U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549

FORM 10-Q/A10-Q
(Mark One)

[x]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended November 30, 20082009


[  ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______________ to _______________


Commission File Number

Edgewater Foods International,Ocean Smart, Inc.
(Exact name of registrant as specified in its charter)

Nevada
 
20-3113571
(State or other jurisdiction
of incorporation or organization)
 (IRS Employer Identification No.)

US Representative Office
400 Professional Drive, Suite 310, Gaithersburg, Maryland 20878 
(Address of principal executive offices (zip code))

(250) 757-9811
 (Issuer's telephone number)

(Former address)

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X ] No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of "accelerated“accelerated filer and large Accelerated filer"accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one)
 
Large Accelerated Filer Accelerated Filer 
Non-accelerated filerSmaller reporting company     XX


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934) Yes [  ] No [X]

As of March 6, 2009,January 13, 2010, there were 25,327,77726,370,147 shares of Common Stock, par value $0.0001$0.001 outstanding, 7,773,998 shares of Series A Preferred Stock, par value is $.001, 207 shares of Series B Preferred Stock, par value is $.001, 747,870 shares of Series C Preferred Stock, par value is $.001 and 304,558 shares of Series D Preferred Stock, par value is $.001.








 


TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION
  3
  
Item 1.  Financial Statements
  17
  3
  
Consolidated Balance Sheets at November 30, 20082009 (unaudited) and August 31, 20082009
3
  
Unaudited Consolidated Statements of Operations for the three months ended November 30, 20082009 and  20072008
4
  
Unaudited Consolidated Statements of Cash Flows for the  three months ended November 30, 20082009 and  20072008
5
  
Unaudited Notes to Consolidated Financial Statements
6
  
Item 2.  Management’s Discussion and Analysis or Plan of Operation
1110
  
Item 3.  Quantitative and Qualitative Disclosures About Market Risk
1614
  
Item 4T. Controls and Procedures
1614
  
  
PART II – OTHER INFORMATION
  16
  
Item 1.  Legal Proceedings
1716
  
Item 1A. Risk Factors
1716
  
Item 2.  Unregistered Sales of Equity Securities And Use Of Proceeds
1716
  
Item 3.  Defaults Upon Senior Securities
1817
  
Item 4.  Submission Of Matters To A Vote Of Security Holders
1817
  
Item 5.  Other Information
1817
  
Item 6.  Exhibits
1917
  



2



Explanatory Note:  We are filing this amendment to ensure consistency with the Amendment to our Annual Report on Form 10-K/A for the year ending August 31, 2008 that we filed on this same day due to comments we received from the SEC regarding such periodic report.


PART I – FINANCIAL INFORMATION

EDGEWATER FOODS INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
 
OCEAN SMART, INC.OCEAN SMART, INC.    
CONSOLIDATED BALANCE SHEETSCONSOLIDATED BALANCE SHEETS    
NOVEMBER 30 and AUGUST 31, 2009NOVEMBER 30 and AUGUST 31, 2009    
      
 November 30,  August 31,  November 30,  August 31, 
 2008  2008  2009  2009 
  (unaudited)     (unaudited)    
ASSETS      ASSETS    
            
Current assets:            
Cash $292,412  $712,298  $17,777  $12,356 
Accounts receivable, net  225,448   195,402   207,598   233,376 
Inventory  1,035,168   1,290,702   554,216   553,311 
Other current assets  49,176   80,011   47,045   52,056 
                
Total current assets  1,602,204   2,278,413   826,636   851,099 
                
Property, plant and equipment, net  3,390,349   3,982,336   3,285,291   3,350,709 
                
Long-term inventory  966,685   986,327   1,099,448   1,075,463 
                
Loans receivable, related party  148,299   114,079 
        
Investments in other assets  3,225   3,758   25,063   9,335 
                
Total assets $6,110,762  $7,364,913  $5,236,438  $5,286,606 
                
LIABILITIES AND STOCKHOLDERS' EQUITYLIABILITIES AND STOCKHOLDERS' EQUITY     LIABILITIES AND STOCKHOLDERS' EQUITY     
                
Current liabilities:                
Short term debt $136,446  $109,648  $165,624  $161,932 
Line of credit  105,468   124,766   76,940   75,194 
Current portion of long term debt  409,258   396,885   345,222   354,318 
Accounts payable and accrued liabilities  886,999   991,061   1,211,188   1,111,503 
                
