U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A INFORMATION
INFORMATION REQUIRED IN PROXY STATEMENT
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
(Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_][ ] Preliminary Proxy Statement [_] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material under Rule 14a-12
Edgewater Foods International, Inc.
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies: Common
Stock
(2) Aggregate number of securities to which transaction applies: 13,557,36623,737,700
(3) Per unit price or other underlying value of transaction computed pursuant
to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is
calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.: (3) Filing Party: (4)
Date Filed:
EDGEWATER FOODS INTERNATIONAL, INC.
5552 West Island Highway
Qualicum Beach, British Columbia
Canada V9K 2C8
(250) 757-9811
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
Edgewater Foods International, Inc. will hold its Annual Meeting of Stockholders
at The Royal Vancouver Yacht Club, located at 3811 Point Grey Road, Vancouver,
British Columbia, Canada V6R 1B3 on February
12, 2007.January 10, 2008. We are holding the meeting
for the following purposes:
1) To elect members of the Board of Directors, whose terms are described
in the proxy statement; and,
2) To transact such other business as may properly come before the
meeting and any postponement or adjournment thereof.
Holders of record of Edgewater common stock at the close of business on January
12,November
15, 2007, are entitled to vote at the meeting. The Board urges Stockholders to
vote "FOR" Item 1 and solicits your vote.
In addition to the proxy statement, proxy card and voting instructions, a copy
of Edgewater's annual report on Form 10-KSB, which is not part of the proxy
soliciting material is enclosed.
It is important that your shares be represented and voted at the meeting. We
hope you will be able to attend the Annual Meeting. Whether or not you expect to
attend the meeting, please vote your shares using the enclosed proxy card.
Simply sign the return card where required, note the number of shares you own
and if you will attend the meeting in person, and return the card in the
envelope provided to us at the address first written above. Of course, you may
also vote your shares in person at the Annual Meeting.
By Order of the Board of Directors,
/s/ Robert Saunders
---------------
Robert Saunders, Chief Executive Officer
January 12,November 29, 2007
PROXY STATEMENT
We are providing these proxy materials in connection with the solicitation by
the Board of Directors of Edgewater of proxies to be voted at our Annual Meeting
of Stockholders, to be held on February 12, 2007,January 10, 2008, and at any meeting following
postponement or adjournment of the Annual Meeting.
You are cordially invited to attend the Annual Meeting, which will begin at 2:00
PM. The meeting will be held at The Royal Vancouver Yacht Club, located at 3811
Point Grey Road, Vancouver, B.C.British Columbia, Canada V6R 1B3. Stockholders will
be admitted beginning at 1:30 PM. The location is accessible to handicapped
persons, and we will provide wireless headsets for hearing amplification upon
request.
You will need an admission ticket to enter the meeting. If you are a stockholder
of record, you will find an admission ticket attached to the proxy card sent to
you. If you plan to attend the Annual Meeting, please retain the admission
ticket. Directions to the Annual Meeting are printed on the admission ticket.
If your shares are held in the name of a bank, broker, or other nominee and you
plan to attend the Annual Meeting, you can obtain an admission ticket in advance
by sending a written request, along with proof of ownership, such as a recent
bank or brokerage account statement, to our transfer agent, Empire Stock
Transfer Inc. at 2470 Saint Rose Pkwy, Suite 304, Henderson, NV 89074,
702.818.5898, Fax 702.974.1444. If you arrive at the Annual Meeting without an
admission ticket, we will admit you if we are able to verify that you are an
Edgewater stockholder.
We are first mailing this proxy statement, the proxy card and voting
instructions on January 19,or about December 3, 2007, to persons who were stockholders at
the close of business on January 12,November 15, 2007 the record date for the meeting.
IMPORTANT--PLEASE READ
Whether or not you expect to attend the Annual Meeting in person, we urge you to
vote your proxy at your earliest convenience by mail using the enclosed
envelope. This will ensure the presence of a quorum at the Annual Meeting and
will save us the expense of additional solicitation. Sending in your proxy card
and voting will not prevent you from voting your shares at the Annual Meeting,
or changing your vote, if you desire to do so. It will also help us provide
adequate seating if you note that you will attend. Your proxy is revocable at
your option in the manner described in the Proxy Statement.
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PROXIES AND VOTING PROCEDURES
You can vote your shares by completing and returning a proxy card or, if you
hold your shares in "street name," a voting instruction form.
If your shares are held in "street name," you must obtain a proxy, executed in
your favor, from your broker or other holder of record, to be able to vote at
the meeting.
You can revoke your proxy at any time before it is exercised by timely delivery
of a properly executed, later-dated proxy or by voting in person at the meeting.
All shares entitled to vote and represented by properly completed proxies
received prior to the meeting and not revoked will be voted at the meeting in
accordance with your instructions.
If you hold your shares through a broker, your shares may be voted even if you
do not attend the Annual Meeting.
Abstentions and broker non-votes do not have the effect of votes in opposition
to a director. Abstentions are also counted towards determining a quorum.
If any other matters are properly presented at the Annual Meeting for
consideration, including, among other things, consideration of a motion to
adjourn the meeting to another time or place, the individuals named as proxies
and acting thereunder will have discretion to vote on those matters according to
their best judgment to the same extent as the person delivering the proxy would
be entitled to vote. If the Annual Meeting is postponed or adjourned, your proxy
will remain valid and may be voted at the postponed or adjourned meeting. You
will still be able to revoke your proxy until it is voted. At the date this
proxy statement went to press, we did not anticipate that any other matters
would be raised at the Annual Meeting.
STOCKHOLDERS ENTITLED TO VOTE
You are entitled to vote at the Annual Meeting all shares of our common stock
that you held as of the close of business on the record date. Each share of our
common stock is entitled to one vote with respect to each matter properly
brought before the meeting.
On January 12,November 15, 2007, the record date, there were 21,188,49123,737,700 shares of common
stock outstanding.
A list of stockholders entitled to vote at the meeting will be available at the
meeting, and for 10 days prior to the meeting, at 5552 West Island Highway,
Qualicum Beach, British Columbia, Canada V9K 2C8 between the hours of 9:00 a.m.
and 4:00 p.m. local time.
REQUIRED VOTE
The presence, in person or by proxy, of the holders a majority of the voting
power at the Annual Meeting shall constitute a quorum, which is required in
order to transact business at the meeting.
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COST OF PROXY DISTRIBUTION AND SOLICITATION
Edgewater will pay the expenses of the preparation of the proxy materials and
the solicitation by the Board of Directors of proxies. Proxies may be solicited
on behalf of Edgewater in person or by telephone, e-mail, facsimile or other
electronic means by directors, officers or employees of Edgewater, who will
receive no additional compensation for soliciting. In accordance with the rules
of the Securities and Exchange Commission, we will reimburse brokerage firms and
other custodians, nominees and fiduciaries for their expenses incurred in
sending proxies and proxy materials to beneficial owners of Edgewater stock.
PROPOSAL 1
Proposal for the Election of Directors
The Board of Directors is comprised of only one class. All of the directors will
serve until the next annual meeting of shareholders and until their successors
are elected and qualified, or until their earlier death, retirement, resignation
or removal. To date we have not had an annual meeting. Dr. Kristina Miller, our Chief Scientific Advisor is the wife of
Robert Saunders, our Chairman, CEO and President, but there are no other family
relationships among our directors and executive officers. Provided below are
brief descriptions of the business experience of each director during the past
five years and an indication of directorships held by each director in other
companies subject to the reporting requirements under the Federal securities
laws.
Information with Respect to Director Nominees
NAME AGE
- ------------------------------------- -----------------------------------
Robert Saunders 54
Douglas C. MacLellan 51
Mark H. Elenowitz 37
Robert L. Rooks 52
Ian Fraser 48
Michael Boswell 38
Darryl Horton 57
Victor Bolton 53
ROBERT SAUNDERS, CHAIRMAN. Mr. Saunders is our CEO and President. Mr. Saunders
has directed all research and development efforts at Island Scallops since its
establishment. After studying for his B.Sc. at the University of British
Columbia in the early 1970's, Mr. Saunders has worked exclusively in the
aquaculture research and development field. His efforts have primarily involved
designing and implementing innovative culture technology and methods for new
aquaculture species in British Columbia. Mr. Saunders has direct experience with
managing projects similar to the type proposed, such as developing the hatchery
technology for producing the Japanese scallop and the development of sablefish
aquaculture.
DOUGLAS C. MACLELLAN, VICE-CHAIRMAN. Since May 1992, Mr. MacLellan has been
President and Chief Executive Officer of the MacLellan Group, Inc., a privately
held business incubator and financial advisory firm. Mr. MacLellan is currently
a member of the board of directors and chairman of the audit committee of AMDL,
Inc. (AMEX: ADL), a publicly held biotechnology firm. From 2002 until September
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2005, Mr. MacLellan was Vice Chairman and a Director of AXM Pharma, Inc. (AMEX;
AXJ). From March 1998 through October 2000, Mr. MacLellan was the co-founder and
a significant shareholder of Wireless Electronique, Ltd., a China-based
telecommunications company having joint venture operations with China Unicom
(NASDAQ: CHU) in Yunnan, Inner Mongolia and Ningxia provinces. He is also a
co-founder and, since May 1997, has been a director of Datalex Corporation, a
Canadian-based legacy software solution provider. From November 1996 to March
1998, Mr. MacLellan was co-Chairman and an Investment Committee member of the
Strategic East European Fund. From November 1995 to March 1998, Mr. MacLellan
was President, Chief Executive Officer and a Director of PortaCom Wireless,
Inc., a company engaged as a developer and operator of cellular and wireless
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telecommunications ventures in selected developing world markets. Mr. MacLellan
is a former member of the board of directors and co-founder of FirstCom
Corporation (NASDAQ: FCLX), an international telecommunications company that
operates a competitive access fiber and satellite network in Latin America,
which became AT&T Latin America (NASDAQ: ATTL) in August 2000. During 1996, he
was also the Vice-Chairman of Asia American Telecommunications (now Metromedia
China Corporation), a majority-owned subsidiary of Metromedia International
Group, Inc. (AMEX: MMG). Mr. MacLellan was educated at the University of
Southern California in economics and finance, with advanced training in
classical economic theory.
MARK H. ELENOWITZ, DIRECTOR. Mr. Elenowitz is a co-founder and managing director
of the TriPoint family of companies. HeCapital Advisors, LLC. Mr. Elenowitz is responsible for the overall
corporate development of the firm and assisting Tripoint'stheir clients with high-level
financial services and general business development. In this role he provides
high level advice regarding corporate finance, corporate structure, SOX 404
compliance, employee option programs and capital market navigation including
providing advice as a member of the board of directors. Mr. Elenowitz integrates
a strong, successful entrepreneurial background with extensive financial
services and capital markets experience. Mr. Elenowitz has assisted in numerous
companies in a "soup-to-nuts" process of preparing a company for the public
markets, bringing them public and advising on an ongoing basis via board seats
and executive positions to oversee further rounds of financing, strategic
acquisitions and a broader investor market via a listing on "higher" securities
exchange or market. Mr. Elenowitz is currently a director of Edgewater Foods
International, Inc. (OTCBB: EDWT) and Global Growth Acquisition Corp. 1, a
Cayman Islands corporation. From December 2002 to September 2005, Mr. Elenowitz
was a board member of AXM Pharma formerly (AMEX: AXJ). From September 2001 to March 2002, Mr. Elenowitz He was a Director and
President of Image World Media, Inc., an international media company
specializing in the production and distribution of various media content for
worldwide distribution across multiple media platforms, such as traditional
television, film and the Internet. From February 1998 to October 2001, Mr.
