Prepaid expenses | | | 5,011 | | | | 30,835 | |
Other current assets | | | - | | | | - | |
Loan receivable, related party | | | - | | | | (55,569 | ) |
Inventory | | | 45,853 | | | | 41,214 | |
Accounts payable | | | 99,685 | | | | (111,757 | ) |
| | | | | | | | |
Net cash provided by (used in) operating activities | | | 55,546 | | | | (345,193 | ) |
| | | | | | | | |
Cash flows from investing activities: | | | | | | | | |
Other assets | | | (15,728 | ) | | | - | |
Purchase of property, plant and equipment | | | (5,656 | ) | | | (80,883 | ) |
| | | | | | | | |
Net cash used in investing activities | | | (21,384 | ) | | | (80,883 | ) |
| | | | | | | | |
Cash flows from financing activities: | | | | | | | | |
| | | | | | | | |
Net proceeds (payments) from line of credit | | | (376 | ) | | | (1,748 | ) |
Payment of short term debt | | | (879 | ) | | | - | |
Proceeds from long term debt | | | - | | | | (10,863 | ) |
| | | | | | | | |
Net cash used in by financing activities | | | (1,255 | ) | | | (12,611 | ) |
| | | | | | | | |
Foreign currency translation effect | | | (27,486 | ) | | | 18,801 | |
| | | | | | | | |
Net increase (decrease) in cash | | | 5,421 | | | | (419,886 | ) |
| | | | | | | | |
Cash, beginning of period | | | 12,356 | | | | 712,298 | |
| | | | | | | | |
Cash, end of period | | $ | 17,777 | | | $ | 292,412 | |
| | | | | | | | |
Supplemental disclosure of cash flow information | | | | | | | | |
| | | | | | | | |
Net cash paid: | | | | | | | | |
Interest | | $ | - | | | $ | - | |
Income taxes | | $ | - | | | $ | - | |
| | | | | | | | |
Non cash transactions: | | | | | | | | |
Acqusition of granscal | | $ | - | | | $ | 87,759 | |
See accompanying notes to consolidated financial statements
OCEAN SMART, INC.
(FORMERLY EDGEWATER FOODS INTERNATIONAL, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)(unaudited)
Note 1. Basis of Presentation, Organization and Nature of Operations
Ocean Smart, Inc. (formerly Edgewater Foods International Inc.(or “Ocean Smart”), a Nevada Corporation, is the parent company of Island Scallops Ltd., a Vancouver Island aquaculture company. Island Scallops was established in 1989 and for over 20 years has operated a scallop farming and marine hatchery business. Island Scallops is dedicated to the farming, processing and marketing of high quality, high value marine species (scallops).
OnWe have evaluated subsequent events through January 12,13, 2010, the date of the consolidated financial statements were available to be issued.
Note 2. Going Concern
Prior to the completion of our initial Preferred Stock Financing, working capital had been primarily financed with various forms of debt. We have suffered operating losses since inception in our efforts to establish and execute our business strategy. As of November 30, 2009, we heldhad a cash balance of approximately $17,800 and an accumulated deficit of approximately $25,300,000 including a net loss of roughly $266,000 for the first three months of our annual shareholder meeting where2010 fiscal year. After the completion of the Series D preferred financing in May 2008, management believed that we had adequate funds to maintain our shareholders voted by proxybusiness operations into our 2010 fiscal year and/or until we become cash flow positive, but we continued to approved changingsuffer operational losses in our corporate name2009 and 2008 fiscal years. Until our operations are able to Ocean Smart, Inc. The name change became effectivedemonstrate and maintain positive cash flows, we may require additional working capital to fund our ongoing operations and execute our business strategy of expanding our operations. In fact, based on March 3, 2009 howeverour current estimates of future sales and capital costs of expanding our farms in order to increase future crop yields, we were not notified by the state of Nevada until March 30, 2009. Accordingly, we reported the name changewill require additional financings to continue expand our operations. Based on these factors, there is substantial doubt about our ability to continue as a Current Report on Form 8-K with the Securities and Exchange Commission and filed it on March 30, 2009.going concern.
Note 2.3. Significant Accounting Policies
Basis of Presentation
Our unaudited consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America for reporting interim financial information and the rules and regulations of the Securities and Exchange Commission. In management’s opinion, all adjustments necessary for a fair presentation of the financial position and results of operations for the periods presented have been included. All such adjustments are of a normal recurring nature. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended August 31, 2008.2009. Results of operations for the three and six months ended February 28,November 30, 2009, are not necessarily indicative of the operating results for the full accounting year or any future period.
Inventory
Edgewater maintains inventories of raw materials for its aquaculture products, of biomass (inventory of live aquaculture product being actively cultivated), and of finished goods (aquaculture product ready for sale). Inventories are reported at the lesser of cost or estimated net realizable value. Biomass and finished goods includes direct and reasonably attributable indirect production costs related to hatchery, cultivation, harvesting, and processing activities. Carrying costs per unit are determined on a weighted average basis.Reclassifications
In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the Company evaluates the carrying value of its inventory for impairment whenever events or changes in circumstances indicate that such carrying values may not be recoverable. The Company uses its best judgment based on the current facts and circumstances relating to its business when determining whether any significant impairment factors exist. The Company’s management performs an undiscounted cash flow analysis to determine if impairment exists. If impairment exists, the Company measures the impairment based on the difference between the inventory’s carrying amount and its fair value, and the impairment is charged to operations in the period in which the inventory impairment is determined by management. Based on its analysis, the Company believes that impairment of $75,000 of the carrying value of its current inventory assets existed at February 28, 2009. There can be no assurance, however, that market conditions will not change or demand for the Company’s products will continue or allow the Company to realize the value of its long-lived assets and prevent future impairment.
Management has classified the costs of crops expected to be sold beyond a 12-month cycle from the date of the financial statements as noncurrent.
At February 28, 2009 and February 29, 2008, inventory consisted of the Biomass (Scallops).
Reclassifications
Certain amounts in the 2008 financial statements have been reclassified to conform to the 2009 financial statementstatements presentation.
Note 3. Acquisition of Granscal
Granscal Tenure
On October 31, 2008, our wholly owned subsidiary – Island Scallops, Ltd., finalized a Share Exchange Agreement with Granscal Sea Farms Ltd., a Kanish Bay Company and Granscal’s sole shareholder. Pursuant to the Agreement, Granscal’s sole shareholder assigned and transferred all of his Granscal shares to Island Scallop in exchange for: (i) 400,000 restricted shares of our common stock; (ii) a sum equal to 50% of the gross revenue Island Scallops earns on account of the sale of Granscal’s 2004, 2005 and 2006 brood year inventory currently in the water – to be paid when Island Scallops consummates the sale of inventory; and (iii) an aggregate cash fee of CDN$30,000. Pursuant to the Agreement; Island Scallops also agreed to pay the CDN$35,000 that Granscal owes to the Bank of Montreal. The 400,000 shares issued were valued at $0.08 per share, the closing bid of our common stock on the date the merger closed. Therefore, total aggregate value of the shares recognized by the company was $32,000.
The CDN$30,000 cash fee shall be paid in CDN$5,000 monthly installments beginning on September 30, 2008 and continuing until the cash fee is fully paid. The cash fee is secured by a Promissory Note between Island Scallop and Granscal’s sole shareholder, who is also Granscal’s Chief Executive Officer. The Promissory Note does not contain any interest, but is immediately due and payable if Island Scallop remains in default of the Promissory Note after a 10 day cure period.