Total current liabilities  1,538,171   1,622,360   1,798,975   1,702,947 
                
Long term debt, net current portion  385,704   548,004 
Long term debt, net of current portion  615,556   598,306 
                
Total liabilities  1,923,875   2,170,364   2,414,531   2,301,253 
                
Stockholders' equity                
Series A Preferred stock, par $0.001, 10,000,000  7,774   7,774   7,774   7,774 
authorized, 7,773,998 issued and outstanding                
at November 30 and August 31, 2008, respectively        
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, 2008, respectively        
November 30 and August 31, 2009, respectively        
Series C Preferred stock, par $0.001, 1,000,000  748   748   748   748 
authorized, 747,870 issued and outstanding                
at November 30 and August 31, 2008 respectively        
at November 30 and August 31, 2009, respectively        
Series D Preferred stock, par $0.001, 380,000  305   305   305   305 
authorized, 304,558 issued and outstanding                
at November 30 and August 31, 2008, respectively        
at November 30 and August 31, 2009, respectively        
Common stock, par $0.0001, 100,000,000 authorized,  2,448   2,448   2,592   2,592 
24,479,150 issued and outstanding at November 30        
August 31, 2008, respectively        
25,920,296 issued and outstanding at November 30        
and August 31, 2009, respectively        
Additional paid in capital  27,535,144   27,497,781   28,378,004   28,372,640 
Accumulated deficit  (22,450,260)  (22,103,314)  (25,274,455)  (25,008,570)
Accumulated other comprehensive income (loss) -                
foreign exchange adjustment  (909,272)  (211,193)  (293,061)  (390,136)
                
Total stockholders' equity  4,186,887   5,194,549   2,821,907   2,985,353 
                
Total liabilities and stockholders' equity $6,110,762  $7,364,913  $5,236,438  $5,286,606 

See accompanying notes to consolidated financial statements

3




EDGEWATER FOODS INTERNATIONAL, INC. 
OCEAN SMART, INC.OCEAN SMART, INC. 
CONSOLIDATED STATEMENTS OF OPERATIONSCONSOLIDATED STATEMENTS OF OPERATIONS CONSOLIDATED STATEMENTS OF OPERATIONS 
THREE MONTHS ENDED NOVEMBER 30, 2008 and 2007 
THREE MONTHS ENDED NOVEMBER 30, 2009 and 2008THREE MONTHS ENDED NOVEMBER 30, 2009 and 2008 
(unaudited)(unaudited) (unaudited) 
            
 2008  2007  2009  2008 
            
            
Revenue $577,105  $429,202  $573,088  $577,105 
Cost of goods sold  640,319   534,850   523,472   640,319 
                
Gross (loss)  (63,214)  (105,648)
Gross profit (loss)  49,616   (63,214)
                
Expenses:                
General and administrative expenses  187,567   685,677   186,211   187,567 
Salaries and benefits  84,925   95,234   109,495   84,925 
Stock compensation expense  -   38,250 
                
Total operating expenses  (272,492)  (819,161)  (295,706)  (272,492)
                
Loss from operations  (335,706)  (924,809)  (246,090)  (335,706)
                
Other income (expense):                
Interest income (expense), net  (11,240)  4,006 
Interest (expense), net  (18,061)  (11,240)
Other income (expense)  -   7,488   (1,734)  - 
                
Total other income (expense), net  (11,240)  11,494   (19,795)  (11,240)
                
Net loss  (346,946)  (913,315) $(265,885) $(346,946)
                
Deemed dividend for beneficial        
conversion feature  -   (163,386)
        
Net loss applicable to                
common shareholders  (346,946)  (1,076,701) $(265,885) $(346,946)
                
Foreign currency translation gain (loss)  (698,079)  248,056 
Foreign currency translation  97,076   (698,079)
                
Comprehensive        
loss $(1,045,025) $(828,645)
Comprehensive loss $(168,809) $(1,045,025)
                
Net loss per Share                
Basic and diluted $(0.01) $(0.05) $(0.01) $(0.01)
                
Weighted average shares outstanding                
Basic and diluted  24,479,150   23,720,852   25,920,296   24,479,150 