Elenowitz was Co-Chairman and Managing Director of GroupNow!, Inc., a financial
consulting firm. In this role he was responsible for the company's overall
corporate development and corporate finance. Mr. Elenowitz integrates a strong,
successful entrepreneurial background with extensive financial services and
capital markets experience. He is also the senior
managing director of Investor Communications Company, LLC (ICC), a national
investor relations firm he founded in 1996. Through ICC, Mr. Elenowitz has
developed ongoing relationships with other investment banking firms, market
makers, and analysts. Mr. Elenowitz has worked with over 3050 publicly traded
companies providing the above mentioned financial consulting and strategic
planning services. Previously, Mr. Elenowitz heldholds the Series 724, 82 and 63 licenses asand is
also CEO of TriPoint Global Equities, LLC, a broker, and held a Series 24 license (Branch Manager) at regional
brokerage firm and also served as Vice President of Sales at NYSEFINRA member firm. Mr. Elenowitz is
the recipient of several entrepreneurial awards.awards and has been profiled in
BusinessWeek and CNBC, as well as several other publications. He is a graduate
of the University of Maryland School of Business and Management, with a Bachelor
of Science in Finance.
DR. ROBERT L. ROOKS, DIRECTOR. Dr. Robert L. Rooks has been Chief of Staff of
All Care Animal Referral Center (ACARC) in Fountain Valley, California, since
1990. ACARC is the largest strictly referral veterinary center in the United
States. Dr. Rooks has a staff of over 20 veterinarians in the areas of surgery,
critical care, internal medicine, oncology, dentistry, radiology and neurology.
Their services include 24-hour critical care/emergency service, MRI and CT
5
scans, color-flow Doppler ultrasounds, hyperbaric oxygen therapy, a complete
orthopedic program including total hip replacements and joint reconstruction,
cobalt radiation therapy, a complete neuro-diagnostic service, a kidney
transplant program and a physical rehabilitation department and much more. He is
the published author of over 100 journals, magazine and newspaper articles. Dr.
Rooks is also the author of the book "Canine Orthopedics" published in 1997 by
Howell Bookhouse. Dr. Rooks completed his undergraduate studies at Iowa State
University in 1978. He graduated from the College of Veterinary Medicine at Iowa
State. Dr. Rooks received his Masters Degree as well as completed his surgical
residency at the University of Illinois in 1981. He is a Diplomat of both the
American College of Veterinary Surgeons and the American College of Veterinary
Practitioner.
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IAN FRASER, DIRECTOR. Since 1997, Mr. Ian Fraser has been President of Fraser
Yacht Sales Ltd., a successful Yacht Brokerage located in Vancouver, B.C. Prior
to establishing Fraser Yacht Sales Ltd., Mr. Fraser gained experience in sales
and marketing both nationally and internationally as a yacht broker for two top
brokerage houses in Vancouver. Previously, Mr. Fraser was worked as an
advertising sales executive with Naylor communications from 1988 to 1990 and
learned valuable communication skills while working with numerous trades
including the Truck Logger's association, the I.W.A of America, and the B.C.
Construction industry. He also operated as a commercial fisherman on the West
coast working on commercial salmon fishing boats for the B.C. Packer Corporation
over a 4 year period and gained valuable knowledge of the coastline of Vancouver
Island and along the mainland from Victoria to the Queen Charlotte Islands. Mr.
Fraser also acquired sea time and commercial shipping skills while working on
the deck department of the B.C. Ferry Corporation based out of Horseshoe Bay
during his early professional career and during the summer months while
attending school in the early 1980s. Mr. Fraser also competes internationally on
ocean racing yachts and has crossed the Pacific and sailed up and down the coast
to Mexico on numerous occasions while racing and delivering racing yachts as
captain. Mr. Fraser studied Business Administration at Simon Fraser University
and Capilano College graduating with a diploma in Business Administration.
MICHAEL BOSWELL, DIRECTOR. Mr. Boswell has also been acting as our Chief
Accounting Officer since August 2005 and will continue to do so until we find an
adequate replacement. Mr. Boswell is a co-founder and member in TriPoint
Capital Advisors, LLC, a boutique merchant bank focused on small and mid-sized
growth companies and a co founder of the TriPoint family of companies. Mr.
Boswell provides high-level financial services to start-up businesses and small
to mid-sized companies. Mr. Boswell is also currently a director of Global
Growth Acquisition Corp. 1, a Cayman Islands corporation. Mr. Boswell holds the
Series 24, 82 and 63 licenses and is also Managing Director and Chief Compliance
Officer of TriPoint Global Equities, LLC, a FINRA member firm. Prior to the
founding of TriPoint, Mr. Boswell had a number of executive positions focusing
on business development and management consulting. Mr. Boswell also spent eight
years as a senior analyst and/or senior engineer for various branches of the
United States Government. He earned a MBA from John Hopkins University and a BS
degree in Mechanical Engineering from University of Maryland.
DARRYL HORTON, DIRECTOR. Mr. Horton has been a businessman successfully involved
in numerous construction and development projects for the past 35 years. He is
the President, Manager and a Partner of Abbotsford Development Corporation and
is currently managing a development project in Abbotsford, British Columbia
called Eagle Mountain. Eagle Mountain is an upscale, master planned community of
single family homes, town homes and commercial properties covering approximately
60 acres that is expected to be valued, upon completion, in excess of 200
million dollars. Prior to Eagle Mountain, Mr. Horton managed, owned and marketed
numerous other residential and commercial projects including the construction of
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a 30 million dollar multi-function residential Intermediate Care Facility in
LaJolla California. For 15 years Mr. Horton was a partner in a general
contracting company that did various contracts with an average volume of about
25 million per year. In the 1970's, Mr. Horton was the Vice president of
Community Builders, the largest single family developer in British Columbia. Mr.
Horton is also the director of several other building and development companies
in British Columbia.
VICTOR BOLTON, DIRECTOR. Mr. Bolton founded a Mechanical contracting firm after
graduating from college and evolved that firm into all aspects of the
construction industry including building and raw land developing as well as
extensive property management. Retiring from this business in 2000, Mr. Bolton
now focuses time and energy towards the food manufacturing field.
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Pursuant to our Articles of Incorporation, this proposal can be approved at the
meeting by a majorityplurality of the votes entitled to vote thereat.cast at the election.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE ELECTION OF THE ABOVE
NAMED DIRECTORS.
Executive Officers
NAME AGE POSITION
- ---- --- --------
Robert Saunders 5354 CEO and President
Michael Boswell 3738 Acting Chief Accounting Officer
Brief descriptions of the business experience during the past five years of each
of our executive officers and an indication of directorships, if any, held by
such officer in other companies subject to the reporting requirements under the
Federal securities laws are provided above within Proposal 1.
Significant Employees
The following are employees who are not executive officers, but who are expected
to make significant contributions to our business:
BRUCE EVANS, FARM MANAGER. Mr. Bruce Evans has been involved in shellfish
production since 1985. He successfully established an oyster business, employing
methods of long-line and beach culture production. That business is still in
operation today, producing 7,000 gals of shucked oysters annually and employing
3 full time people and 4 part time people. He moved to Island Scallops in 1989.
Mr. Evans was responsible for securing the leases from the Provincial government
for this scallop grow-out project. He built the established long-line systems
that currently produce scallops for Island Scallops. Mr. Evans worked with a
Japanese scallop farmer for two years in B.C. and spent a month working on
highly acclaimed scallop farms in Japan. Mr. Evans has BS in Marine Biology from
the University of Victoria.
DR. KRISTINA M. MILLER, CHIEF SCIENTIFIC ADVISOR. Dr. Miller is currently Head
of the Molecular Genetics Section in the Pacific Region for the Department of
Fisheries and Oceans, Canada (DFO). She has been a research scientist at DFO
since obtaining her PhD in Biological Sciences from Stanford University in 1992.
The Molecular Genetics section she oversees contains a staff of 26, including
scientists, biologists, computer analysts and research technicians. Dr. Miller
conducts research on the genetic composition, adaptation, immunity and
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physiology of wild and domesticated fish and shellfish species using both
molecular and genomic approaches. She has been a leader in the development of
molecular technologies to aid in the conservation and management of aquatic
resources. In the past 10 years, she has published over 40 scientific
peer-reviewed journal manuscripts, and her group has been the focus of numerous
magazine and newspaper articles. Dr. Miller brings a strong scientific component
to the management of Edgewater Foods, and she will serve as Chief Scientific
Advisor. In addition to her PhD, Dr. Miller received a BSc in Zoology from
University of California, Davis in 1983, and a MSc in Biology from University of
British Columbia in 1986. Dr. Miller is Robert Saunders, our Chairman, CEO and
President's wife.
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GOVERNANCE OF EDGEWATER
BOARD COMMITTEES
We currently have six committees appointed by our Board of Directors:
o Audit Committee, which is comprised of Douglas MacLellan (Chair),
Robert Rooks and Ian Fraser. The Board has determined that all of
these members are independent,independent1, as that term is defined in Section
121(A) of the American Stock Exchange's Listing Standards.
o Finance Committee, which is comprised of Mark Elenowitz (Chair),
Douglas MacLellan and Robert Saunders.
o Compensation Committee, which is comprised of Ian Fraser (Chair), Mark
Elenowitz and Doug MacLellan.
o Disclosure Committee, which is comprised of Douglas MacLellan (Chair),
Robert Saunders and Michael Boswell.
o Nominating Committee, which is comprised of Robert Saunders (Chair),
Douglas MacLellan and Robert Rooks. The Board has determined that Mr.
Rooks and Mr. MacLellan are independent, as that term is defined in
Section 121(A)121 of the American Stock Exchange's Listing Standards.
o Sarbanes-Oxley Steering Committee, which is comprised of Douglas
MacLellan, Robert Saunders, Michael Boswell and Louis Taubman (Louis
Taubman is our outside corporate and securities counsel).
Audit Committee and Financial Expert
We have an Audit Committee as specified in Section 3(a)(58)(A) of the Securities
Exchange Act of 1934, as amended, composed of Douglas MacLellan (Chair), Robert
Rooks and Ian Fraser. The Audit Committee focuses its efforts on assisting our
Board of Directors to fulfill its oversight responsibilities with respect to
our:
- -----------------
1 Our stock is currently traded on the OTC Bulletin Board, which does not
require that a majority of our directors be independent. Accordingly, Item 407
of Regulation S-B requires that we apply the definition of "independent" used by
an exchange that does have such a requirement, such as the American Stock
Exchange.
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o Quarterly and annual consolidated financial statements and financial
information filed with the Securities and Exchange Commission;
o System of internal controls;
o Financial accounting principles and policies;
o Internal and external audit processes; and
o Regulatory compliance programs.
The committee meets periodically with management to consider the adequacy of our
internal controls and financial reporting process. It also discusses these
matters with our independent auditors and with appropriate financial personnel
that we employ. The committee reviews our financial statements and discusses
them with management and our independent auditors before those financial
statements are filed with the Securities and Exchange Commission.
The committee has the sole authority to retain and dismiss our independent
auditors and periodically reviews their performance and independence from
8
management. The independent auditors have unrestricted access and report
directly to the committee. The committee met 3 times in fiscal 2006.2007. We do not
have a written charter for the audit committee.
Douglas MacLellan is our Audit Committee Financial Expert, as that term is
defined in Item 401407 of Regulation S-B and the Board has determined that Mr.
MacLellan is independent, as that term is useddefined in Item 7(d)(3)(iv)Section 121 of Schedule
14A under the American
Stock Exchange's Listing Standards and Section 10A(m)(3) of the Securities
Exchange Act.Act of 1934. Mr. MacLellan's qualifications as an audit committee
financial expert are described in his biography above.
[THE REST OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
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REPORT OF AUDIT COMMITTEE
We have reviewed Edgewater Foods International, Inc.'s audited financial
statements as of and for the fiscal year ended August 31, 2006,2007, and met with
both management and LBB & Associates Ltd., LLP, Edgewater's independent
auditors, to discuss those financial statements. Management has represented to
us that the financial statements were prepared in accordance with accounting
principles generally accepted in the United States of America.
Management has primary responsibility for Edgewater's financial statements and
overall reporting process, including the company's system of internal controls.