Note 4. Accounts Payable and Accrued LiabilitiesShort Term Debt
Included in accounts payable and accrued liabilities are balances outstanding related to credit cards held in the name of one of our shareholders totaling $49,217 and $33,292short-term debt at February 28,November 30, 2009 and August 31, 2008, respectively. We used these credit cards as a means of short term financing and incur interest charges on such unpaid balances.
Included in accounts payable and accrued liabilities at February 28, 2009, is an amount of $104,650 in respect to an agreement to purchase geoduck seed from us (for additional information see Note 7 – Contingent Liabilities).
Included in accounts payable and accrued liabilities at February 28, 2009 and August 31, 2008 is $104,955 and $95,065 of principal due and interest accrued in respect to the loan from the National Research Council of Canada Industrial Research Assistance Program (see Note 6 – Long Term Debt for additional information).
Note 5. Line of Credit
Included in line of credit at February 28, 2009 are two bank linesestimated royalties of credit. The first line isUS$62,669 and US$60,948 payable to a $67,000 bank linethird party from whom the former sole shareholder of credit forIsland Scallops originally acquired the shares of Island Scallops. The interest rate1992 share purchase agreement (for Island Scallops) provided that the third party was to receive 3% of revenues from Island Scallops as earned, on a quarterly basis, throughout the lineperiod from December 1, 1992 to November 30, 2002. The third party holds a first charge (or first lien) over our inventory (including broodstock) in the amount of credit is 7.5%CDN$350,000 in support of its royalty entitlement. The third party has not taken further action to enforce payment of the arrears liability. To date, we have accrued the entire balance of US$62,669 as of February 28, 2009. At February 28, 2009,a current liability and we plan to pay it with available funds in the balance due is $65,027. The second line is a $40,000 bank line of credit for Island Scallops. The interest rate on the line of credit is 6.5% as of February 28, 2009 and February 28, 2009, the balance due is $15,810. This second line of credit is subject to a personal guarantee by our Chairman and CEO, Robert Saunders.near future.
Note 6.5. Long Term Debt
These consolidated financial statements include a Western Diversification Program non-interest bearing loan to Island Scallops that requiresoriginally required repayment equal to 12% of gross revenues from our scallop sales, payable semi-annually, with no specified due date. The repayment terms have been formally amended several times. Most recently, in June 2008, the Western Diversification Program agreed to allow Island Scallops to suspend repayment of the roughly $340,000 loan until October 2008. Starting in October 2008, Island Scallops was to begin repaying the loan at a rate of $7,937 per month for five months. Once these five months of loan payments were completed, the Western Diversification Program had agreed to base quarterly repayments on 3% of the gross scallop sales (as opposed to the originally agreed upon 4%) or $19,841 whichever is greater. Asas of February 28, 2009, we reached an agreement with the Western Diversification Program to revise the repayment terms of the remaining balance of $339,167$392,154 (representing $122,222$141,902 overdue and a balance of $216,945)$250,252). Beginning February 28, 2009, we began repaying the overdue amount at rate of $794$942 (CDN$1,000) per month and were scheduled to continue through December 31, 2010.2009. Commencing January 31, 2011,2010, we will begin paying $3,968$4,708 (CDN$5,000) per month towards the overdue balance. Starting January 31, 2011, our monthly repayment amount will be the greater of 4% of Island Scallops’ gross monthly revenues or $7,937$9,416 (CDN$10,000) per month. Under the terms of the modified agreement, the overdue amount will also bear interest at an annual rate of 3%. Starting January 31, 2012, we will begin repaying the balance of $216,945$250,252 at the greater of 4% of Island Scallops gross monthly revenues or $7,937$9,416 (CDN$10,000) per month. At February 28,November 30, 2009 and August 31, 2009, the balance due is $339,167,$US397,892 and US$388,428, of which $122,222US$ 140,151 and US$138,107 is reflected in the current portion of long term debt and the remaining balance of $216,945US$257,741 and US$250,321 is reflected as long term debt.
These consolidated financial statements include Island Scallops’ unsecured loan from the National Research Council of Canada Industrial Research Assistance Program which requires quarterly payments commencing March 1, 2003 equal to 3% of gross revenues of Island Scallops until the earlier of full repayment or December 1, 2012. If at December 1, 2012, Island Scallops has not earned sufficient revenues to repay the original loan amount, the remaining portion of the loan is to be forgiven. Amounts currently due at August 31, 2008,November 30, 2009, bear interest at a rate of 1% per month. At February 28,November 30, 2009, Island Scallops is in arrears in respect to the payment of these amounts. The National Council of Canada Industrial Research Assistance Program has requested payment of the $104,955$144,303 that they claim is owed under this loan agreement. As such, at February 28,November 30, 2009, $104,955US$165,627 is included in accounts payable and accrued liabilities and the remaining full principal balance of $207,491US$205,071 is reflected in the current portion of long term debt. We are seeking to renegotiate the repayment terms.terms with NRC.
These consolidated financial statements include Island Scallop’s mortgage loan repayable at $2,262 per month (currently interest only calculated at 10.5% per annum). The loan is secured by a first charge on the real property of Island Scallops. At February 28, 2009, the principal due is $222,222.
Note 7.6. Contingent Liabilities
Our wholly owned subsidiary, Island Scallops, entered into an agreement in 1998 with two parties, under which Island Scallops was to produce and sell geoduck seed to the two parties. Island Scallops received advance payments from each of the two parties in 2002 of approximately $64,140 and recognized related revenue of $43,705 in respect to seed delivered in 2002. The balance of the deposits received (advance payments), net of sales, totaling $104,650, is included in accounts payable and accrued liabilities.
Management’s position is that the two parties violated the terms of the agreement and we are therefore entitled to retain the balance of the deposits. Per the terms of the original agreement, Island Scallops was entitled to make up any shortfall in the product produced in the following year. Although product was available and offered by Island Scallops in the following year, the two parties refused to honor the terms of the agreement and would not accept the product (to make up the shortfall) in the following year.
As of August 31, 2004, one of the two parties made claims that Island Scallops owed it an amount totaling $88,925. This particular party believed that the agreement required Island Scallops to deliver the product in year one and did not allow Island Scallops to make up any shortfall with product produced in the following year. The balance included in accounts payable and accrued liabilities related to this party is $29,762.
Any additional liability to us, or any reduction of the currently recognized liability, in respect to these deposits will be recorded at the time a conclusion to this matter can be determined.
Neither we nor our wholly owned subsidiary maintain insurance covering the replacement of our inventory. Consequently, we are exposed to financial losses or failure as a result of this risk.
Note 8.7. Stock Option and Warrants
Stock Options
In August 2005, our Board of Directors approved the “Edgewater Foods International 2005 Equity Incentive Plan.” The Board of Directors originally reserved 5,000,000 shares of our common stock to be issued in the form of incentive and/or non-qualified stock options for employees, directors and consultants to Edgewater.Ocean Smart. Per the terms of the plan, the aggregate number of shares available for granting awards has increased to 8,000,000 shares. As of August 31, 2008,November 30, 2009, our Board of Directors had authorized the issuance of 3,062,0005,892,000 options to employees.