See accompanying notes to consolidated financial statements

4




EDGEWATER FOODS INTERNATIONAL, INC. 
CONSOLIDATED STATEMENTS OF CASH FLOWS 
THREE MONTHS ENDED NOVEMBER 30, 2008 and 2007 
OCEAN SMART, INC.OCEAN SMART, INC. 
CONSOLIDATED STATEMENTS OF CASHFLOWSCONSOLIDATED STATEMENTS OF CASHFLOWS 
THREE MONTHS ENDED NOVEMBER 30, 2009 and 2008THREE MONTHS ENDED NOVEMBER 30, 2009 and 2008 
(unaudited)(unaudited) (unaudited) 
            
 2008  2007  2009  2008 
            
Cash flows from operating activities:            
            
Net loss $(346,946) $(913,315) $(265,885) $(346,946)
                
Adjustments to reconcile net loss to net cash used in operating activities:                
Depreciation and amortization  121,713   140,790   139,741   121,713 
Stock option expense  5,363   516,701   5,363   5,363 
Common stock issued for services  -   38,250 
                
Changes in current assets and liabilities:                
Accounts receivable  (30,046)  (18,338)  25,778   (30,046)
Prepaid expenses  30,835   -   5,011   30,835 
Other current assets  -   (14,979)  -   - 
Loan receivable  (55,569)  (11,621)
Loan receivable, related party  -   (55,569)
Inventory  41,214   (218,929)  45,853   41,214 
Accounts payable  (111,757)  2,769   99,685   (111,757)
                
Net cash used in operating activities  (345,193)  (478,672)
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  (80,883)  (331,535)  (5,656)  (80,883)
                
Net cash used in investing activities  (80,883)  (331,535)  (21,384)  (80,883)
                
Cash flows from financing activities:                
                
Net proceeds from line of credit  (1,748)  - 
Net proceeds (payments) from line of credit  (376)  (1,748)
Payment of short term debt  -   (836)  (879)  - 
Proceeds from long term debt  (10,863)  -   -   (10,863)
Payment of long term debt  -   (35,366)
Preferred stock issued for cash  -   800,648 
                
Net cash provided by (used in) financing activities  (12,611)  764,446 
Net cash used in by financing activities  (1,255)  (12,611)
                
Foreign currency translation effect  18,801   101,362   (27,486)  18,801 
                
Net increase (decrease) in cash  (419,886)  55,601   5,421   (419,886)
                
Cash, beginning of period  712,298   1,656,868   12,356   712,298 
                
Cash, end of period $292,412  $1,712,469  $17,777  $292,412 
                
Supplemental disclosure of cash flow information                
                
Net cash paid        
Net cash paid:        
Interest $-  $-  $-  $- 
Income taxes $-  $-  $-  $- 
                
Non cash transactions        
Acquisition of Granscal $87,759  $- 
Non cash transactions:         
Acqusition of granscal    87,759  

 
See accompanying notes to consolidated financial statements

 

5


OCEAN SMART, INC.


EDGEWATER FOODS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)(unaudited)

Note 1.  Basis of Presentation, Organization and Nature of Operations

Edgewater Foods InternationalOcean Smart, 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 1920 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).

We have evaluated subsequent events through January 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 had 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 2010 fiscal year.  After the completion of the Series D preferred financing in May 2008, management believed that we had adequate funds to maintain our business operations into our 2010 fiscal year and/or until we become cash flow positive, but we continued to suffer operational losses in our 2009 and 2008 fiscal years. Until our operations are able to demonstrate 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 our current estimates of future sales and capital costs of expanding our farms in order to increase future crop yields, we will require additional financings to continue expand our operations.  Based on these factors, there is substantial doubt about our ability to continue as a 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 months ended November 30, 2008,2009, are not necessarily indicative of the operating results for the full accounting year or any future period.

Reclassifications

Certain amounts in the 20072008 financial statements have been reclassified to conform to the 20082009 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 $30,000.  Pursuant to the Agreement; Island Scallops also agreed to pay the $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 $30,000 cash fee shall be paid in $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.

 

 
6


 
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 $39,776 and $33,292short-term debt at November 30, 2009 and August 31, 2008, respectively.  We used these credit cards as2009 are estimated royalties of US$62,669 and US$60,948 payable to a meansthird party from whom the former sole shareholder of short term financing and incur interest charges on such unpaid balances.