The independent auditors audit the annual financial statements prepared by
management, express an opinion as to whether those financial statements present
fairly, in all material respects, the financial position, results of operations
and cash flows of the company in conformity with accounting principles generally
accepted in the United States of America and discuss with us their independence
and any other matters they are required to discuss with us or that they believe
should be raised with us. We oversee these processes, although we must rely on
the information provided to us and on the representations made by management and
the independent auditors.
We have received and discussed with LBB & Associates, the written disclosure and
the letter required by Independence Standards Board Standard No. 1 (Independence
Discussions with Audit Committees). These items relate to that firm's
independence from Edgewater. We also discussed any matters required to be
discussed pursuant to Statement on Auditing Standards No. 61 (Communications
with Audit Committees) with LBB & Associates.
Based on these reviews and discussions, we recommend to the Board that the
Company's audited financial statements be included in Edgewater's annual report
on Form 10-KSB for the fiscal year ended August 31, 2006.2007.
Douglas MacLellan (Chair)
Robert Rooks
Ian Fraser
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Compensation Committee
The Compensation Committee is responsible for setting executive compensation,
for making recommendations to the full Board concerning director compensation
and for general oversight of the compensation and benefit programs for other
employees. The Compensation Committee does not have a charter. The committee met
1 time in fiscal 2006.2007.
Our overall compensation policies are monitored by the Compensation Committee.
The duties and responsibilities of the Compensation Committee, which consists of
3 directors - 2 of whom are independent, are to:
o administer the employee benefit plans of our company designated for
such administration by the board;
o establish the compensation of our Chief Executive Officer (subject to
the terms of any existing employment agreement);
o with input from our Chief Executive Officer, establish or recommend to
the board the compensation of our other executive officers (subject to
the terms of any existing employment agreements); and
o monitor our overall compensation policies and employment benefit
plans.
Michael Boswell, our Acting Chief Accounting Officer, participates in
determinations regarding the compensation and design of our benefit programs for
all employees, including our other executive officers. However, he does not
participate in determining his own compensation.
We believe that an appropriate compensation program should draw a balance
between providing rewards to executive officers while at the same time
effectively controlling compensation costs. We reward executive officers in
order to attract highly qualified individuals, to retain those individuals in a
highly competitive marketplace for executive talent and to motivate them to
perform in a manner that maximizes our corporate performance. We want our
compensation to provide our executives with an overall competitive compensation
package that seeks to align individual performance with our long-term business
objectives.
During 2007, we did not rely upon consultants to set our salaries, to establish
salary ranges or to provide advice regarding other compensation matters. We
compare our salaries and other elements of compensation against the salaries and
other compensation measures of other public companies in our industry by
reviewing the proxy statements of such other companies. However, we do not
prepare formal benchmarking studies.
Disclosure Committee
The Disclosure Committee is responsible for oversight of our public disclosure
made in our public filings with Securities and Exchange Commission, in the press
and as communicated to our shareholders by investor relations firms that we
employ. The Disclosure Committee did not meet during fiscal 2006,2007, but rather
disclosure issues were discussed orally at the Audit Committee meetings and no
controls or procedures issues were noted.
11
The Finance Committee
The Finance Committee assists the Board in matters related to the capital
structure of the Company and is responsible for overseeing the investment of the
Company's assets pending utilization in the Company's operations. The Committee
did not have any meetings during fiscal 2006.2007.
Nominating Committee
The Nominating Committee nominates candidates for the Board and will consider
nominees recommended by shareholders. However, the Board does not have an
express policy with regard to the consideration of any director candidates
recommended by shareholders and believes it can adequately evaluate any such
nominees on a case-by-case basis. Additionally, as discussed below under the
heading "Stockholder Communications to the Board," stockholders are free to send
communications in writing directly to the Board. The Board will consider
director candidates proposed in accordance with the procedures set forth below
under "Shareholder Proposals for the 20082009 Annual Meeting" and will evaluate
shareholder-recommended candidates under the same criteria as internally
generated candidates. Although the Board does not currently have a charter or
any formal minimum criteria for nominees, substantial relevant business and
industry experience would generally be considered important, as would the
ability to attend and prepare for board, committee and shareholder meetings. Any
candidate must state in advance his or her willingness and interest in serving
on the board of directors.
To date, we have not engaged third parties to identify or evaluate or assist in
identifying potential nominees, although we reserve the right in the future to
retain a third party search firm, if necessary. We have not received any
recommendations for a director nominee from any shareholder. All of the director
nominees included in this Schedule are standing for re-election. The committee
did not hold any meetings in fiscal 2006.2007.
Sarbanes-Oxley Steering Committee
AtIn early 2007, the Board's last meeting, the membersBoard determined that it was in the company's best interest
to establish a committee to help ensure Edgewater's compliance with Section 404
of the Sarbanes-Oxley Act. Pursuant to Section 404, we must include information
in our annual reports concerning the scope and adequacy of our internal controls
and procedures for financial reporting, as well as the
11
effectiveness of such
internal controls and procedures. Accordingly, the Board created the
Sarbanes-Oxley Steering Committee. This committee will have a leadership role in
shaping governance policies and practices regarding internal controls and
procedures, including recommending a SOX 404 compliance plan that the Company
should adopt and to which the committee will monitor the company's compliance.
This committee will meet periodically with our independent auditors and
management to review our internal control structure and financial reporting
matters.
In addition to the members of the committee that are listed above, the committee
intends to hire a project leader for the proposed compliance plan. As theThe committee was not established until December 2006, it
did not hold any meetings duringin fiscal 2006.2007.
12
Directors Attendance at Meetings
During fiscal 2006,2007, the Board held two meetings. None of the directors attended
fewer than 75% of the total number of Board of Directors meetings or the Board
committee(s) of which he or she was a member during fiscal 2006.2007.
We intend to schedule a Board meeting in conjunction with our Annual Meeting and
expect that our directors will attend, absent a valid reason, such as a schedule
conflict. This isAll of our first annual meeting and therefore, there was no annual or
correspondingdirectors attended the board meeting we held last year.year in
conjunction with last year's annual shareholder meeting.
STOCKHOLDER COMMUNICATIONS WITH DIRECTORS
Edgewater stockholders who want to communicate with our Board or any individual
director can write to:
Edgewater Foods International, Inc.
5552 West Island Highway, Qualicum Beach
British Columbia, Canada V9K 2C8
Attn: Board Administration
Your letter should indicate that you are an Edgewater stockholder. Depending on
the subject matter, management will:
o Forward the communication to the Director or Directors to whom it is
addressed;
o Attempt to handle the inquiry directly, for example where it is a
request for information about Edgewater or it is a stock-related
matter; or
o Not forward the communication if it is primarily commercial in nature
or if it relates to an improper or irrelevant topic.
At each Board meeting, a member of management presents a summary of all
communications received since the last meeting that were not forwarded and makes
those communications available to the Directors on request.
12
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Exchange Act requires our officers, directors and persons
who own more than 10% of any class of our securities registered under Section
12(g) of the Exchange Act to file reports of ownership and changes in ownership
with the SEC. Officers, directors and greater than 10% stockholders are required
by SEC regulation to furnish us with copies of all Section 16(a) forms they
file.
We were a voluntary filer pursuant to Section 15(d) of the Act until August 30,
2006 and, therefore, our officers, directors and 10% or greater holders of our
securities were not required to file reports pursuant to Section 16(a) during
the fiscal year ended August 31, 2006. However, after we filed a Form 8-A to
register our common stock and series A preferred stock pursuant to Section 12(g) of the Act on August 30,
13
2006, based upon our review of copies of such reports, our officers, directors
and 10% stockholders filed the reports required by Section 16(a).
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Dr. Kristina Miller, our Chief Scientific Advisor is Robert Saunders, our
Chairman, CEO and President's wife.
We are party to a consulting agreement with TriPoint Capital Advisors, LLC, a
company in which Mark Elenowitz, a director and one of our significant
shareholders, indirectly owns a 40% interest. Michael Boswell, our acting Chief
Accounting Officer and one of our directors, indirectly owns a 30% interest in
TriPoint. Louis Taubman, our outside corporate and securities counsel also
indirectly owns an interest (30%) in TriPoint. Our Board recently approved the
Compensation Committee's recommendation of a flat rate $15,000 per month fee,
which shall be reduced to $7,500 per month until our cash flow position
improves, for the legal services Mr. Taubman provides us. The Board also
approved the recommendation of a $15,000 per month fee, which shall be reduced
to $7,000 per month until our cash flow position improves, for the Acting CFO
type services and financial advisory services Michael Boswell and TriPoint,
respectively, provide us. Additionally, our corporate offices in Gaithersburg,
Maryland are currently provided by Tripoint Holdings, LLC, the parent company of
Tripoint, at no cost to us.
Island Scallops, Ltd., our wholly owned subsidiary, recently transferred 100%
ownership of RKS Laboratories, Inc. to Robert Saunders, our Chairman, CEO and
President. RKS is a Vancouver research and development that is working towards
developing superior strains of scallops (developed by Island Scallops and known
as the Pacific Scallop) with beneficial traits such as higher meat yield and
rapid growth. Island Scallops agreed to transfer its ownership of RKS in
consideration for the grant to Island Scallops by RKS and Robert Saunders of a
right of first refusal to commercialize any intellectual property developed by
RKS. Island Scallops has the right to acquire or use any intellectual property
from RKS at RKS' cost, in perpetuity or until such time as RKS shall cease to
exist. Between June 2006 and November 2006,August 2007, Island Scallops agreed to loan RKS a
total of approximately $56,000$82,000 under fiveeight non-interest bearing notes that are
secured by all of RKS' assets and are due at various dates beginning on June 15,
2007 and ending on NovemberAugust 31, 2007.
13
2008.
LEGAL PROCEEDINGS
In 1998, 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 Agreements by the
purchasers, it is our position that we may retain any unused portion of these
advance payments.
As of August 31, 2006,2004, one of the two purchasers had claimed that Island
Scallops owed it amounts totaling $88,925. Since it is our position that the
purchasers breached their agreements with Island Scallops, we have no intention
of seeking a settlement of this matter at this time. We are unaware of any
formal proceedings that may have been commenced by either of these two
purchasers in regard to any claims that they may have.
Other than as set forth herein, we are not a party to any material legal
proceeding and to our knowledge, no such proceeding is currently contemplated or
pending.
14
EXECUTIVE AND DIRECTOR COMPENSATION
Summary Compensation Table
- ---------------------------------------------------------------- ------------------------------ ------------ ---------------------
Annual Compensation Awards Payouts
- ---------------------------------------------------------------- ------------------------------ ------------ ---------------------
- ----------------------------------------------------------------------------------------------------------------------
Name and Principal Salary Bonus Stock Awards Option Awards
Position Year ($) ($) ($) ($)
(a) (b) (c) (d) (e) (f)
- ----------------------------------------------------------------------------------------------------------------------
Robert Saunders, CEO 2007 60,000 (1) 0 0 20,651 (3)
- ----------------------------------------------------------------------------------------------------------------------
Robert Saunders, CEO 2006 60,000 (1) 150,000 (1) 0 0
- ----------------------------------------------------------------------------------------------------------------------
Michael Boswell 2007 0 (2) 0 0 26,847 (3)
Acting Chief
Accounting Officer
- ----------------------------------------------------------------------------------------------------------------------
Michael Boswell 2006 0 (2) 0 0 0
Acting Chief
Accounting Officer
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
Non-Qualified
Non-Equity Deferred
Name and Incentive Plan Compensation
Principal Compensation Earnings All other Total
Position Year ($) ($) Compensation ($)
(a) (b) (g) (h) (i) Name Year Salary Bonus($) Other Restricted Securities LTIP All Other
and ($) Annual Stock Under- Payouts Compensation
Principal Compen- Awards($) lying ($) ($)
Position sation ($) Options/
SARs(#)(j)
- ---------------- -------- ---------- -------------- ------------ --------------- -------------- ------------ -------------------------------------------------------------------------------------------------------------------------------------------
Robert Saunders, CEO 2007 0 0 1,000,000 1,080,651
- ----------------------------------------------------------------------------------------------------------------------
Robert Saunders, CEO 2006 60,000 150,0000 0 1,000,000 1,210,000
- ----------------------------------------------------------------------------------------------------------------------
Michael Boswell 2007 0 0 0 0 0
Saunders,
Chairman,
President and
CEO(1)26,847
Acting Chief
Accounting Officer
- ---------------- -------- ---------- -------------- ------------ --------------- -------------- ------------ ---------------------
Robert 2005 10,000 0 0 0 0 0 0
Saunders,
Chairman,
President and
CEO
- ---------------- -------- ---------- -------------- ------------ --------------- -------------- ------------ ---------------------
Robert 2004 0 0 0 0 0 0 0
Saunders,
Chairman,
President and
CEO
- ---------------- -------- ---------- -------------- ------------ --------------- -------------- ------------ -------------------------------------------------------------------------------------------------------------------------------------------
Michael Boswell 2006 0 0 0 0
0 0 0
Boswell,
Acting Chief
Account
Officer (2)
- ---------------- -------- ---------- -------------- ------------ --------------- -------------- ------------ ---------------------
Michael 2005 0 0 0 0 0 0 0
Boswell,
President and
Acting Chief
AccountAccounting Officer
- ---------------- -------- ---------- -------------- ------------ --------------- -------------- ------------ ---------------------
Michael Boswell 2004 0 0 0 0 0 0 0
- ---------------- -------- ---------- -------------- ------------ --------------- -------------- ------------ -------------------------------------------------------------------------------------------------------------------------------------------
(1) In June 2005, we entered into an employment agreement with Mr. Robert
Saunders, as our Chairman, CEO and President effective on June 29, 2005.