On September 8, 2008, our board of directors authorized the issuance of an aggregate of 100,000 options to purchase our common stock to one of our directors pursuant to the “Edgewater Foods International 2005 Equity Incentive Plan.” The options vest in two equal installments over the next two years (on September 8, 2009 and 2010). Each option is exercisable for a period of five years from the issuance date and has an exercise price of $0.45 respectively. Pursuant to these options, we will incur approximately an additional $43,000 through August 31, 2010. We used the Black Scholes option-pricing model with the following assumptions: an expected life equal to the contractual term of the options (five), underlying stock price of $0.45 per share, no dividends; a risk free rate of 2.96%, which equals the one, three and six-year yield on Treasury bonds at constant (or fixed) maturity and volatility of 175%. During the first sixthree months ended November 30, 2009, $5,363 in stock option expenses was recognized. An additional $5,363 will be recognized in the three month period ending February 28, 2009, the company recognized approximately $10,700 of option expense.2010.
Stock option activity during the period ending February 28,three months ended November 30, 2009, was as follows:
| | Number of Shares | | | Weighted Average Exercise Price | |
Outstanding, August 31, 2008 | | | 2,592,000 | | | | 1.23 | |
Granted | | | 100,000 | | | | 0.45 | |
Exercised | | | -- | | | | -- | |
Forfeited | | | -- | | | | -- | |
Expired | | | -- | | | | -- | |
Outstanding, February 28, 2009 | | | 2,692,000 | | | $ | 1.20 | |
Exercisable, February 28, 2009 | | | 2,592,000 | | | $ | 1.23 | |
| Number of Shares | | Weighted Average Exercise Price |
Outstanding, August 31, 2009 | | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Outstanding, November 30, 2009 | | | | | |
Exercisable, November 30, 2009 | | | | | |
At February 28,November 30, 2009, 62,000 of the exercisable options expire in August 2010, 3,200,000 of the exercisable options expire in March 2012, 190,000 of exercisable options expire in April of 2012, 2,120,000 of the exercisable options expire in August 2012, 100,000 of the exercisable options expire in September 2014 with the remaining balance of 220,000 having an expiration date of August 2015.
Warrant activity during the period ending February 28,three months ended November 30, 2009, was as follows:
| | Number of Warrants | | | Weighted Average Exercise Price | | Number of Warrants | | Weighted Average Exercise Price |
Outstanding, August 31, 2008 | | | 1,381,952 | | | $ | 1.33 | | |
Outstanding, August 31, 2009 | | | | | | |
Granted | | | -- | | | | -- | | | | | | |
Exercised | | | -- | | | | -- | | | | | | |
Forfeited | | | -- | | | | -- | | | | | | |
| | | | | | |
Expired | | | -- | | | | -- | | | | | | |
Outstanding, February 28, 2009 | | | 1,381,952 | | | $ | 1.33 | | |
Exercisable, February 28, 2009 | | | 1,381,952 | | | $ | 1.33 | | |
Outstanding, November 30, 2009 | | | | | | |
Exercisable, November 30, 2009 | | | | | | |
At February 28,November 30, 2009, if all options and warrants were exercised and all shares of preferred stock were converted, wethe company would have 58,851,97058,908,486 shares of common stock outstanding.
Note 9. Common Stock
On December 31, 2008, we issued 324,691 shares of common stock to the investors of our April 12, May 30, June 30 and July 11, 2006 financings as payment of the semi-annual dividend per the terms of the Certificate of Designation of the Relative Rights and Preferences of the Series A Convertible Preferred Stock. The number of shares issued was based on the dividend payment at a rate of 8% per annum (subject to a pro rata adjustment) of the Liquidation Preference Amount ($1,416,000 for the April 12 financing, $1,500,000 for the May 30 financing, $1,550,000 for the June 30 financing and $1,450,000 for the July 11 financing) payable in shares equal to 90% of the quotient of (i) the dividend payment divided by (ii) the average of the VWAP for the 20 trading days immediately preceding the date the dividend payment is due, but in no event less than $0.65. As such, the shares were valued at approximately $233,500 and the total aggregate value of the transaction was recorded as a preferred stock dividend.
On December 31, 2008, we issued 86,454 shares of common stock to the investors of our January 16, 2007 financing as payment of the semi-annual dividend per the terms of the Certificate of Designation of the Relative Rights and Preferences of the Series B Convertible Preferred Stock. The number of shares issued was based on the dividend payment at a rate of 6% per annum (subject to a pro rata adjustment) of the Liquidation Preference Amount ($1,416,000) payable in shares equal to 90% of the quotient of (i) the dividend payment divided by (ii) the average of the VWAP for the 20 trading days immediately preceding the date the dividend payment is due, but in no event less than $0.65. As such, the shares were valued at approximately $62,500 and the total aggregate value of the transaction was recorded as a preferred stock dividend.
On December 31, 2008, we issued 37,482 shares of common stock to the investors of our November 5, 2007 financing as payment of the semi-annual dividend per the terms of the Certificate of Designation of the Relative Rights and Preferences of the Series C Convertible Preferred Stock. The number of shares issued was based on the dividend payment at a rate of 6% per annum (subject to a pro rata adjustment) of the Liquidation Preference Amount (approximately $897,000) payable in shares equal to 90% of the quotient of (i) the dividend payment divided by (ii) the average of the VWAP for the 20 trading days immediately preceding the date the dividend payment is due, but in no event less than $0.65. As such, the shares were valued at approximately $24,000 and the total aggregate value of the transaction was recorded as a preferred stock dividend.
In January, 2009, we issued 400,000 restricted shares of our common stock to Leslie Rombough as part of the purchase of Granscal Sea Farms Ltd., a Kanish Bay Company, by our wholly owned subsidiary – Island Scallops, Ltd. The shares were issued in accordance with the exemption from the registration provisions of the Securities Act of 1933, as amended, provided by Section 4(2) of such Act for issuances not involving any public offering. The 400,000 shares issued were valued at $0.08 per share, the closing bid of our common stock on the date the merger was closed. Therefore, total aggregate value of the transaction recognized by the company was $32,000.
Note 10.8. Subsequent Events
In March 2009, we engaged International Investment Consulting Company S.A (“IICC”) to provide international investor relations services. The initial term of the agreement is for two years. Pursuant to the consulting agreement, after 120 days if certain terms and conditions are met, we will begin paying IICC $10,000 per month for the term of the agreement. As additional compensation, we agreed to issue IICC 200,000 shares of restricted stock that vest 50,000 per quarter. The shares were issued in accordance with the exemption from the registration provisions of the Securities Act of 1933, as amended, provided by Section 4(2) of such Act for issuances not involving any public offering. We also agreed to immediately issue IICC options to purchase 3,200,000 shares of our common stock at various exercise prices between $0.15 and $1.20. The pricing and vesting schedule of these options is as follows:
| Amount | | Strike Price | | Vesting Schedule |
| | | | | |
| 50,000 | $ | 0.15 | | Vests immediately |
| 50,000 | $ | 0.20 | | Vests immediately |
| 50,000 | $ | 0.25 | | Vests immediately |
| 50,000 | $ | 0.30 | | Vests immediately |
| 75,000 | $ | 0.35 | | Vests immediately |
| 75,000 | $ | 0.40 | | Vests immediately |
| 75,000 | $ | 0.45 | | Vests immediately |
| 75,000 | $ | 0.50 | | Vests immediately |
| 200,000 | $ | 0.55 | | Vests immediately |
| 200,000 | $ | 0.60 | | Vests immediately |
| 500,000 | $ | 0.80 | | Vests immediately |
| 800,000 | $ | 1.00 | | Vests immediately |
| 1,000,000 | $ | 1.20 | | Vests immediately |
The shares underlying the options have registration rights that require us to register the shares in our next registration statement. The options and the shares underlying were issued in accordance with the exemption from the registration provisions of the Securities Act of 1933, as amended, provided by Section 4(2) of such Act for issuances not involving any public offering. We will incur stock option expense of approximately $220,000 in the quarter ending MayOn December 31, 2009. We used the Black Scholes option-pricing model with the following assumptions: an expected life equal to the contractual term of the options (three years), underlying stock price of $0.10 per share, no dividends; a risk free rate of 1.28%, which equals the three-year yield on Treasury bonds at constant (or fixed) maturity and volatility of 175%. In the event of termination of unexercised vested options expire 45 days from termination.