Included in accounts payable and accrued liabilities at November 30, 2008, is an amountIsland Scallops originally acquired the shares of $106,320 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 November 30 and August 31, 2008 is $93,629 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 November 30, 2008, are two bank lines of credit.  The first line is a $67,000 bank line of credit for 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 line of credit is 7.5% as ofperiod from December 1, 1992 to November 30, 2008.  At November 30, 2008,2002.  The third party holds a first charge (or first lien) over our inventory (including broodstock) in the amount of 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 due is $66,713. The second line isof US$62,669 as a $40,000 bank line of credit for Island Scallops.  The interest rate oncurrent liability and we plan to pay it with available funds in the line of credit is 6.5% as of August 31, 2008.  At November 30, 2008, the balance due is $38,755.  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,as of February 28, 2009, we reached an agreement with the Western Diversification Program agreed to allow Island Scallops to suspendrevise the repayment terms of the roughly $345,000 loan until October 2008.remaining balance of $392,154 (representing $141,902 overdue and a balance of $250,252).  Beginning February 28, 2009, we began repaying the overdue amount at rate of $942 (CDN$1,000) per month and were scheduled to continue through December 31, 2009.  Commencing January 31, 2010, we will begin paying $4,708 (CDN$5,000) per month towards the overdue balance.  Starting in October 2008,January 31, 2011, our monthly repayment amount will be the greater of 4% of Island Scallops was toScallops’ gross monthly revenues or $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 loanbalance of $250,252 at a ratethe greater of $8,063 per month for five months.   Once4% of Island Scallops had completed these five months of loan payments are 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%)monthly revenues or $20,185 whichever is greater.    As of November 30, 2008, no payments have yet been made under the revised terms and we are currently seeking to renegotiate this new agreement to further extend the repayment terms.$9,416 (CDN$10,000) per month.  At November 30, 2008,2009 and August 31, 2009, the balance due is $345,388,$US397,892 and US$388,428, of which $124,980US$ 140,151 and US$138,107 is reflected in the current portion of long term debt and the remaining balance of $220,408US$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 be required 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 November 30, 2008,2009, 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 $93,629$144,303 that they claim is owed under this loan agreement.  As such, at November 30, 2008, $93,6292009, US$165,627 is included in accounts payable and accrued liabilities and the remaining full principal balance of $223,804US$205,071 is reflected in the current portion of long term debt. We are seeking to renegotiate the repayment terms.
7

These consolidated financial statements include Island Scallop’s mortgage loan repayable at $2,298 per month (currently interest only calculated at 10.5% per annum).  The loan is secured by a second charge on the real property of Island Scallops. At November 30, 2008, the principal due is $225,770.terms with NRC.

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 $106,320, 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 $30,237.

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.

7


Note 8.7.   Stock Option Expenseand 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 authorizedDuring the issuance of an aggregate of 100,000 options to purchase our commonthree months ended November 30, 2009, $5,363 in stock to one of our directors pursuant tooption expenses was recognized.  An additional $5,363 will be recognized in 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 athree month period of five years from the issuance date and has an exercise price of $0.45 respectively.  Pursuant to this option, we will incur approximately an additional $43,000 through August 31,ending February 28, 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%. However, at the date of this Report, we have not yet issued this option.
 

Stock option activity during the period endingthree months ended November 30, 2008,2009, 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, November 30, 2008  2,692,000  $1.20 
Exercisable, November 30, 2008  2,592,000  $1.23 
8

 Number of Shares Weighted Average Exercise Price
Outstanding, August 31, 2009
 
5,892,000
 
$
1.03
    Granted
 
--
  
--
    Exercised
 
--
  
--
    Forfeited
 
--
  
--
    Expired
 
--
  
--
Outstanding, November 30, 2009
 
5,892,000
 
$
1.03
Exercisable, November 30, 2009
 
5,892,000
 
$
1.03
 
At November 30, 2008,2009, 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 endingthree months ended November 30, 2008,2009, 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
 
803,285
 
$
1.88
Granted  --   --  
--
  
--
Exercised  --   --  
--
  
--
Forfeited  --   --  
--
  
--
Returned and exchanged
 
--
  
--
Expired  --   --  
--
  
--
Outstanding, November 30, 2008  1,381,952  $1.33 
Exercisable, November 30, 2008  1,381,952  $1.33 
Outstanding, November 30, 2009
 
803,285
 
$
1.88
Exercisable, November 30, 2009
 
803,285
 
$
1.88

At November 30, 2008,2009, if all options and warrants were exercised and all shares of preferred stock were converted, wethe company would have 65,526,27858,908,486 shares of common stock outstanding.