Subsequently in August 2005,President. Mr. Saunders was appointed CEO by our Board
15
of Directors. Mr. Saunders serveswill serve at
the pleasure of the Board. For
serving as President,Board of Directors. Pursuant to his employment
agreement, Mr. Saunders' compensation will be US $60,000 (USD) per annum.annum
for his services as our President. Following the receipt of at least
15
$5,000,000 (USD) min outside funding, Mr. Saunders will receive an
additional $10,000 per month for his services as Chairman and,
thereafter, $20,000 per month provided that we achieve gross revenues
of at least $20,000,000 (USD) for our most recent fiscal year and
continuing as long as we maintain gross revenues of at least
$20,000,000 (USD) for each successive fiscal year. If we fail to
achieve gross revenue of $20,000,000 (USD) in a successive fiscal
year, Mr. Saunders compensation as Chairman shall be reduced to
$10,000 (USD) per month. Additionally, we agreed to grant Mr. Saunders
a signing bonus of US $150,000 (USD) to be paid onupon the closing of at
least US $3,500,000 in new third party financing and increase his compensation to $120,000 per annum if
we receive at least US $5,000,000 in outside funding. Thefinancing. In August 2006, our
Board recently approved the Compensation Committee's recommendationfollowing revisions to Mr. Saunders' compensation:
reduce Mr. Saunders' compensation from $10,000 to $5,000 per month
until our cash flow position improves, at which time the Compensation
Committee will reconvene and recommend to
the Board that Mr. Saunders' compensation increase back
to $10,000 per month. AlthoughAs of August 31, 2007, we have yet to reach a final agreement on payment terms,
wehad paid Mr. Saunders
$50,000 towards$75,000 of the signing$150,000 bonus in Septemberthat was due under the terms of 2006.the
agreement. Additionally, we are currently discussing possible
restructuring/payment terms of the accrued salary of $130,000 as of
August 31, 2007, until such time that we become significantly cash
flow positive for its operations.
(2) Mr. Boswell served as our President from March to June 2005, at which
time Mr. Saunders replaced Mr. Boswell as President. Mr. Boswell has
served as our Acting Chief Accounting Officer since August 2005. Mr.
Boswell indirectly owns a minority interest in TriPoint Capital
Advisors, LLC, a significant shareholder and party with which we
maintain a consulting agreement. TheIn August 2006, the Board recently approved
the Compensation Committee's recommendation to pay TriPoint $15,000
per month, which includes fees for Mr. Boswell's services as our
Acting Chief Accounting Officer during 2006,2005, however TriPoint agreed to reduce
such fee to $7,000 per month until our cash flow position improves, at
which time the Committee will reconvene and recommend a return to
$15,000 per month. In addition, TriPoint has agreed not to accept any
additional fees, other than expenses, until we are sufficiently funded
to carry out our business and operations. Although Mr. Boswell did not
work for us in any capacity until 2005, we are required to include our
last three fiscal years in the above table. According to the above
reasons, Mr. Boswell did not receive any compensation in 2003, 2004 or
2005.
Options/SARs
We did not2006 and only
received the options listed in the table above in 2007.
(3) On August 17, 2007, Mr. Saunders and Mr. Boswell were granted
five-year nonqualified stock options, pursuant to our 2005 Equity
Plan, that vest on a 1/12 monthly basis over a twelve month period
beginning on the grant anydate. The exercise price of the options or SARs to anyis
$1.21, which represents 110% of the closing price of our named executive officers
duringcommon stock
on August 17, 2007. Based on the last fiscal year nor didBlack-Scholes option pricing model,
the total fair value of these options were determined to be $247,815
and $322,159 for Mr. Saunders and Mr. Boswell, respectively. Since
these options vest monthly, the company will incur a monthly cost of
$20,651 and $26,847 respectively. As of August 31, 2007, only one
month of these stock options costs had been realized.
16
Outstanding Equity Awards at Fiscal Year-End
- ----------------------------------------------------------------------------------------------------------------------
Equity
Incentive Plan
Number of Number of Awards:
Securities Securities Number of
Underlying Underlying Securities
Unexercised Unexercised Underlying
Options Options Unexercised Option Option
(#) (#) Unearned Options Exercise Price Expiration
Name Exercisable Unexercisable (#) ($) Date
(a) (b) (c) (d) (e) (f)
- ----------------------------------------------------------------------------------------------------------------------
Robert Saunders 300,000 (1) 0 0 1.21 8-14-2007
- ----------------------------------------------------------------------------------------------------------------------
Michael Boswell 390,000 (1) 0 0 1.21 8-14-2007
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
Equity Incentive Equity Incentive
Plan Awards: Plan Awards:
Number of Number of Market or Payout
Shares or Market Value of Unearned Shares, Value of
Units of Stock Shares of Units of Units or Other Unearned Shares,
That Have Not Stock That Have Rights That Have Units or Other
Vested Not Vested Not Vested Rights That Have
Name (#) ($) (#) Not Vested
(a) (g) (h) (i) (j)
- ----------------------------------------------------------------------------------------------------------------------
Robert Saunders 275,000 227,164 0 0
- ----------------------------------------------------------------------------------------------------------------------
Michael Boswell 357,500 295,312 0 0
- ----------------------------------------------------------------------------------------------------------------------
(1) Pursuant to our 2005 Equity Incentive Plan, Mr. Saunders and Mr.
Boswell were granted five-year nonqualified stock options on August
17, 2007 that vest on a 1/12 monthly basis over a twelve month period
beginning on the grant date. The exercise price of the options is
$1.21, which represents 110% of the closing price of our common stock
on August 17, 2007. As Of August 31, 2007 only 1/12 of these options
have vested.
Retirement/Resignation Plans
We do not have any plans or arrangements in place regarding the payment to any
of our executive officers exercisefollowing such persons retirement or resignation.
17
DIRECTOR COMPENSATION
- ----------------------------------------------------------------------------------------------------------------------
Name Fees Earned or Stock Awards Option Awards Non-Equity
Paid in Cash ($) ($) incentive Plan
($) Compensation
($)
(a) (b) (c) (d) (e)
- ----------------------------------------------------------------------------------------------------------------------
Douglas MacLellan 36,000 0 13,768 (1) (2) 0
- ----------------------------------------------------------------------------------------------------------------------
Mark Elenowitz 0 0 35,795 (1) (3) (4) 0
- ----------------------------------------------------------------------------------------------------------------------
Darryl Horton 1,000 0 688 (1) (5) 0
- ----------------------------------------------------------------------------------------------------------------------
Ian Fraser 1,000 0 5,163 (1) (6) 0
- ----------------------------------------------------------------------------------------------------------------------
Victor Bolton 1,000 0 688 (1) (7) 0
- ----------------------------------------------------------------------------------------------------------------------
Robert Rooks 1,000 0 3,442 (1) (8) 0
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
Name Change in Pension Value All other Compensation Total
and Nonqualified Deferred ($) ($)
Compensation Earnings
(a) (f) (g) (h)
- ----------------------------------------------------------------------------------------------------------------------
Douglas MacLellan 0 0 49,768
- ----------------------------------------------------------------------------------------------------------------------
Mark Elenowitz 0 0 35,795
- ----------------------------------------------------------------------------------------------------------------------
Darryl Horton 0 0 1,688
- ----------------------------------------------------------------------------------------------------------------------
Ian Fraser 0 0 6,163
- ----------------------------------------------------------------------------------------------------------------------
Victor Bolton 0 0 1,688
- ----------------------------------------------------------------------------------------------------------------------
Robert Rooks 0 0 4,442
- ----------------------------------------------------------------------------------------------------------------------
(1) At the end of the fiscal year, 2,962,000 options are outstanding.
(2) These include the five-year incentive stock options granted to such
individual on August 17, 2007 pursuant to our 2005 Equity Plan. These
options vest on a 1/12 monthly basis over a twelve month period
beginning on the grant date and are exercisable at $1.21, which
represents 110% of the closing price of our common stock on August 17,
2007. Based on the Black-Scholes option pricing model, the total fair
value of these 200,000 options were determined to be $165,210. Since
these options vest monthly, we will incur a monthly cost of $13,768.
As of August 31, 2007, only one month of these stock options costs had
been realized.
(3) These include the five-year incentive stock options granted to such
individual on August 17, 2007 pursuant to our 2005 Equity Plan. These
options vest on a 1/12 monthly basis over a twelve month period
beginning on the grant date and are exercisable at $1.21, which
represents 110% of the closing price of our common stock on August 17,
2007. Based on the Black-Scholes option pricing model, the total fair
value of these 520,000 options were determined to be $429,546. Since
these options vest monthly, we will incur a monthly cost of $35,795.
As of August 31, 2007, only one month of these stock options costs had
been realized.
18
(4) Mr. Elenowitz indirectly owns a minority interest in TriPoint Capital
Advisors, LLC, a significant shareholder and party with which we
maintain a consulting agreement. In August 2006, the Board approved
the Compensation Committee's recommendation to pay TriPoint $15,000
per month, which includes fees for Mr. Elenowitz's services as a
Director; however, TriPoint agreed to reduce such fee to $7,000 per
month until our cash flow position improves, at which time the
Committee will reconvene and recommend a return to $15,000 per month.
In addition, TriPoint has agreed not to accept any additional fees,
other than expenses, until we are sufficiently funded to carry out our
business and operations.
(5) These include the five-year incentive stock options or SARs duringgranted to such
individual on August 17, 2007 pursuant to our 2005 Equity Plan. These
options vest on a 1/12 monthly basis over a twelve month period
beginning on the last fiscal year.
Long Term Incentive Plans
No Long Term Incentive awardsgrant date and are exercisable at $1.21, which
represents 110% of the closing price of our common stock on August 17,
2007. Based on the Black-Scholes option pricing model, the total fair
value of these 10,000 options were determined to be $8,260. Since
these options vest monthly, we will incur a monthly cost of $688. As
of August 31, 2007, only one month of these stock options costs had
been realized.
(6) These include the five-year incentive stock options granted into such
individual on August 17, 2007 pursuant to our 2005 Equity Plan. These
options vest on a 1/12 monthly basis over a twelve month period
beginning on the last fiscal year.
Boardgrant date and are exercisable at $1.21, which
represents 110% of Director Feesthe closing price of our common stock on August 17,
2007. Based on the Black-Scholes option pricing model, the total fair
value of these 75,000 options were determined to be $61,954. Since
these options vest monthly, we will incur a monthly cost of $5,163. As
of August 31, 2007, only one month of these stock options costs had
been realized.