On March 23, 2009, we issued 100,000 sharesan aggregate of 449,851shares of common stock, as dividends, to Gallatin Consulting, Inc. thatthe holders our BoardSeries A Convertible Preferred Stock, Series B Convertible Preferred Stock and Series C Convertible Preferred Stock. The number of Directors previously approvedshares issued was calculated at a rate of 8% for the investor relationsSeries A and marketing services that they will provide6% for the Series B and Series C Preferred Stock, per annum (subject to us. The shares were issued in accordance with the exemption from the registration provisionsa pro rata adjustment) of the Securities Actliquidation preference amount payable in shares equal to 90% of 1933, as amended, providedthe quotient of (i) the dividend payment divided by Section 4(2)(ii) the average of the VWAP for the 20 trading days immediately preceding the date the dividend payment is due, but in no event less than $0.65. As such, Act for issuances not involving any public offering. The 100,000the shares issued were valued at $0.08 per share,approximately $324,800 and the closing bid of our common stock on the date of issue. Therefore, total aggregate value of the transaction that we will recognize is $8,000. Going forward the cost of these shares will be expensed at current market pricewas recorded as they are issued.a preferred stock dividend.
Preferred Stock Dividends Issued on December 31, 2009
Date | | Preferred Stock | Common Shares Issued | Dividend Value |
| | | | |
| | | | |
| | | | |
| | | | |
Item 2
MANAGEMENT’S DISCUSSION AND ANALYSIS
The following discussion should be read in conjunction with our financial statements and the notes thereto which appear elsewhere in this report. The results shown herein are not necessarily indicative of the results to be expected in any future periods. This discussion contains forward-looking statements based on current expectations, which involve uncertainties. Actual results and the timing of events could differ materially from the forward-looking statements as a result of a number of factors. Readers should also carefully review factors set forth in other reports or documents that we file from time to time with the Securities and Exchange Commission.
Overview
During our the first and second quarter of our 20092010 fiscal year, we continued the harvesting, processing and sale of our remaining 2005 and 2006 year classes of scallops and transferringbegan the harvesting, processing and sale of our 2007 scallops. In addition, we continued the transfer of 2008 year-class scallops (which were still maturing in our tenured growing sites and on-shore ponds) to larger grow-out nets on our farm sites. We also begancontinued the spawningprocess of transferring our 2009 scallop class.class to our farm sites (from onshore nursery ponds). We refer to the year-class of scallops based on when the scallops were spawned. Generally, the harvest begins approximately 22
In addition to 24 months after spawning of the scallops. For example,scallop sales, we plan on generating additional revenues via the sale of scallop and other shellfish seed (including mussels and oysters). In the future, management may place emphasis on generating additional revenues via equipment sales to begin harvesting our 2009 scallop class (that was initially spawned in February of 2009) in December 2010.other aquaculture businesses.
DuringAs was the case in the previous fiscal year, we continued to struggle to achieve positive operational cash flows during the first quarter of 2010. Given our recent operational history, it is likely that we will continue to struggle to achieve positive cash flows in the near future. As a result, management continued to investigate a variety of methods to either increase sales or develop new business lines or joint ventures to improve our margins. As part of this process, we are still searching for strategic acquisitions and/or business opportunities with seafood industry partners or additional strategic investors to enable the company to capitalize on our existing hatchery technology and expertise. Part of this process may involve locating opportunities to increase near-term revenues via the sale of shellfish seed or shellfish larvae produced in our hatchery. Our initial focus is on companies that we believe could significantly benefit from our hatchery technology and expertise and that would add additional revenue and/or have a geographically desirable location. We are evaluating both potential acquisitions and partnerships and/or assets sales or purchases with such companies to reach our goal of capitalizing on our hatchery technology, which should increase cash flows. We are currently focusing our efforts on Chinese companies. Aside from the November 2008 acquisition of Granscal Sea Farms Ltd., as of the date of this filing, no new definitive agreements have been signed. Management currently plans to fund any future acquisition via either debt financing or additional equity financings, although we cannot guarantee that such financing will be available when it is required or on terms that we consider to be favorable. Alternatively, management believes that opportunities exist where we could provide our technology and knowledge to a joint venture that is funded by the other party.
We are also continuing our discussions with various individuals and First Nations groups about possible partnerships or joint ventures. Originally, management believed that we would be able to formalize our first joint venture with a First Nations group as early as the start of the 2010 calendar year. To date, we have yet to finalize a revenue producing First Nations joint venture.
During 2009, fiscal year, we completed a large purchase ordersales agreement with Fanny Bay Oyster Co., a division of Taylor Shellfish Farms of Shelton, Washington (an international seafood distributor and the largest shellfish company on the West Coast). The order includes live scallops, fresh scallop meat and frozen scallops that will be packaged and delivered in various scallop products (including live in-the-shell, frozen half-shell and fresh meat). As a result of this order, Fanny Bay willhas effectively become the exclusive distributor of our scallops outside the European market. We believe thisThis order will reduce costhas reduced costs and encourageencouraged additional wholesalers within the Taylor network to carry our scallops. In addition to the Taylor sales agreement, we finalized an order to provide frozen scallop meat with roe to the European market. Due to problems with the cadmium levels in our frozen product, we were unable to complete the initial portion of this order. We believe we have identified and solved this problem and should be able to begin European shipments in summer of 2010. Despite the initial problem fulfilling this European order, we believe this order could represent an important first step towards establishing a large European based demand for our seafood products.
Management believes that these new sales agreements, coupled with the improved processing plant will yield increased revenues in our 2009 fiscal year and thereafter. Management believes that the combination of the Fanny Bay (Taylor) sales and marketing network and the Island Scallop processing plant and product will result in both improved sales and margins in 2009 and beyond.
In addition to scallop sales, we plan on generating additional revenues via the sale of scallop and other shellfish seed (including clams and oysters). In the future, Management may place emphasis on generating additional revenues via equipment sales to other aquaculture businesses. Additionally, we recently started the process of investigating strategic acquisitions and/or business opportunities with seafood industry partners or additional strategic investors to enable the company to capitalize on our existing hatchery technology and expertise. As part of this initiative, we recently established an Acquisition/Business Opportunity Board Committee and are currently beginning initial, informal, conversations with both North American and Chinese based companies. Part of this process may involve locating opportunities to increase near-term revenues via the sale of shellfish seed or shellfish larvae produced in our hatchery. We are initially focusing on companies that we believe could significantly benefit from our hatchery technology and expertise and that would add additional revenue and/or have a geographically desirable location. We are evaluating both potential acquisitions and partnerships with such companies in order to reach our goal of capitalizing on our hatchery technology in order to increase cash flows. Aside from the November 2008 acquisition of Granscal Sea Farms Ltd., as of the date of this filing, no new definitive agreements have been signed. Additionally, we have not yet located and/or finalized financing sources for any possible acquisition. Management currently plans to fund any future acquisition via either debt financing or additional equity financings. Alternatively, Management believes that opportunities exist where we could provide our technology and knowledge to a joint venture that is funded by the other party.