Note 9.8. Subsequent Events

On December 31, 2008,2009, we issued 324,691 sharesan aggregate of 449,851shares of common stock, as dividends, to the investors ofholders our April 12, May 30, June 30Series A Convertible Preferred Stock, Series B Convertible Preferred Stock 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 AC Convertible Preferred Stock. The number of shares issued was based on the dividend paymentcalculated at a rate of 8% for the Series A and 6% for the Series B and Series C Preferred Stock, 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)liquidation preference amount 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$324,800 and the total aggregate value of the transaction was recorded as a preferred stock dividend.
 
 
 
98


 
OnPreferred Stock Dividends Issued 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’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.

Date Preferred StockCommon Shares Issued Dividend Value
     
12/31/2009
 
Series A
325,575
 $                  233,500
12/31/2009
 
Series B
86,691
 $                    62,600
12/31/2009
 
Series C
37,585
 $                    27,100

 
 
 
 
 
 
 
 


109



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 quarter of our 20092010 fiscal year, we continued the harvesting, processing and sale of our 2004remaining 2005 and 20052006 year classes of scallops continued sorting our 2006 scallop class 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 continued the process of transferring our 2009 scallop 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 occurs approximately 22 to 24 months after spawning of the scallops.

DuringIn addition to 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 other aquaculture businesses.  

As 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.  While our arrangement with Taylor Shellfish will focus on North America markets, we believe this order could represent an important first step towards establish a large European based demand for quality 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, recent experience gained from harvesting and sorting scallops on the new longline systems should allow for greater future harvesting rates. Also, as a result of the operational review that we completed in the spring of 2008, we are working on streamlining our operations in several areas while continuing to grow our revenues .
In the near term, we plan on generating additional near term revenues via the sale of scallop and other shellfish seed (including clams and oysters).  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 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.  Management anticipates formalizing our first joint venture with a first nations group as early as the start of the 2009 calendar year.  This will provide us with additional growing areas for scallops and we believe that such a partnership will begin producing significant new revenue as early as our 2009 fiscal year.
 
 
 
1110


 
Despite the increased revenues in for the first three months of our 2009 fiscal year (as compared to 2008), we were not able to achieve positive operational cash flows during this quarter.  As a result of our new sales agreements, improved processing plant and increasing shellfish seed sales, Management expects our sales and margins to increase and to achieve positive cash flows in 2009.  Even with our expectations of improved sales and positive cash flows, we plan to expand our search for possible acquisitions of other aquaculture companies, equipment vendors and/or seafood distributors.  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 and/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.


During the three months ended November 30, 2008, 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 approximately an additional $50,000 that is secured by all assets of RKS.  As a result, we currently have five secured notes receivable from RKS that total approximately $148,000.  We expect RKS to begin repaying at least a portion of these loans as early as next quarter.

During the continued harvesting of our 2005, class, sorting of our 2006 and 2007 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 1.6 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, starting with the 2007 scallop class, 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 73 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.
12


During the first 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 31.2 million full-size scallops.   Based on our initial review of the hatchery spawn, we believe the mortality problemproblems 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.

During the 2009 spawning season (February and March 2009), a total of roughly 780 million pre metamorphic larvae were produced.  As a result of a recentcolder than normal seawater temperatures, onshore nursery growth was delayed in April and May.  We transferred more than 7 million 3-5 mm scallop seed into our ocean farms during the summer of 2009. As of November 30, 2009, 6 million 2009 scallops (of all sizes) were growing in our ocean farms.
As a result of a review of our business plan and sales and marketing efforts to date, we currently plan to harvest and sell approximately 73 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 3roughly 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 at least $1as much as 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.  As discussed above,We are beginning to place a greater emphasis on scallop seed sales and it is possible, although we also plan on generating additional annual revenues via the salecannot make any assurances, that we will be able to produce and/or sell a significantly larger amount of scallop and other shellfish seed in the upcoming years.near future.  As described above, our current estimated inventory size and projected sales cycle is summarized in the following table as of November 30, 2009.
11



  Estimated Inventory (value) to be Sold
Year-classAccumulated Cost to Datenext 12 monthsnext 24 monthsbeyond 24 months
2005
             14,843
 $             14,843
$                      - 
$                      - 
2006
            86,031
           86,031
 -
2007
            755,569
            453,342
            302,227
2008
            403,668
            403,668
2009
             393,552
 -
            393,552
     
Totals
$         1,653,663
$          554,216
$           302,227
$           797,220



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 from 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 November 30, 2009, management performed an undiscounted cash flow analysis to determine that there was no impairment in the carrying value our scallop inventory.    There can be no assurance, however, that market conditions will not change or demand for our products will continue or allow us to realize the value of our 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.