(7) These include the five-year incentive stock options granted to such
individual on August 17, 2007 pursuant to our 2005 Equity Plan. These
options vest on a 1/12 monthly basis over a twelve month period
beginning on the grant date and are exercisable at $1.21, which
represents 110% of the closing price of our common stock on August 17,
2007. Based on the Black-Scholes option pricing model, the total fair
value of these 10,000 options were determined to be $8,260. Since
these options vest monthly, we will incur a monthly cost of $688. As
of August 31, 2007, only one month of these stock options costs had
been realized.
(8) These include the five-year incentive stock options granted to such
individual on August 17, 2007 pursuant to our 2005 Equity Plan. These
options vest on a 1/12 monthly basis over a twelve month period
beginning on the grant date and are exercisable at $1.21, which
represents 110% of the closing price of our common stock on August 17,
2007. Based on the Black-Scholes option pricing model, the total fair
value of these 50,000 options were determined to be $41,302. Since
these options vest monthly, we will incur a monthly cost of $3,442. As
of August 31, 2007, only one month of these stock options costs had
been realized.
Our directors who are employees do not receive any compensation from us for
services rendered as directors. The Board has created three classes of fees for
outside directors: (1) outside directors who are "independent," as defined in
the Exchange Act will be paid $500 per meeting, whether telephonic or in person
for director fee - there shall not be any fees for written consents in lieu of
board meetings; (2) outside directors who are not "independent" will not receive
any fees at this time, but once our cash flow position improves, the
Compensation Committee will reconvene and make recommendations; (3) the Vice
Chairman will receive $3,000 per month, which includes $1,500 per month for his
role as Chairman of our Audit Committee.
19
Additionally, although we do not currently have an arrangement or agreement to
provide stock based compensation to our outside directors, in the future we may, from time to
time, grant outside directors incentive-basedincentive stock compensation.
16
options pursuant to our 2005
Equity Incentive Plan.
Employment Agreements
In June 2005, we entered into an employment agreement with Robert Saunders, our
Chairman, CEO and President. Mr. Saunders will serve at the pleasure of the
Board of Directors. Pursuant to his employment agreement, Mr. Saunders'
compensation will be $60,000 (USD) per annum for his services as our President.
Following the receipt of at least $5,000,000 (USD) min outside funding, Mr.
Saunders will receive an additional $10,000 per month for his services as
Chairman and, thereafter, $20,000 per month provided that we achieve gross
revenues of at least $20,000,000 (USD) for our most recent fiscal year and
continuing as long as we maintain gross revenues of at least $20,000,000 (USD)
for each successive fiscal year. If we fail to achieve gross revenue of
$20,000,000 (USD) in a successive fiscal year, Mr. Saunders compensation as
Chairman shall be reduced to $10,000 (USD) per month. Additionally, we agreed to
grant Mr. Saunders a signing bonus of $150,000 (USD) to be paid upon the closing
of at least $3,500,000 in new third party financing. In August 2006, our Board
approved the following revisions to Mr. Saunders' compensation: reduce Mr.
Saunders' compensation from $10,000 to $5,000 per month until our cash flow
position improves, at which time the Compensation Committee will recommend that
Mr. Saunders' compensation increase back to $10,000 per month. WeAs of August 31,
2007, we paid Mr. Saunders $75,000 of the $150,000 bonus that was due under the
terms of the agreement. Additionally, we are currently discussing possible
restructuring/payment terms regardingof the $70,000 deferred compensation
from fiscal year 2006 and 2005 and the $150,000 bonusaccrued salary of $130,000 as of August 31,
2007, until such time that was to be paid to Mr.
Saunders upon the closing of at least US$3,500,000 in outside funding. Although
we have yet to reach a final agreement on payment terms, we paid Mr. Saunders
$50,000 towards the bonus in September of 2006.become significantly cash flow positive for its
operations.
INDEPENDENT PUBLIC ACCOUNTANTS
The Board reappointed LBB & Associates, Ltd., LPP (formerly Lopez, Blevins, Bork
& Associates, LLP) as the independent accounting firm to audit our financial
statements for fiscal 2007.2008. LBB & Associates, as the Company's independent
accounting firm, audited our financial statements for fiscal years ended 20052006
and 2006.2007. Representatives of LBB & Associates will not be present at the meeting
nor will they be available during that time to respond to any questions.
Audit Fees
The aggregate fees billed for professional services rendered by LBB & Associates
for the audit of the registrant's annual financial statements and review of
financial statements included in the registrant's Form 10-KSB or services that
are normally provided by the accountant in connection with statutory and
regulatory filings or engagements for fiscal years 20062007 and 20052006 were
approximately $46,000$102,000 and $9,000,$46,000, respectively.
Audit-Related Fees
No such fees were incurred in fiscal 2006.2007.
All Other Fees
No other fees were incurred in fiscal 2006.
172007.
20
Our Board of Directors must pre-approve all auditing services and permitted
non-audit services (including the fees and terms thereof) to be performed for
Edgewater by its independent auditors, subject to the de minimus exceptions for
non-audit services described in Section 10A(i)(1)(B) of the Securities Exchange
Act of 1934, which should nonetheless be approved by our Board prior to the
completion of the audit. Each year the independent auditor's retention to audit
our financial statements, including the associated fee, is approved by the Board
before the filing of the previous year's annual report on Form 10-KSB. At the
beginning of the fiscal year, the Board will evaluate other known potential
engagements of the independent auditor, including the scope of work proposed to
be performed and the proposed fees, and approve or reject each service, taking
into account whether the services are permissible under applicable law and the
possible impact of each non-audit service on the independent auditor's
independence from management. At each subsequent Board meeting, the auditor and
management may present subsequent services for approval. Typically, these would
be services such as due diligence for an acquisition, that would not have been
known at the beginning of the year.
Since May 6, 2003, the effective date of the Securities and Exchange Commission
rules stating that an auditor is not independent of an audit client if the
services it provides to the client are not appropriately approved, each new
engagement of LBB & Associates has been approved in advance by the Board, and
none of those engagements made use of the de minimus exception to pre-approval
contained in Section 10A(i)(1)(B) of the Securities Exchange Act of 1934.
BENEFICIAL OWNERSHIP OF EDGEWATER COMMON STOCK
As used in this section, the term beneficial ownership with respect to a
security is defined by Rule 13d-3 under the Securities Exchange Act of 1934, as
amended, as consisting of sole or shared voting power (including the power to
vote or direct the vote) and/or sole or shared investment power (including the
power to dispose of or direct the disposition of) with respect to the security
through any contract, arrangement, understanding, relationship or otherwise,
subject to community property laws where applicable.
As of January 12,November 15, 2007 we had a total of 21,188,49123,737,700 shares of common stock and
7,821,33310,321,955 shares of preferred stock issued and outstanding, which are the only
issued and outstanding equity securities of the Company. The preferred stock
does not have voting rights with respect to the proposals contained herein, but
we include such stock on as converted basis for purposes of the following table.
The following table sets forth, as of January 12,November 15, 2007: (a) the names and
addresses of each beneficial owner of more than five percent (5%)5% of our common stock and
preferred stock (taken together as one class) known to us, the number of shares
of common stock and preferred stock beneficially owned by each such person, and
the percent of our common stock and preferred stock so owned; and (b) the names
and addresses of each director and executive officer, the number of shares our
common stock and preferred stock beneficially owned, and the percentage of our
common stock and preferred stock so owned, by each such person, and by all of
our directors and executive officers as a group. Each person has sole voting and
investment power with respect to the shares of our common stock and preferred
stock, except as otherwise indicated. Beneficial ownership consists of a direct
interest in the shares of common stock and preferred stock, except as otherwise
indicated.
1821
Name and Address Amount and Nature of Percentage
Beneficial Ownership of Voting of
Securities (1)
Robert Saunders, Chairman, President & CEO 9,900,000 34.13%10,025,000 (2) 29.44%
5552 West Island Highway
Qualicum Beach, British Columbia
Canada V9K 2C8
Douglas C. MacLellan, Vice Chairman 1,040,000 3.58%1,123,333 (3) 3.30%
8324 Delgany Avenue
Playa del Ray, CA 90293
Mark Elenowitz, Director 1,238,000 (2)1,454,667 (4) (5) 4.27%
400 Professional Drive, Suite 310
Gaithersburg, MD 20879
Dr. Robert Rooks, Director 300,000 1.03%320,833 (6) 0.94%
912 Pine Avenue
Huntington Beach, CA 90293
Ian Fraser, Director 800,000 (3) 2.76%831,250 (7) (8) 2.44%
3056 West 2nd Avenue
Vancouver, British Columbia
Canada V6T 1E9
Michael Boswell, Director & Acting Chief 938,000 (4)1,100,500 (9) (10) 3.23%
Accounting Officer
400 Professional Drive, Suite 310
Gaithersburg, MD 20879
Victor Bolton, Director 0 0.0%4,167 (11) 0.01%
345-916 W. Broadway
Vancouver, BC V5Z 1K7
Darryl Horton, Director 0 0.0%4,167 (12) 0.01%
33568 Eagle Mountain Drive
Abbortsford, BC V3G 2X7
Vision Opportunity Master Fund, Ltd. 2,871,973 (5) 9.99%1,699,577 (13) 4.99%
20 West 55th St., 5th Floor
New York, NY 10019
All directors and officers as a group
(8 persons) 14,216,000 49.00%14,863,917 43.64%
22
(1) All Percentages have been rounded up to the nearest one hundredth of
one percent.percent and such percentage is based upon the amount of our
outstanding common stock and preferred stock, on an as converted
basis. The percentage assumes in the case of each shareholder listed
in the above list that all warrants or options held by such
shareholder that are exercisable currently or within 60 days were
fully exercised by such shareholder, without the exercise of any
warrants or options held by any other shareholders.
(2) In addition to his stock ownership, Mr. Saunders was granted 300,000
five-year nonqualified stock options on August 17, 2007 that vest on a
1/12 monthly basis over a twelve month period beginning on the grant
date. The exercise price of the options is $1.21, which represents
110% of the closing price of our common stock on August 17, 2007. As
of November 15, 2007, only 3/12 of these options have vested, but an
additional 2/12 will vest within 60 days from such date.
(3) In addition to his stock ownership, Mr. MacLellan was granted 200,000
five-year nonqualified stock options on August 17, 2007 that vest on a
1/12 monthly basis over a twelve month period beginning on the grant
date. The exercise price of the options is $1.21, which represents
110% of the closing price of our common stock on August 17, 2007. As
of November 15, 2007, only 3/12 of these options have vested, but an
additional 2/12 will vest within 60 days from such date.
(4) Mr. Elenowitz is a 100% percent shareholder of MHE, Inc., which owns
18,000 shares of our voting stock. Additionally, MHE, Inc. is a 40%
member of
19
TriPoint Capital Advisors, LLC, which owns 3,000,000 shares
of our voting stock. Mr. Elenowitz owns 20,000 shares of our voting
stock directly. Therefore, Mr. Elenowitz beneficially owns
1,238,000shares of our voting stock.
(3)(5) In addition to his stock ownership, Mr. Elenowitz was granted 520,000
five-year nonqualified stock options on August 17, 2007 that vest on a
1/12 monthly basis over a twelve month period beginning on the grant
date. The exercise price of the options is $1.21, which represents
110% of the closing price of our common stock on August 17, 2007. As
of November 15, 2007, only 3/12 of these options have vested, but an
additional 2/12 will vest within 60 days from such date.
(6) In addition to his stock ownership, Dr. Rooks was granted 50,000
five-year nonqualified stock options on August 17, 2007 that vest on a
1/12 monthly basis over a twelve month period beginning on the grant
date. The exercise price of the options is $1.21, which represents
110% of the closing price of our common stock on August 17, 2007. As
of November 15, 2007, only 3/12 of these options have vested, but an
additional 2/12 will vest within 60 days from such date.