We are also moving forward with our discussions with various First Nations1 groups about possible partnerships or joint ventures on potential farm sites on First Nation owned lands. Originally, Management believed that we would be able to formalize our first joint venture with a first nations group as early as the start of the 2009 calendar year. To date, we have yet to finalize a revenue producing First Nations joint venture. Despite these delays, management believes that the initial joint ventures will soon be finalized. This will provide us with additional growing areas for scallops and we believe that such a partnership will begin producing significant new revenue sometime in our 2010 fiscal year.
Despite the increased revenues for the first six months of our 2009 fiscal year (as compared to 2008), we were not able to achieve positive operational cash flows during this period. As a result of our new sales agreements, improved processing plant and increasing shellfish seed sales, Management expects our sales and margins to improve and to achieve positive cash flows in the second half of 2009. Management is still in the process of evaluating the impact of the recent global economic downturn and is unsure of the direct impact it will have on our sales and projects. It is possible that the North American recession could materially impact future revenues and growth.
During the six months ended February 28, 2009, we continued working with RKS Laboratories, Inc., a Vancouver research and development company that is working towards developing superior strains of scallops with beneficial traits such as higher meat yield and rapid growth. Robert Saunders, our President and CEO, owns 100% of RKS. As part of this relationship, we loaned RKS an additional approximately $57,000 that is secured by all assets of RKS. As a result, we currently have five secured notes receivable from RKS that total approximately $155,000. Management, originally expected RKS to begin repaying at least a portion of these loans as early as the second quarter of 2009. To date, RKS has yet to begin repaying a portion of these loans, but we are hopeful that initial repayment will begin in the upcoming quarter as RKS begins to realize repayment of government R&D credits.
During the continued harvesting of our 2005, class2006 and 20062007 scallops classes and transfer and handling of our 20072008 scallop classes, we were able to continue to review our mortality rates and update our class size projections. Based on this review and recent sales, we expect to bring the remaining 1.1 million47,574 of our 2005 and 2006 year class scallops to reach market in the 20092010 calendar year. Originally, we believed that our 2006 spawning would yield between 5 and 10 million scallops at full maturity/harvest. However, mortality rates were at the higher end of our projections due to the handling and sorting learning curve associated with the roll-out of our new longline and anchor system. Additionally, problems associated with the timing of moving scallops to large nets (also known as “ocean timing”) and the density (i.e. number of scallops per net level) contributed to additional mortality problems. We anticipate that survival rates for the future classes, will improve due to the addition of more lines and anchors, better spacing and sorting within each lantern net, experience gained from the sorting and farming of both the 2005 and 2006 year classes and lessons learned on ocean timing and scallop density during the handling of our 2006 scallop class. We noticed gains in animal survival rates and individual scallop size in the 2007 class as compared to the 2006 class at a similar point in its development. As of our most recent review of our scallop inventory, we currently believe that our 2007 year class should yield up to 63 million scallops at full maturity/harvest. Although this is significantly lower than initial estimates, it will still represent our largest year class to date.
____________________________
1 First Nations commonly refers to the indigenous peoples in what is now Canada. There are currently over 600 recognized First Nations governments or bands in Canada, roughly half of which are in the provinces of Ontario and British Columbia.
During the first and second quarter of 2009, we continued to grow the transfer of our 2008 scallop class from our hatchery ponds and into the ocean farms.in pearl nets. We originally expected to produce up to 24 million full-size scallops in this year class, but due to survival problems associated with our hatchery spawns and funding limitations, we now expect to produce as few as 2.21.2 million full-size scallops. Based on our initial review of the hatchery spawn, we believe the mortality problems were the result of large blooms of toxic marine algae at the critical stage prior to metamorphosis of approximately 600 million scallop larvae. These blooms corresponded to high levels of Paralytic Shellfish Poisoning in our ocean farms and although it did not harm any of our juvenile or mature scallops, it is believed that pre-metamorphic larvae are particularly susceptible. Procedures are now in place to prevent the introduction of toxic algae into the hatchery system in the coming years.
TheDuring the 2009 spawning season started on February 10, 2009 with(February and March 2009), a total of 400roughly 780 million pre metamorphic larvae were produced. New larval husbandry methods increase overall larval survivalAs a result of a colder than normal seawater temperatures, onshore nursery growth was delayed in April and corresponding larval competency or the ability of the larvae to successfully undergo metamorphosis. Anticipated larval settlement in early March was expected to be over 350 million larvae. Management believed that this could produce a minimum of 35May. We transferred more than 7 million 3-5 mm scallop forseed into our ocean entryfarms during the summer of 2009. As of November 30, 2009, 6 million 2009 scallops (of all sizes) were growing in mid May. The second scallop spawn was scheduled for the first week of March with an additional 250 million larvae expected to be produced.our ocean farms.
As a result of a recent review of our business plan and sales and marketing efforts to date, we currently plan to harvest and sell approximately 63 million full-size 2007 scallops over the 12 months ending December 2010. In addition, we estimate that our 2008 year class will produce at least 2.2roughly 1.2 million full-size scallops. TheGiven our lower than expected revenues and negative cash flows during 2009 and the first quarter of 2010, the size of our 2009 and 2010 year classes will (in somemany ways) be determined by our ability to generate positive cash flows and/or our ability to locate additional financing. As a result of our lower than expected sales and yields, we are still evaluating the cash available for farming and infrastructure costs related to transferring the remaining portion of the 2009 scallop class and to expanding our future yields. These classes will be harvested and sold in subsequent 12 month periods following the sales our 2007 year class. Based on our current review of sales and marketing conditions, we believe that in the best case scenarios our scallops will yield as much $1as USD$1.00 of revenue per scallop; in 2009 our yield was approximately US$1.05 per scallop. The yield per scallop couldmay increase significantly if we are able to sell a greater percentage of live scallops. Additionally, weWe are beginning to place a greater emphasis on scallop seed sales and it is possible, although we cannot make any assurances, that we will be able to produce and/or sell a significantly larger amount of 2009 and 2010 scallop seed.seed in the near future. As described above, our current estimated inventory size and projected sales cycle is summarized in the following table.table as of November 30, 2009.
| | Estimated Inventory (value) to be Sold |
Year-class | Accumulated Cost to Date | next 12 months | next 24 months | beyond 24 months |
| | | | |
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| | | | | Estimated Inventory (value) to be Sold | |
Year-class | | Accumulated Cost to Date | | | next 12 months | | | next 24 months | | | beyond 24 months | |
2005 | | $ | 118,084 | | | $ | 118,084 | | | | | | | |
2006 | | $ | 577,861 | | | $ | 577,861 | | | | | | | |
2007 | | $ | 577,014 | | | $ | 144,254 | | | $ | 432,760 | | | | |
2008 | | $ | 306,721 | | | | | | | | | | | $ | 306,721 | |
2009 | | $ | 51,541 | | | | | | | | | | | $ | 51,541 | |
| | | | | | | | | | | | | | | | |
Totals | | $ | 1,631,221 | | | $ | 840,199 | | | $ | 432,760 | | | $ | 358,262 | |
Please note that the above table represents estimates of inventory to be sold over the next 12 months, 24 months and beyond. It is possible that actual results could differ significantly forfrom our estimates.