OurDespite our efforts to improve our cost of goods continued to improve relative to our selling price, however, werewe 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 duringcontributed to this low or negative operating margin, we have yet to successfully reduce our recently completed top-down operation review.  As a result, we expect are cost of goods sold toand 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 current rate of 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 14 months in order 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 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.

 

 
1312


 
Comparison of results for the three months ended November 30, 2008 to the three months ended November 30, 2007.2009 and 2008.

Revenues.  Revenues for the three months ended November 30, 2008,2009, were approximately $577,000.$573,000.  We had revenues of approximately $429,000$577,000 for the three months ended November 30, 2007.2008.  This is an increasea decrease of approximately $148,000$4,000 or 34%0.70%.   The increase inRevenue generated by scallop sales (only) increased almost 49% (in terms of Canadian dollars).  In the first quarter of 2009, scallop sales represented 90% of our overall sales was a direct result of management’s new sales and marketing efforts coupled with our emphasis on infrastructure improvements and crop expansion.  If not for the recent volatility in the foreign currency markets (and the rapid improvement of the US dollar relative to the Canadian dollar during the three month period ended November 30, 2008),sales.  Although our overall volume of scallops sales increase would have been greater.  In fact, sales in absolute Canadian dollars  improved by over 56%increased over the three month period.  Our overallprevious fiscal year, our average price per scallop remained roughlyrelatively unchanged fromdue to the agreement with Fanny Bay.  During the three month period endingmonths ended November 30, 2007 to the three month period ending November 30, 2008.  As a result, the increase in revenue generated from the sales of our scallops was directly due to increased volume.  In the first quarter of our 209 fiscal year,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. As was the caseroughly 10% in 2007, 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 November 30, 2008,2009 was approximately $63,000, a decrease$50,000, an increase of approximately $43,000$113,000 as compared to gross loss of roughly $106,000,$63,000 for the three months ended November 30, 2007. After several consecutive periods of increase gross losses,2008.  We believe that we believe this is theare beginning of the company capitalizingto capitalize on management’s continued focus on both the both expansion and development of larger scallop crops and larger scallop yields for future years.years as well as our sales and marketing agreement with Fanny Bay.  Additionally, management 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;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.  We believe that we have already seen the initial benefits in increased sales of our own scallops 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 November 30, 2008,2009, were approximately $188,000.$296,000.  Our general and administrativeoperating expenses were approximately $686,000$273,000 for the three months ended November 30, 2007.  This is a decrease of approximately $498,000 or 73%. This decrease was directly attributable to a reduction in stock option expense or roughly $511,000 as compared to the third months ended November 30, 2007.
                                                                                                                                          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 $43,000 through August 31, 2010.  As such, management2008.   Management 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 stock option and stock compensation expenses are reduced to pre-2007 levels, our overall general and administrative expenses will significantly drop.more than 20 million.

Stock compensation and stock option expense.  During the three months ended November 30, 2008, 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 months ended November 30, 2008.  During the three months ended November 30, 2007, we had stock compensation expense of approximately $39,000. We did however, issue 100,000 new options during the three months ended November 30, 2008.  As a result, we have stock option expense of roughly $6,000 for the three months ended November 30, 2008.  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 $517,000 during the three months ended November 30, 2007.
14

Other income (expense), net.  Interest expense for the three months ended November 30, 2008,2009, was approximately $11,000.$18,000.  Interest income for the three months ended November 30, 2007, was approximately $4,000.  Other expense for the three months ended November 30, 2008, was nil as opposed to otherapproximately $11,000.  Other income of approximately $7,000 for the three months ended November 30, 2007.2009, was roughly $2,000 as opposed to other expense of nil for the three months ended November 30, 2008.