(7) Mr. Fraser is a 100% shareholder of One Way Grill Limited, which owns
800,000 shares of our voting stock. Therefore, Mr. Fraser beneficially
owns 800,000 shares of our voting stock.
(4)(8) In addition to his stock ownership, Mr. Fraser was granted 75,000
five-year nonqualified stock options on August 17, 2007 that vest on a
1/12 monthly basis over a twelve month period beginning on the grant
date. The exercise price of the options is $1.21, which represents
110% of the closing price of our common stock on August 17, 2007. As
of November 15, 2007, only 3/12 of these options have vested, but an
additional 2/12 will vest within 60 days from such date.
(9) Mr. Boswell and his wife jointly own Invision, LLC, which owns 38,000
shares of our voting stock. Additionally, Invision, LLC.LLC is a 30%
member of TriPoint Capital Advisors, LLC, which owns 3,000,000 shares
of our voting stock. Therefore, Mr. Boswell beneficially owns 938,000
shares of our voting stock.
(5)23
(10) In addition to his stock ownership, Mr. Boswell was granted 390,000
five-year nonqualified stock options on August 17, 2007 that vest on a
1/12 monthly basis over a twelve month period beginning on the grant
date. The exercise price of the options is $1.21, which represents
110% of the closing price of our common stock on August 17, 2007. As
of November 15, 2007, only 3/12 of these options have vested, but an
additional 2/12 will vest within 60 days from such date.
(11) Mr. Bolton was granted 10,000 five-year nonqualified stock options on
August 17, 2007 that vest on a 1/12 monthly basis over a twelve month
period beginning on the grant date. The exercise price of the options
is $1.21, which represents 110% of the closing price of our common
stock on August 17, 2007. As of November 15, 2007, only 3/12 of these
options have vested, but an additional 2/12 will vest within 60 days
from such date.
(12) Mr. Horton was granted 10,000 five-year nonqualified stock options on
August 17, 2007 that vest on a 1/12 monthly basis over a twelve month
period beginning on the grant date. The exercise price of the options
is $1.21, which represents 110% of the closing price of our common
stock on August 17, 2007. As of November 15, 2007, only 3/12 of these
options have vested, but an additional 2/12 will vest within 60 days
from such date.
(13) Vision owns 5,133,3332,204,296 shares of our preferredcommon stock, 5,238,333 shares of
common stock issuable upon conversion of their Series A Convertible
Preferred Stock, 1,495,740 shares of common stock issuable upon
conversion of their Series B Convertible Preferred Stock, 747,870
shares of common stock issuable upon conversion of their Series C
Convertible Preferred Stock and 22,107230,630 shares of common stock
received as dividends on June 30, 2006.dividends. However, based upon the terms of the preferred
stock, Vision may not convert its preferred stock if on any date, it
would be deemed the beneficial owner of more than 9.99%4.99% of the then
outstanding shares of our common stock. In addition to the shares
listed in the table, Vision holds warrants to purchase 15,666,668up to
19,787,758 shares of our common stock, but based upon the terms of
these warrants, Vision cannot exercise them if on any date, it would
be deemed the beneficial owner of more than 9.99%4.99% of the then
outstanding shares of our common stock. However, Vision can elect to
waive the cap upon 61 days notice to us.us or less if, and only if less
than 61 days remain on the term of the warrant and in such case the
waiver will not be effective until the warrant's expiration date.
CHANGES IN CONTROL
To the best of our knowledge, there are no arrangements that could cause a
change in our control.
STOCKHOLDER PROPOSALS FOR THE 20082009 ANNUAL MEETING
Any stockholder who intends to present a proposal at the 20082009 Annual Meeting of
Stockholders must ensure that the proposal is received by the Corporate
Secretary of Edgewater at 5552 West Island Highway, Qualicum Beach, British
Columbia, Canada V9K 2C8:
o Not later than September 22, 2007,August 4, 2008, if the proposal is submitted for
inclusion in our proxy materials for that meeting pursuant to
Rule 14a-8 under the Securities Exchange Act of 1934; or
o December 6, 2007.October 1, 2008.
24
FORM 10-KSB
On November 28, 2006,29, 2007, the Company filed with the SEC an annual report on Form
10-KSB for the fiscal year ended August 31, 2006.2007. A copy of the Form 10-KSB is
enclosed herewith. Upon written request to the Company's Secretary, at the
Company's U.S. corporate offices, 400 Professional Drive, Suite 310,
Gaithersburg, Maryland 20878, the exhibits set forth on the exhibit index of the
Form 10-KSB may be made available at reasonable charge (which will be limited to
our reasonable expenses in furnishing such exhibits).
2025
ADMISSION TICKET
EDGEWATER FOODS INTERNATIONAL, INC.
5552 West Island Highway
Qualicum Beach, British Columbia
Canada V9K 2C8
THIS ADMISSION TICKET ADMITS ONLY THE NAMED STOCKHOLDER AND A GUEST.
NOTE: If you plan on attending the Annual Meeting in person, please bring, in
addition to this admission ticket, a proper form of identification. Video, still
photography and recording devices are not permitted at the Annual Meeting. For
the safety of attendees, all handbags and briefcases are subject to inspection.
Your cooperation is appreciated.
Directions to the Royal Vancouver Yacht Club
3811 Point Grey Road:Road
FROM WESTBOUND HIGHWAY 1 (TRANS-CANADA):
1. Exit at Grandview Highway
2. Drive west on Grandview Highway which turns into East 12th Avenue.
3. East 12th Avenue turns into West 12th Avenue which turns into West 10th
Avenue.
3. Turn right (north) onto Alma Street (approximately 20 minutes after exiting
Hwy 1).
5.4. Turn left (west) onto Point Grey Road.
6.5. There is a clubhouse located on the north side (close to the water) of Point
Grey Road.
FROM NORTHBOUND HIGHWAY 99:
1. Drive north on Highway 99 into Vancouver.
2. Highway 99 turns into Oak Street after crossing the Oak Street Bridge.
3. Turn left (west) on West 12th Avenue.
4. West 12th Avenue turns into West 10th Avenue.
5. Turn right (north) onto Alma Street.
6. Turn left (west) onto Point Grey Road.
7. There is a clubhouse located on the north side (close to the water) of Point
Grey Road.
FROM DOWNTOWN VANCOUVER:
1. Drive south on Burrard Street across the Burrard Street Bridge.
2. Stay in the far right lane and exit onto Cornwall Avenue.
3. Cornwall Avenue turns into Point Grey Road.
4. There is a clubhouse located on the north side (close to the water) of Point
Grey Road one block west of Alma Street.
2126
PROXY
EDGEWATER FOODS INTERNATIONAL, INC.
5552 West Island Highway
Qualicum Beach, British Columbia, Canada V9K 2C8
ANNUAL MEETING OF SHAREHOLDERS - FEBRUARY 12, 2007JANUARY 10, 2008
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Robert Saunders, as proxy of the undersigned,
with full power to appoint his substitute, and hereby authorizes him to
represent and to vote all the shares of stock of Edgewater Foods International,
Inc. which the undersigned is entitled to vote, as specified on the reverse side
of this card, at the Annual Meeting of Shareholders of Edgewater Foods
International, Inc. to be held at The Royal Vancouver Yacht Club, located at
3811 Point Grey Road, Vancouver, British Columbia, Canada V6R 1B3, on February 12, 2007January
10, 2008 at 2:00 PM and at any adjournment or postponement thereof.
When this proxy is properly executed, the shares to which this proxy relates
will be voted as specified. If no contrary instruction is indicated for any
proposal, the vote shall be cast in accordance with the recommendation of the
Board of Directors. This proxy authorizes the above designated proxy to vote in
his discretion on such other business as may properly come before the meeting or
any adjournments or postponements thereof to the extent authorized by Rule
14a-4(c) promulgated under the Securities Exchange Act of 1934, as amended.
If you wish to vote in accordance with the Board of Directors' recommendations,
just sign below. You need not mark any boxes.
This proxy is solicited on behalf of the Board of Directors of Please mark your
votes as indicated in this Directors ofexample. [X] Edgewater Foods International, Inc. The example.
[X]
Board of Directors unanimously recommends that you vote "For" each of the
proposals.
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY BY USING THE
ENCLOSED ENVELOPE.
1. To elect The Board of Directors, whose terms are described in the proxy
statement.
Tostatement: (to withhold authority to vote for any nominee, mark "For All Except"
and write the nominee's name(s) on the line below.below)
FOR ALL WITHHOLD ALL FOR ALL EXCEPT
[_] [_] [_]
----------------------------
Please indicate if you intend to attend this meeting [_] YES [_] NO [_]
If address has changed, please check the box and indicate your new address belowon
the line below: [_]
22
- -------------------------------
- -------------------------------
- -------------------------------
I/We: [ ]will attend; [ ]will not attend the meeting.________________________________________________________________________________
Signature(s): _______________________________ Date: - -------------------------------------------------------
- -------------------------------------------------------
PLEASE PRINT YOUR NAME ABOVE________________________
Please print your name and title, if required: _________________________________
This proxy must be signed exactly as your name appears hereon. When shares are
held by joint tenants, both should sign. Attorneys, executors, administrators,
trustees and guardians should indicate their capacities. If the signer is a
corporation, please print full corporate name and indicate capacity of the duly
authorized officer executing on behalf of the corporation. If the signer is a
partnership, please print full partnership name and indicate capacity of duly
authorized officer executing on behalf of the partnership.
2327
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934.
For the Fiscal Year Ended August 31, 20062007
Commission File Number 0-50092
EDGEWATER FOODS INTERNATIONAL, INC.
-----------------------------------
(Name of Small Business Issuer in Its Charter)
Nevada 20-3113571
- --------------------------------------------------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
- --------------------------------------------------------------------------------
5552 West Island Highway, Qualicum Beach, British Columbia, Canada V9K 2C8
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(250) 757-9811
(Issuer's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock
and
Series A Convertible Preferred
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act.
YES X NO
---- ------------
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Act 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 requirement for the past 90 days.
X YES NO
---- ------------ -----
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ X ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
YES X NO
---- -------------
The issuer's revenues for its most recent fiscal year were: $527,623.$657,065.
The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant as of November 27, 200623, 2007 was $9,567,496$9,616,917
(computed by multiplying the closing sales price for our common stock on such
date by the number of shares of common stock held by persons other than
officers, directors or by record holders of 10% or more of the registrant's
outstanding common stock. This characterization of officers, directors and 10%
or more beneficial owners as affiliates is for purposes of computation only and
is not an admission for any purposes that such people are affiliates of the
registrant).
The number of shares of our common stock outstanding on November 27, 200623, 2007 was
21,049,926.
223,737,700.
ii
TABLE OF CONTENTS
PART I
Item 1 Description of Business...............................Business.................................... Page 5
Item 2 Description of Property...............................Property.................................... Page 1415
Item 3 Legal Proceedings.....................................Proceedings.......................................... Page 16
Item 4 Submission of Matter to a Vote of Security Holders....Holders......... Page 1617
PART II
Item 5 Market for Common Equity, Related Stockholder Matters
and Small Business Issuer Purchases of Equity Securities............................................Securities.. Page 1718
Item 6 Management's Discussion and Analysis or Plan of Operation.............................................Operation.. Page 2226
Item 7 Financial Statements..................................Statements....................................... Page F-1
Item 8 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure...................Disclosure.................................. Page 3041
Item 8A Controls and Procedures...............................Procedures.................................... Page 3041
PART III
Item 9 Directors and Executive Officers of the Registrant....Registrant......... Page 3243
Item 10 Executive Compensation................................Compensation..................................... Page 3749
Item 11 Security Ownership of Certain Beneficial Owners, and
Management and Related................................Related Stockholder Matters...........Matters................ Page 4054
Item 12 Certain Relationships and Related Transactions........Transactions............. Page 4258
Item 13 Exhibit List and Reports on Form 8-K..................List............................................... Page 4359
Item 14 Principal Accountants Fees and Services...............Services.................... Page 46
Signatures............................................61
Signatures................................................. Page 4662
3
PART I.