We periodically evaluate the carrying value of our inventory for impairment whenever events or changes in circumstances indicate that such carrying values may not be recoverable. Management uses its best judgment based on the current facts and circumstances relating to its business when determining whether any significant impairment factors exist. As of February 28,November 30, 2009, management performed an undiscounted cash flow analysis to determine that there was no impairment of $75,000 existed in the carrying value our 2006 scallop year class inventory. As such, the impairment of $75,000 was charged against operations for the period ending February 28, 2009. There can be no assurance, however, that market conditions will not change or demand for the Company’sour products will continue or allow the Companyus to realize the value of itsour long-lived assets and prevent future impairment.
If our mortality rates are better than our current projections, our yield and revenues from the 2005, 20062007 and 20072008 scallop class could be higher; conversely, if our mortality rates are worse than we anticipate our revenues for this period could be lower than we anticipate. In addition, changes in the anticipated growth rates, projected harvesting cycles and large fluctuations in the price of scallops or the US-Canadian exchange rate could impact our current projections. Furthermore, if we cannot achieve our estimated product mixture (live/fresh/frozen) than our average sales price per scallop will be lower. Alternatively, if we are able to sell a large percentage of high yield products (live or frozen on the half shells) than our average price per scallop will be higher.
Given our failure to achieve positive cash flows in 2009, the size of our future crops could be smaller than originally projected. If so, our future revenues and yields could be adversely impacted.
Despite our efforts to improve our cost of goods relative to our selling price, we are still operating at a low or negative margin. Part of this problem was associated withAlthough we conducted a top-down operations review and originally believed that we had indentified certain operational inefficiencies that were identified during our recently completed top-down operation review. As a result,contributed to this low or negative operating margin, we expecthave yet to successfully reduce our cost of goods soldand achieve positive cash flow. Management is hopeful that we could achieve positive cash flow at some point in our 2010 fiscal year. However, given our recent operational history, it is likely that we will continue to improve for our 2006 and 2007 year classes andstruggle to achieve positive cash flows in the coming years we expect to see continued improvements in cost of goods.near future.
Based on our current estimates of near-term sales, and capital costs of expanding our farms to increase future crop yields and capital requirement for near-term operations, we will require additional financings to continue our expansion. As we have yet to raise additional capital and our sales have increased at a slower than expected pace, we have already scaled back some of our expansion plans and maywill likely have to further scale back the plans outlined herein. We originally anticipated that we would need approximately $1.0 million over the next 12 months to continue our originally planned expansion activities, however, we now plan to try and align our future expansions with our ability to generate positive cash flows from our current scallop crops and/or our ability to locate additional financing. As a result of our failure to achieve positive cash flows in 2009, we will require additional capital to complete our expansion plans. Additionally, management intends to place a greater emphasis on increasing scallop and other shellfish seed sales in 2009 and 2010.
2010 in order to generate additional cash that could be used in operations. If we are unable to generate more cash from sales and/or financings, we may need to further modify our business plans.
Comparison of results for the three and six months ended February 28,November 30, 2009 to the three and six months ended February 29, 2008.
Revenues. Revenues for the three months ended February 28,November 30, 2009, were approximately $433,000.$573,000. We had revenues of approximately $366,000$577,000 for the three months ended February 29,November 30, 2008. This is an increasea decrease of approximately $67,000$4,000 or 18%0.70%. If not forRevenue generated by scallop sales (only) increased almost 49% (in terms of Canadian dollars). In the recent improvementfirst quarter of the US dollar relative to the Canadian dollar for the three months ended February 28, 2009, (as compared to the same period in 2008),scallop sales represented 90% of our overall sales increase would have been greater. In fact, sales in absolute Canadian dollars improved by 47% over the three month period. Revenues for the six months ended February 28, 2009, were approximately $1,010,000. We had revenues of approximately $795,000 for the six months ended February 29, 2008. This is an increase of approximately $215,000 or 27%. If not for the recent improvement of the US dollar relative to the Canadian dollar for the six months ended February 28, 2009 (as compared to the same period in 2008), our overall sales increase would have been greater. In fact, sales in absolute Canadian dollars improved by 50% over the six month period.sales. Although our overall volume of scallops sales increased over the previous six month period,fiscal year, our average price per scallop slightly decreased fromremained relatively unchanged due to the previous periods. As a result, revenue generated by scallops sales increased slightly fromagreement with Fanny Bay. During the previous period. In the first sixthree months of our 2009 fiscal year,ended November 30, 2008, management also continued to placeplaced a greater emphasis on equipment sales to other aquaculture companies and continued their efforts to increase revenues generated from both scallop and shellfish seed sales. This resultedRevenue from non-scallop sales represented almost 44% of revenue in increased seed sales and new equipment sales2008 as compared to the previous fiscal year. In fact, the majority of increased revenue was directly related to increase seed and equipment sales. As was the caseroughly 10% in the previous six month period, management continued its emphasis on the development and production of larger scallop crops. Management believes that our emphasis on expansion of future crops coupled with our new sales agreements will yield increased revenues in our 2009 fiscal year and beyond.2009.
Gross loss.profit (loss). Gross lossprofit for the three months ended February 28,November 30, 2009 was approximately $296,000,$50,000, an increase of approximately $168,000$113,000 as compared to gross loss of roughly $128,000,$63,000 for the three months ended February 29,November 30, 2008. For the six months ended February 28, 2009, gross loss was roughly $359,000. Gross loss for the six months ended February 29, 2008 was approximately $233,000. This is an increase of $126,000 or roughly 54%. The increase in gross loss for the three and six months ended February 28, 2009 (as compared to the same period in the previous year) was attributable to increased cost of inventory and cost of scallop seed relative to the previous periods. The increase in the cost of inventory (per scallop) was the result of certain inventory downgrades related to mortality and survivability issues that we believe have been corrected in future classes. The increase in the cost of scallop seed inventory was the result of certain older inventory that was deemed too small for processing and was therefore sold as seed. In addition, as of February 28, 2009, management performed an undiscounted cash flow analysis to determine that impairment of $75,000 existed in carrying value our 2006 scallop year class inventory. As such, the impairment of $75,000 was charged against operations for the three and six ending February 28, 2009. This increase in gross losses reversed the one-time reduction of gross loss that we experience for the previous quarter. Despite this increase in gross loss for the three and six months ended February 28, 2009, weWe believe that we are beginning to capitalize on management’s continued focus on both the expansion and development of larger scallop crops and larger scallop yields for future years as well as an increased emphasis on seed sales.our sales and marketing agreement with Fanny Bay. Additionally, Management believes that we have addressedmanagement is continuing to attempt to address issues that resulted in higher cost of inventory and seed costs. Management believes that in the future our sales willmay continue to increase while costs of goods sold will only increase slightly. As a result, we expectare hopeful that our margins towill improve in future years. InDespite our continuing losses over the future, asprevious fiscal years, we capitalize on our new sales agreements, we expect our salesare attempting to increase more rapidly and for these costs and margins to quickly improve. We continuedcontinue to focus resources on maintaining, developing and tending to our scallop crops and shellfish seed andseed. We believe that we have already seen the initial benefits in increased sales of our own scallops and increased seed sales and thatif we willare able to locate adequate working capital, than we can continue to see additional benefits from our efforts in developing larger crops and expanding our seed sales in the 20092010 fiscal year and beyond. If we are unable to locate adequate working capital and/or generate positive cash flow that can be used for overall business development, we may not be able to capitalize on recent developments and gross losses could further increase in future periods. Additionally, given our recent operational history, it is likely that we will continue to struggle to achieve positive cash flows in the near future.