Net profit (loss).loss.  As a result of the above, the net loss for three months ended November 30, 20082009, was approximately $347,000$266,000 as compared to a net loss of approximately $913,000$347,000 for the three months ended November 30, 2007.2008.

Liquidity and Cash Resources.At November 30, 2008,2009, we had a cash balance of approximately $292,000..  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 continued 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 expandfurther modify our operations.business plans.  Based on these factors, there is substantial doubt about our ability to continue as a going concern.  Management intendsplans to overcome the significant doubt about its ability to continue as a going concernaddress this situation by utilizing strategic relationshipsour new sales agreements, improved processing plant, recent harvesting and sorting experience and increasing scallop and shellfish seed sales to increase sales volume, while at the same time capitalizing on the recent improved harvesting methodsour revenues and processing plant improvements to achieve atry 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 margin.  However, if we are unsuccessfulcash 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 efforts to increasehatchery.  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 and achieve cash flows, we will require additional financing over the next several yearsor purchases with such companies in order to overcomereach our goal of capitalizing on our hatchery technology in order to increase cash flows, but as of the substantial doubt regardingdate 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 over any one fiscal year or locate additional financings in the first three months of our ability to continue as a going concern2010 fiscal year..  



 







1513




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 thatourthat 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 the 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 although it identified a significant deficiency as of August 31, 2008, discussed below. A2009.

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.

Currently 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.
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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/A10-Q relates that have materially affected, or are reasonably likely to materially affect our internal controls over financial reporting.

 
 
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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

We did not sell any securities that On December 31, 2009, we issued 325,575 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 not registered underissued 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, 2009, we issued 86,691 shares of 1933,common stock to the investors of our January 16, 2007 financing as amended duringpayment of the period coveredsemi-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 this Report.(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, 2009, we issued 37,585 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.


(b)             Not Applicable.

(c)             Not Applicable
             


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ITEM 3. Defaults upon Senior Securities

(a)             Not Applicable.

(b)             Not Applicable.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

We did not submit any matters to a vote of our shareholders during the period covered by this report.
However, in December 2008, we sent out the proxy statement for our 2008 Annual Shareholder Meeting, which was held on January 12, 2009, soliciting shareholders to vote to re-elect all of our current directors and to approve changing our corporate name to Ocean Smart, Inc.  Both proposals were approved at the Annual Shareholder Meeting.  The votes from the meeting were as follows:None.


Proposal 1 - Director NomineeFORWITHHELD
Robert Saunders17,709,935    100%0
Michael Boswell17,709,935    (100%)0
Mark Elenowitz17,709,935    (100%)0
Douglas MacLellan17,709,935    (100%)0
Victor Bolton17,709,935    (100%)0
Javier Idrovo17,709,935    (100%)0
Darryl Horton17,709,935    (100%)0

 Proposal 2 FOR WITHHELD
To amend our articles of incorporation to change our corporate name to Ocean Smart, Inc. 17,708,801  (99.99%)1,133 (0.006%)

We will file Articles of Amendment with the Secretary of State of the State of Nevada to amend our existing Articles of Incorporation and thereby effect the name change, which will become effective on the date of filing the Articles of Amendment. As a result of the name change, we will need a new Over the Counter Bulletin Board trading symbol and cusip number. We will report our new symbol and cusip number as soon as they are available by filing a Current Report on Form 8-K with the Securities and Exchange Commission.


ITEM 5. OTHER INFORMATION
 
(a)             Not applicable.

(b)             Not applicable.

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ITEM 6.  EXHIBITS

(a) The following exhibits are filed as part of this report.

           Exhibit No.                     Document
 Exhibit No.          Document
3.1
Articles of Incorporation, as amended (Incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-QSB filed on April 13, 2007).amended.
  
3.2
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).
  
31.1
Certification  of  Chief  Executive  Officer and Acting Chief Accounting Officer  required  by Rule 13a-14/15d-14(a) under the Exchange Act
  
32.1
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.



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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:   March 9, 2009January 13, 2010
EDGEWATER FOODS
INTERNATIONAL,OCEAN SMART, INC.
  
 
By:   /s//s/  Robert Saunders
 Robert Saunders,
 Chief Executive Officer & President
  
 
By: /s/  Michael Boswell
 
Michael Boswell,
Acting Chief Accounting Officer
 

2018