CAUTIONARY STATEMENT REGARDING
FORWARD-LOOKING INFORMATION
From time to time, we may make written statements that are "forward-looking,"
including statements contained in this report and other filings with the
Securities and Exchange Commission, reports to our stockholders and news
releases. All statements that express expectations, estimates, forecasts or
projections are forward-looking statements. In addition, other written or oral
statements which constitute forward-looking statements may be made by us or on
our behalf. Words such as "expects," "anticipates," "intends," "plans,"
"believes," "seeks," "estimates," "projects," "forecasts," "may," "should,"
variations of such words and similar expressions are intended to identify such
forward-looking statements. These statements are not guarantees of future
performance and involve risks, uncertainties and assumptions which are difficult
to predict. Therefore, actual outcomes and results may differ materially from
what is expressed or forecasted in or suggested by such forward-looking
statements. We undertake no obligation to update publicly any forward-looking
statements, whether as a result of new information, future events or otherwise.
Important factors on which such statements are based are assumptions concerning
uncertainties, including but not limited to uncertainties associated with the
following:
(a) volatility or decline of our stock price;
(b) potential fluctuation in quarterly results;
(c) our failure to earn revenues or profits;
(d) inadequate capital and barriers to raising the additional capital
or to obtaining the financing needed to implement its business
plans;
(e) inadequate capital to continue business;
(f) changes in demand for our products and services;
(g) rapid and significant changes in markets;
(h) litigation with or legal claims and allegations by outside parties;
or
(i) insufficient revenues to cover operating costs.
There is no assurance that we will be profitable, we may not be able to
successfully develop, manage or market our products and services, we may not be
able to attract or retain qualified executives and technology personnel, our
products and services may become obsolete, government regulation may hinder our
business, additional dilution in outstanding stock ownership may be incurred due
to the issuance of more shares, warrants and stock options, or the exercise of
warrants and stock options, and other risks inherent in the our businesses.
4
We undertake no obligation to publicly revise these forward-looking statements
to reflect events or circumstances that arise after the date hereof. Readers
should carefully review the factors described in other documents we file from
time to time with the Securities and Exchange Commission, including the
Quarterly Reports on Form 10-QSB and Annual Report on Form 10-KSB and any
Current Reports on Form 8-K filed by us. All forward-looking statements
attributable to us are expressly qualified in their entirety by the cautionary
statement above.
ITEM 1. DESCRIPTION OF BUSINESS
OVERVIEW
We were incorporated under the laws of the State of Nevada on June 12, 2000,
with the name Heritage Management Corporation. In August 2005, we entered into a
share exchange agreement with Edgewater Foods International, Inc., the parent
company of Island Scallops Ltd. an aquaculture company located in Vancouver
Island, British Columbia. As a result of the Share Exchange, Edgewater became
our wholly owned subsidiary and Edgewater's shareholders became the owners of
the majority of our voting stock. Pursuant to the terms of the Share Exchange
Agreement, Edgewater's officers and directors were appointed as our officers and
directors. Additionally, we changed our name from Heritage Management, Inc. to
Edgewater Foods International, Inc.
Our wholly owned subsidiary, Edgewater Foods International Inc., 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 17
years has successfully 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 and sablefish. Scallop farming is
relatively new to North America and Island Scallops is the only producer of both
live-farmed Pacific scallops and live sablefish (or blackcod). Given Island
Scallops' unique hatchery technology and extensive research and development, we
believe that there is currently no significant competition for these marine
species. Island Scallops is committed to rapidly expanding production and
profits while continuing to finance the aggressive growth of the company and
maintaining a healthy respect for the marine environment.
Edgewater acquired Island Scallops in June 2005 through a tax free share
exchange. Island Scallops was established in 1989 to commercialize Canadian
government research on scallop aquaculture. Island Scallops' hatchery operations
have diversified to produce other species of shellfish such as mussels, clams,
geoducks and oysters. Island Scallops has also investigated the culture of
halibut, spot prawn, sea urchin and abalone. Island Scallops is the first
hatchery to successfully produce sablefish juveniles for commercial grow-out.
Currently, Island Scallops' primary product is farmed pacific scallops for sale
in the west coast of North America. Island Scallops offers a variety of other
products and services to the industry including aquaculture equipment,
consulting, research and development, and custom processing and marketing.
Internationally, Island Scallops has collaborated with both Japanese and
Moroccan fisheries interests.
5
On August 30, 2006, we filed a Form 8-A to register our common stock and series
A preferred stock pursuant to
Section 12(g) of the Act and we therefore ceased being a voluntary filer.
KEY CORPORATE OBJECTIVES
Our key business development objectives over the next 36 months are to:to expand
scallops salesscallop and begin blackcodsablefish production using both existing and new infrastructure at
our facilities in Qualicum Beach, Canada, thatwhich we anticipate will allowenable us to
reach annual sales of as much as approximately US$18.440.0 million and earnings of
approximately US$615.0 million by the end of our 2010 fiscal year on scallop
sales alone. This significant expansion will be accomplished as a result of the
following four factors:
o We expect to begin harvesting the 2007 year-class scallops during the
spring of 2009, however, we could begin harvesting portions of the
class sooner if mortality rates (at various points of the growth
cycle) are significantly lower than our current projections or if
growth rates are substantially higher. We anticipate that at least 20
million scallops could reach maturity and thus be harvested.
o We expect to produce more than 200 million scallop seeds in 2008, (onwith
a projected 2008 scallop class of at least 40 million scallops sales
alone).at
various sizes.
o We plan to implement this significant expansion through the following
five initiatives:
o Produce at least 15 million scallops of our 2006 scallop class, which
we will start harvesting in the spring of 2008.
o Capitalizecapitalize on the high demand for sablefish in foreign
markets by entering into the blackcod market in the next 2 to 3 years.
o ExpandWe plan to expand current distribution by establishing new strategic
relationships with 10-15 American fisheries importers in Seattle,
Portland, San Francisco, San Jose, and Los Angeles and overseas in
2007.
o During 2007, rapidly increase farm production with a projected minimum
2007 scallop class of at least 50 million which we will begin to
harvest in early 2009.
o Produce more than 200 million scallop seedsHong Kong in 2008 with a projected
2008 scallop classand the introduction of at least 100 million scallops.frozen on the half-shell
product targeting the Eastern United States and Canada .
MARKETING AND DISTRIBUTION
Our marketing and distribution strategy for Island Scallops is focused on
developing and maintaining long-term relationships with distribution channel
members. Island Scallops also strives to differentiate its products to achieve
consistent supply and quality. Island Scallops believes the scallop market
effectively functions as a commodity market and therefore, relationships with
distributors are important. To develop these relationships, Island Scallops has
identified key purchasing criteria for the distributors: price, quality and
consistent farmed supply. In the short term, Island Scallops intends to adopt a
pricing policy equal to the market wholesale prices. In other words, we do not
intend to set any promotional or premium prices for either the whole or shucked
product, but instead intend to sell our products at the market rate. This would
mean Island Scallops' products would compete on other factors, such as supply
and consistent quality.
Over the long term, for the reasons noted below, Island Scallops wants to
differentiate its products so that it can command premium prices. Freshness is
6
an important factor for scallops since whole scallops only have a shelf life of
6
approximately 7 days while shucked scallops remain fresh for up to 20 days. Due
to this short shelf life, distributors try to offer the freshest products.
Island Scallops believes it is in a favorable position to supply fresh products
to United States brokers/distributors, especially those located on the west
coast where demand for the product is strong. Currently, these
brokers/distributors are supplied for the most part with east coast North
American scallops, which have several transportation-related delivery delays
that decrease freshness.
Supply is another key factor where Island Scallops has a distinct advantage.
Based on our planned increase in scallop production, we believe that Island
Scallops will have a large quantity of scallops for sale. Therefore, a
distributor would not have to deal with numerous suppliers, which costs
additional time and money. This makes Island Scallops an attractive source for
scallops, since we believe that we will be able to satisfy the demand of
distributors, which will save them time and money.
Island Scallops has also developed a unique live holding system for use with our
distribution model. This system allows Island Scallops to deliver live product
directly to seafood suppliers and individual restaurants.
Traditionally, as described above, we have sold live scallops within the Pacific
Northwest market. We recently hired outside seafood sales and distribution
consultants who have began to introduce new product lines of fresh meat and a
new unique frozen half-shell product that is generating significant interest.
Part of the new marketing strategy includes working with various high-end
restaurants and chefs to develop new menu items based on our scallops. We
believe that this will help create product and encourage additional wholesalers
to carry our scallops. As part of our overall strategy and in conjunction with
the introduction of our frozen half-shell product, we are currently evaluating
strategic relationships with three major US-based distributors.
CURRENT PRODUCTS
Island Scallops currently focuses exclusively on aquaculture products and is not
involved in wild fisheries. All seafood products are produced in private
hatcheries and grown on ocean farm sites. Currently, the Pacific Scallop is the
only product that Island Scallops produces, grows, processes and markets.markets, with
the exception of limited quantities of sablefish grown as part of our planned
expansion into this market. In the past however, Island Scallops has, however, produced a
variety of other shellfish species including the Pacific oyster, European flat
oyster, Manila clam, eastern blue mussel, Mediterranean mussel, rock scallop,
geoduck clam and sea urchin, which in the
past we have sold to third party shellfish farmers.
Additionally, our hatchery has produced and is capable of producing a variety of
shellfish seed (for grow-out and sale by our companies) including mussel,
oysters and geoduck as well as scallop seed.
Island Scallops has been a leader in marine hatchery technology for the past 17
years. Island Scallops has developed proprietary hatchery techniques for a
number of marine species, most notably the hybridizing of the Pacific Scallop
and becoming the first company to produce commercial quantities of sablefish
juveniles. Both of these breakthroughs have required many years of research and
considerable investment. In the case of sablefish, which is a cold-water fish
7
that spawns at depths of 800 - 2400 ft, a variety of techniques were required to
successfully mature, spawn, incubate and rear the larvae. In addition, there
were technical difficulties associated with egg and yolk sac incubation (as well
as larvae rearing and weaning) that were resolved using proprietary technology
developed at Island Scallops. Island Scallops was only able to reach its goal of
commercially farming sablefish with over 8 years of dedicated research and
capital investment of approximately US$2.4 million. We intend to begin significant further
commercialization of sablefish in the next two to three years, provided we are
able to finance the expansion of this product which we estimate will require at
least $5.0 million of capital.
7
SCALLOP OVERVIEW
Island Scallops' main product is the "Pacific Scallop", which is a hybrid of the
imported Japanese scallop and the local weathervane scallop. Between 1993 and
1999, Island Scallops developed this new scallop using Japanese scallops that
were imported under quarantine in the early 1990's. This unique scallop is
marketed as the Pacific scallop and is the largest scallop in the world,
reaching sizes of 15 cm and 500 grams. The scallop species farmed by Island
Scallops has a proven record of being disease resistant, with a 95% survival
rate during the grow-out phase. We have the necessary farming infrastructure to
significantly increase our scallop productionproduce up to a minimum of 15 million scallops annually beginningand, with an additional capital
investment of approximately $1.0 million, which we hope to fund from the
2006 scallop class which will begin its
harvest in early 2008.exercise of warrants or improving cash flows, up to 30 million scallops annually
by the fall of 2009. If we are not able to fund this expansion via the exercise
of warrants or cash flow, we have to seek additional financings. Given the high
worldwide demand for scallops, Island Scallops is poised to rapidly expand
production and significantly increase revenues and earnings.revenues.
The Pacific Scallop is sold live in four sizes,sizes: medium, large, extra small, small, mediumlarge and
large.jumbo. Pricing ranges from a low of US$1.203.95 per pound to $4.00$4.20 per pound for the
larger sized scallops. Previously, Island Scallops also produced shucked meats
with or without roe. However, due to the large demand and high value for
live scallops, meat productour focus was discontinued and the focus switched toon the sale of live scallops.scallops in 2006. We recently
hired outside seafood sale and distribution consultants who have begun to
introduce new product lines of fresh meat and a new unique frozen half-shell
product that is generating significant interest.