General and administrative.Operating expenses. General and administrativeOperating expenses for the three months ended February 28,November 30, 2009, were approximately $338,000.$296,000. Our general and administrativeoperating expenses were approximately $761,000$273,000 for the three months ended February 29,November 30, 2008. This is a decrease of approximately $423,000 or 56%. This decrease was directly attributable to a reduction in stock option expense of roughly $510,000 as compared to the third months ended February 29, 2008. For the six months ended February 28, 2009, our general and administrative expenses were roughly $526,000. As compared to roughly $1,485,000 for the six months ended February 29, 2008. This decrease of approximately $959,000 was mainly the result of a reduction of roughly $1,021,000 in stock option expense.
60;
To date, we have already expensed the majority of the stock option costs related to the 2,692,000 outstanding options and are currently scheduled to only incur approximately an additional $32,000 through August 31, 2010. However, we will incur an additional $220,000 of stock option expense in our next fiscal quarter as a result of new stock option grants. As such, managementManagement expects that general and administrative expenses (excluding stock options expense) may slightly rise as we continue to expand our operations. However, if adequate working capital is available, we believe that we now have the necessary general and administrative staff in place to maintain ouran expansion into scallop crops of 30 million and beyond. In addition, as our overall stock option and stock compensation expenses are reduced to pre-2007 levels, our overall general and administrative expenses will significantly drop.
Stock compensation and stock option expense. During the three and six months ended February 28, 2009, our Board of Directors did not authorize the issuance of any shares of our restricted common stock for compensation. As a result, we did not incur any stock compensation expense for the three and six months ended February 28, 2009. During the three and six months ended February 29 2008, we had stock compensation expense of approximately $12,000 and $50,000, respectively. We did however, issue 100,000 new options during the six months ended February 28, 2009. As a result, we have stock option expense of roughly $11,000 for the six months ended February 28, 2009. We did not issue any new options during the six months ended February 29, 2008. However, due to options issued to employees, consultants and directors during 2007 and based upon the common stock trading price at the times of issuance, vesting schedules and FASB rules, we incurred stock option compensation expenses of approximately $516,000 and $1,033,000 during the three and six months ended February 29, 2008, respectively.more than 20 million.
Other income (expense), net. Interest expense for the three months ended February 28,November 30, 2009, was approximately $12,000.$18,000. Interest expense for the three months ended November 30, 2008, was approximately $11,000. Other income for the three months ended February 29, 2008, was approximately $3,000. Other expense for the three months ended February 28,November 30, 2009, was nilroughly $2,000 as opposed to other expense of approximately $36,000nil for the three months ended February 29,November 30, 2008.
Interest expense for the six months ended February 28, 2009, was approximately $23,000. Interest income for the six months ended February 29, 2008, was approximately $7,000. Other expense for the six months ended February 28, 2009, was nil as opposed to other income of approximately $28,000 for the six months ended February 29, 2008.
Net profit (loss).loss. As a result of the above, the net loss for three months ended February 28,November 30, 2009, was approximately $729,000$266,000 as compared to a net loss of approximately $1,015,000$347,000 for the three months ended February 29, 2008. Net loss for six months ended February 28, 2009 was approximately $1,076,000 as compared to a net loss of approximately $1,871,000 for the six months ended February 29,November 30, 2008.
Liquidity and Cash Resources.At February 28,November 30, 2009, we had a cash balance of approximately $94,000. During the year ending August 31, 2007, we completed one private equity financing and had investors exercise various warrants that resulted in net proceeds of approximately $3,075,000. During the year ending August 31, 2006, we relied on four private equity financings that resulted in net proceeds of approximately $5,140,000.$18,000. Prior to the completion of our initial Preferred Stock Financing, our initial expansionpreferred stock financing, working capital had been largely funded by a short term noteprimarily financed with a maximum limitvarious forms of approximately $1,451,000. This short term note was repaid with proceeds from the 2006 preferred stock financings and is no longer available to us. These 2006 and 2007 financings formerly contained warrants, which if fully exercised, could have raised approximately an additional $49,350,000. To date, the exercise of these warrants resulted in net proceeds of roughly $1,200,000; however, the financing we completed in June 2008, resulted in a warrant exchange that eliminated most of the remaining warrants from the 2006 and 2007 financings.debt. We have suffered operating losses since inception in our efforts to establish and execute our business strategy. After the completion of the JuneSeries D preferred financing in May 2008, financing, management believed that we had adequate funds to maintain our business operations into our 20092010 fiscal year and/or until we become cash flow positive, but we continuecontinued to suffer operational losses in our 2009 and 2008 fiscal year.years. Until our operations are able to demonstrate and maintain positive cash flows, we maywill require additional working capital to fund our ongoing operations and execute our business strategy of expanding our operations. In fact, based onAs we have yet to raise additional capital and our sales have increased at a slower than expected pace, we have scaled back some of our expansion plans and will likely have to further scale back the plans outlined herein. We now plan to try and align our future expansions with our ability to generate positive cash flows from our current estimatesscallop crops and/or our ability to locate additional financing. As a result of future sales and capital costs of expanding our farmsfailure to achieve positive cash flows in order to increase future crop yields,2009, we will require additional capital to complete our expansion plans. If we are unable to generate more cash from sales and/or financings, we may need to continue expandingfurther modify our operations.business plans. Based on these factors, there is substantial doubt about our ability to continue as a going concern. Management plans to address this situation by utilizing our new sales agreements, improved processing plant, recent harvesting and sorting experience and increasing scallop and shellfish seed sales to increase our revenues and to try to begin achieving cash flow positive operations. In addition, Management believes that opportunities exist with other aquaculture companies, equipment vendors, seafood distributors and/or First Nations groups that could result in possible partnerships, joint ventures, financings and/or acquisitions that could result in significantly improved cash flows.flows or additional working capital. Part of this process may involve locating opportunities to increase near-term revenues via the sale of shellfish seed or shellfish larvae produced in our hatchery. Our initial focus is on companies that we believe could significantly benefit from our hatchery technology and expertise and that would add additional revenue and/or have a geographically desirable location. We are evaluating both potential acquisitions and partnerships and/or assets sales or purchases with such companies in order to reach our goal of capitalizing on our hatchery technology in order to increase cash flows, but as of the date of this Report, have not entered into any formal agreements or conducted any formal negotiations with any such companies. To date, we have been unable to achieve positive cash flows.flows over any one fiscal year or locate additional financings in the first three months of our 2010 fiscal year.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable
ITEM 4T. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We maintain disclosure controls and procedures designed to provide reasonable assurance that material information required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that the information is accumulated and communicated to our management, including our Chief Executive Officer and Acting Chief Accounting Officer, as appropriate to allow timely decisions regarding required disclosure. We performed an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Acting Chief Accounting Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on their evaluation, our management, including our Chief Executive Officer and Acting Chief Accounting Officer, concluded that our disclosure controls and procedures are effective in giving us reasonable assurance that the information we are required to disclose in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms and to ensure that such information is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
We do not expect that our disclosure controls and procedures will prevent all errors and all instances of fraud. Disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Further, the design of disclosure controls and procedures must reflect the fact that there are resource constraints, and the benefits must be considered relative to their costs. Because of the inherent limitations in all disclosure controls and procedures, no evaluation of disclosure controls and procedures can provide absolute assurance that we have detected all our control deficiencies and instances of fraud, if any. The design of disclosure controls and procedures also is based partly on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
Changes in Internal Control Over Financial Reporting
In our Management’s Report on Internal Control Over Financial Reporting included in the Company’s Form 10-K/A10-K for the year ended August 31, 2008,2009, management concluded that our internal control over financial reporting was effective as of August 31, 2008.2009.
Management did however identify a significant deficiency; a significant deficiency is a deficiency, or a combination of deficiencies, that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of the registrant’s financial reporting. CurrentlyCurrently we do not have sufficient in-house expertise in US GAAP reporting. Instead, we rely very much on the expertise and knowledge of external financial advisors in US GAAP conversion. External financial advisors have helped prepare and review the consolidated financial statements. Although we have not identified any material errors with our financial reporting or any material weaknesses with our internal controls, no assurances can be given that there are no such material errors or weaknesses existing. To remediate this situation, we are seeking to recruit experienced professionals to augment and upgrade our financial staff to address issues of timeliness and completeness in US GAAP financial reporting. In addition, we do not believe we have sufficient documentation with our existing financial processes, risk assessment and internal controls. We plan to work closely with external financial advisors to document the existing financial processes, risk assessment and internal controls systematically.
We believe that the remediation measures we are taking, if effectively implemented and maintained, will remediate the significant deficiency discussed above.
Except as described above, there have been no changes in our internal controls over financial reporting that occurred during our last fiscal quarter to which this Quarterly Report on Form 10-Q relates that have materially affected, or are reasonably likely to materially affect our internal controls over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
In 1998 our wholly owned subsidiary, Island Scallops, entered into an Agreement with two parties, pursuant to which Island Scallops was to produce and sell geoduck seed to the two parties. Island Scallops received advance payments from each of the two parties in 2002 totaling approximately $64,140. As a result of breaches of the purchase agreements by the purchasers, it is our position that we may retain any unused portion of these advance payments.None.
As of August 31, 2004, one of the two purchasers had claimed that Island Scallops owed it amounts totaling $88,925. Since it is our position that the purchasers breached their agreements with Island Scallops, we have no intention of seeking a settlement of this matter at this time. We are unaware of any formal proceedings that may have been commenced by either of these two purchasers in regard to any claims that they may have.
Other than as set forth herein, we are not a party to any material legal proceeding and to our knowledge no such proceeding is currently contemplated or pending.
Item 1A. Risk Factors
Not applicable to smaller reporting companies.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) Unregistered Sales of Equity Securities
On December 31, 2008,2009, we issued 324,691325,575 shares of common stock to the investors of our April 12, May 30, June 30 and July 11, 2006 financings as payment of the semi-annual dividend per the terms of the Certificate of Designation of the Relative Rights and Preferences of the Series A Convertible Preferred Stock. The number of shares issued was based on the dividend payment at a rate of 8% per annum (subject to a pro rata adjustment) of the Liquidation Preference Amount ($1,416,000 for the April 12 financing, 1,500,000 for the May 30 financing, $1,550,000 for the June 30 financing and $1,450,000 for the July 11 financing) payable in shares equal to 90% of the quotient of (i) the dividend payment divided by (ii) the average of the VWAP for the 20 trading days immediately preceding the date the dividend payment is due, but in no event less than $0.65. The dividend shares were issued to these investors pursuant to the exemption from registration provided by Section 4(2) of the Securities Act for issuances not involving any public offering.
On December 31, 2008,2009, we issued 86,45486,691 shares of common stock to the investors of our January 16, 2007 financing as payment of the semi-annual dividend per the terms of the Certificate of Designation of the Relative Rights and Preferences of the Series B Convertible Preferred Stock. The number of shares issued was based on the dividend payment at a rate of 6% per annum (subject to a pro rata adjustment) of the Liquidation Preference Amount ($1,416,000) payable in shares equal to 90% of the quotient of (i) the dividend payment divided by (ii) the average of the VWAP for the 20 trading days immediately preceding the date the dividend payment is due, but in no event less than $0.65. The dividend shares were issued to these investors pursuant to the exemption from registration provided by Section 4(2) of the Securities Act for issuances not involving any public offering.
On December 31, 2008,2009, we issued 37,48237,585 shares of common stock to the investors of our November 5, 2007 financing as payment of the semi-annual dividend per the terms of the Certificate of Designation of the Relative Rights and Preferences of the Series C Convertible Preferred Stock. The number of shares issued was based on the dividend payment at a rate of 6% per annum (subject to a pro rata adjustment) of the Liquidation Preference Amount (approximately $897,000) payable in shares equal to 90% of the quotient of (i) the dividend payment divided by (ii) the average of the VWAP for the 20 trading days immediately preceding the date the dividend payment is due, but in no event less than $0.65. The dividend shares were issued to these investors pursuant to the exemption from registration provided by Section 4(2) of the Securities Act for issuances not involving any public offering.
In January, 2009, we issued 400,000 restricted shares of our common stock to Leslie Rombough’s part of the purchase of Granscal Sea Farms Ltd., a Kanish Bay Company, by our wholly owned subsidiary – Island Scallops, Ltd. The shares were issued in accordance with the exemption from the registration provisions of the Securities Act of 1933, as amended, provided by Section 4(2) of such Act for issuances not involving any public offering. The 400,000 shares issued were valued at $0.08 per share, the closing bid of our common stock on the date the merger was closed. Therefore, total aggregate value of the transaction recognized by the company was $32,000.
(b) Not Applicable.
(c) Not Applicable
ITEM 3. Defaults upon Senior Securities
(a) Not Applicable.
(b) Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
On January 12, 2009, we held our annual shareholder meeting where our shareholders voted by proxy to re-elect all of our current directors and approved changing our corporate name to Ocean Smart, Inc. The full results of the meeting are disclosed in our Quarterly Report on Form 10-Q/A for the quarter ending November 30, 2008, which was filed on March 9, 2009. The name change became effective on March 3, 2009; however Nevada’s Secretary of State did not notify us that the change was implemented until March 30, 2009. Accordingly, we reported the name change on a Current Report on Form 8-K with the Securities and Exchange Commission and filed it on March 30, 2009.
ITEM 5. OTHER INFORMATION
(a) Not applicable.
(b) Not applicable.
ITEM 6. EXHIBITS
(a) The following exhibits are filed as part of this report.
Exhibit No. | Document |
| Articles of Incorporation, as amended. |
| |
| Amended and Restated Bylaws (Incorporated by reference to Exhibit 3.2 to the Company’s Quarterly Report on Form 10-QSB filed on April 13, 2007). |
| |
| Certification of Chief Executive Officer and Acting Chief Accounting Officer required by Rule 13a-14/15d-14(a) under the Exchange Act |
| |
| Certification of Chief Executive Officer and Acting Chief Accounting Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| |
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: April 14, 2009January 13, 2010 | OCEAN SMART, INC. | |
| | |
| By: /s//s/ Robert Saunders | |
| Robert Saunders, | |
| Chief Executive Officer & President | |
| | |
| By: /s/ Michael Boswell | |
| Michael Boswell, Acting Chief Accounting Officer | |