The basis for our anticipated scallop farming production increase stems from a
combination of our tenure expansion, our recent financing, improved grow-out
techniques and our transition to a combination of "lantern-style" netting and
ear-hanging methods. Scallops culture utilizes two styles of small cages
referred to as "pearl nets and lantern nets." Pearl nets are shaped like a
pyramid with a 35 by 35 cm square base and grow small scallops from 2-3 mm to
10mm. The 10-mm scallops are grown in cylindrical nets called lantern nets and
are 60 cm in diameter and 1.2 meters deep containing 12 layers. Once the
scallops reach 5cm they can be grown to harvest using a method called
"earhanging" or be grown out in lantern nets. Our Hindoo Creek
and Deep Bay tenures have been approved for expansion and once expansion of our
Denman tenure is approved, which we believe will occur by the second or third quarter of our next fiscal year,
we will be able to increase capacity to approximately 25,000,00015,000,000 animals per
annum. Thereafter, we intend to further expandchange our management plan to include off bottom
culture at our Bowser tenure in late 2007 or 2008, which would supply us with
the capacity to produce an additional 30-5020 million animals at harvest.
As the only hatchery/producer of cultured scallops on the west coast of North
America, Island Scallops has the ability to supply fresh scallops (of a
predictable quality and quantity) throughout the year. Although the supply of
8
scallops has fluctuated in the past, consumer demand has always absorbed the
available supply. A primary factor for increased consumption is the increasing
health consciousness among consumers. Scallops are low in saturated fats and
cholesterol and high in protein. All parts of the scallop body are edible;
however, different parts tend to be consumed in different regions of the world.
In North America, the adductor muscle is traditionally the only part eaten, with
the rest of the body discarded. In Europe, Australia and Tasmania, the adductor
muscle is usually marketed and eaten with the gonad attached. Japan utilizes the
whole animal, where most of the product is cooked in the shell prior to sale.
Marketed scallops generally take the following product forms:
o Whole-live (shelf life of seven days);
o Whole dried;
o Eviscerated whole;
8
o Shucked fresh (shelf life of about 15-20 days);
o Shucked frozen (shelf life of about a year);
o Frozen on the half-shell (shelf life of about a year); and
o Value added forms (smoked, breaded, canned).
The shucked product form is the most significant form for North American
markets. A whole-live product form is the most desirable from the
aquaculturist's point of view, as processing costs are minimal. Previously,
Island Scallops has developed a market for whole live scallops, which exceeds
5,000 lbs. per week into Vancouver. Our initial expansion plan envisions four major cities onWe are currently in the west coast (Seattle, Portland, San Franciscoprocess of expanding
our live scallop distribution network into Hong Kong and Los Angeles)the western United
States to consume
2,500up to 15,000 lbs. per week per city based onin the successful Vancouver model.near future. We are also in the
process of introducing fresh scallop meat into high end restaurants in Toronto
and Montreal and frozen half-shell product into the eastern US and Canada. In
2008, we expected our overall product mixture to consist of 40% live scallops,
30% fresh meat and 30% frozen half-shell, and then 50% frozen half-shell, 30%
live and 20% fresh thereafter.
Island Scallops currently distributes through specialty wholesalers with
particular expertise in selling to restaurants.restaurants and has developed a market for
whole live scallops that exceeds 5,000 lbs. per week into Vancouver. In
Vancouver these include but are not limited to Albion Fisheries, Tri-Star
Seafood Supply, Pacific Rim Shellfish, Sea World Fisheries and Teamway
Fisheries. As we expand our distribution, we will continue to focus on specialty
wholesalers with strong ties to major restaurants.
The most predominant scallop production in North America comes from the offshore
fishery located on the Georgia Band on the east coast. Large American and
Canadian fishing companies dominate the fishery. The majority of their product
is shucked aboard ship then supplied to primarily frozen to seafood processors
onshore. The processors then distribute the product to various restaurants,
retail outlets and seafood brokers.
Sablefish (Blackcod) Overview
Sablefish (Anoplopoma fimbria), often called blackcod although not a member of
the cod family, is an elongate fish with two dorsal fins and an anal fin similar
to and opposite the second dorsal fin. Adults are black or greenish gray;
usually with slightly paler blotches or chainlike pattern on the upper back. At
30-61 cm in size they are often greenish with faint stripes on the back.
9
Sablefish inhabit shelf and slope waters in depths of greater than 1,500 meters,
from Baja California to the Aleutian Islands and the Bering Sea. The larger
populations of sablefish are centered in northern British Columbia and the Gulf
of Alaska. Adults favor mud bottoms and feed on benthic invertebrates, squid and
numerous fish species. In turn, they are prey for halibut, lingcod, hagfishes
and marine mammals such as sea lions. In addition, killer whales have been known
to take sablefish from long line gear as it is being retrieved.
Sablefish spawn from January to March along the continental shelf at depths of
250 to 750 meters. Fecundity ranges from 60,000-200,000 eggs up to one million
eggs for a 102-cm fish. Larval sablefish are found in surface waters over the
shelf and slope in April and May. Juveniles are highly migratory with
significant movement from nursery areas in northern B.C. to the Gulf of Alaska
and the Bering Sea. Sablefish move to deeper waters as they mature. Growth is
rapid with sizes at maturity reaching 52-61 cm for five-year-old males and 58-71
cm for five-to-seven year old females. Sablefish growth appears to be rapid for
the first three-to-five years and slow asymptotically thereafter. Annual natural
mortality of adults has been estimated to be about 10 percent.
9
Island Scallops plans to raise sablefish onshore using shallow ponds or above
ground tanks. This system has been successful in Texas for the culture of
catfish. Tests have shown that sablefish prove to be very hardy when grown in
ponds and havethis has the added advantage of causing sablefish to be parasite free.
Wild sablefish carry a parasite that does not allow the fish to be eaten raw.
With adequate funding, Island Scallops has already demonstrated the feasibility
of onshore sablefish farming and plans to develop a new blackcodsablefish facility that
could produce at least 500,000 sablefish as early as 2007,2008, with production
planned to increase by at least 500,000 annually by 20082009 and beyond. We
currently plan to fund this new sablefish facility via the exercise of existing
warrants. Since the exercise of the warrants is, however, to a large extent
dependent upon the price of our stock in the public market, we cannot guarantee
when any of the warrants will be exercised, if at all and, as a result, the
proceeds from the exercise of the warrants may not be available to us. If we are
not able to fund this expansion via the exercise of warrants, we need to seek
additional financings to fund this project.
Over the past eight years, Island Scallops has also developed proprietary
hatchery technology for the production of sablefish juveniles. We believe that
sablefish will be the next species, after salmon, for successful large-scale
commercial farming. Sablefish, which is a premium-quality whitefish with a
delicate texture and moderate flavor, is an ideal substitute for Chilean sea
bass (currently over-fished in all oceans). To date, Island Scallops has
marketed a limited number of live sablefish into the Vancouver market. Initial
response was excellent for a small 1-kilogram live sablefish (~$11/kg). To
capitalize on Island Scallops' breakthrough sablefish hatchery technology, in
the next two to three years, we plan to construct a new sablefish hatchery
consisting of the following:
o An expanded Brood Stock facility with larger capacity to hold the
various families of selected strains of sablefish. This new facility
will incorporate a new state-of-the-art water treatment system.
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o An improved incubation and larval rearing facility incorporating
proprietary improvements in tank design and seawater systems.
o An upgraded zooplankton culture facility with improved handling and
enrichment techniques.
o An expanded and improved juvenile rearing facility incorporating
proprietary recirculation system designs.
As part of this expansion, we also intend to construct a new onshore tank farm
consisting of large and small ponds and tanks complete with associated
recirculation systems. This onshore facility will be used to augment the
juvenile rearing area and will house and grow juvenile fish.
At the present time, worldwide "non-farming" sablefish catches are struggling to
meet the worldwide demand according to DFOWeb, NPFMCWeb and Pacific Fishery
Management Council Website. Currently, there are only two hatchery facilities:
Island Scallops Ltd. and Sablefish Hatcheries Inc. that have produced sablefish
juveniles. Current production is only approximately 100,000 juveniles per year.
Based on our analysis of present market conditions, increasing worldwide
hatchery production tenfold (to roughly 1 million 3 kilo sablefish) would fill
less than 10% of the current world demand shortfall. If Island Scallops' new
sablefish facilities are able to reach a production of 3 million sablefish
annually, this will only fill less than 30% of the current overall shortfall.
The economic potential for sablefish is therefore considerable. Given these
market conditions and opportunities, Island Scallops, subject to our ability to
10
secure adequate funding, is determined to enter the market for sablefish in a
significant manner withwithin the next two to three years.
OTHER PRODUCTS
In the past Island Scallops sold a variety of shellfish larvae and seed to both
international and local customers. Sales included two species of mussels, manila
clams, geoduck clams, oysters, abalone and sea urchins. Island Scallops has
established suppliers of aquaculture equipment in Japan and China and supplies
nets, ropes, floats, and processing equipment into the British Columbia
industry. Currently, Island Scallops is focused almost exclusively on expansion
of scallop sales and development of its sablefish operation with a goal of
further commercialization of sablefish in two to threefour years. However, during
the second half of 2006, Island Scallops was approached by a new customer and
began producing and selling a limited amount of oyster seed to this customer.
GENERAL FISHERIES MARKET OVERVIEW
The worldwide market for farmed marine species continues to grow. According to
personal communications with the National Marine Fisheries Service, Fisheries
Statistics Division, Silver Spring, MD, in British Columbia alone, farming
production increased from US$44.56 million in 1988 to US$190.24 million in 1998.
Although significant growth occurred in salmon farming and little or no growth
occurred in shellfish (oyster) farming, recent problems within the salmon
industry are causing some salmon farming interests to turn towards shellfish.
Island Scallops can only benefit from this recent trend towards shellfish, as
training farmers in correct husbandry would only add another revenue stream.
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The majority of the world's current scallop production comes from three species
of scallops: the Japanese scallop, the sea scallop and the king scallop. The
Chinese scallop is also selling well, but FDA inspections of China facilities
found that the conditions and hygiene were issues as hatcheries were highly
polluted. There has also been a fishery boom on the east coast of Canada and the
United States with the Digby or sea scallop.
In the United States, consumption of scallops exceeded 64 million pounds in
2002. Various communications between Island Scallops personnel and the National
Marine Fisheries Service, Fisheries Statistics Division, Silver Spring, MD and
analysis of data from the Fisheries Statistics & Economics Division of the
National Marine Fisheries Service (NMFS) website for annual landings of
commercial fisheries (http://www.st.nmfs.noaa.gov/st1/commercial/index.html),
tell us that this represented a per capita consumption of 0.22 pounds, with a
dollar value of US$342 million. After shrimp, scallops represent one of the most
popular shellfish products in the United States. In general, per capita
consumption of seafood in the United States has remained steady over the last
six years ranging from 15.2 to 16.2 pounds per annum. Based upon Robert
Saunders', our chairman and president, communications with the National Marine
Fisheries Service, Fisheries Statistics Division of Silver Spring, MD, and
personal observations, given consumers' growing preoccupation with healthier
foods and the increasing availability of seafood (due to the recent successes in
aqua farming and improved distribution channels), we expect per capita
consumption to continue to increase.
11
Shifts in North American shellfish market trends from shucked to live in shell
products can be seen in the oyster markets. Within the last 5 years, we have
seen a significant trend away from shucked oyster meat to live in the shell
product in the Pacific Northwest due to the demand for fresh high quality
products. We believe that once a live in the shell product is readily available
within the scallop market, a shift from frozen scallop meat to fresh in shell
product will also occur.
REGULATORY ENVIRONMENT
Effect of Government Regulation
There are a limited number of regulations that restrict the fishing,
distributing or purchase of scallops in Canada and the United States. Therefore,
the country of origin makes little difference for the pricing or demand of
scallops.
A limitation to market supply is paralytic shellfish poisoning (PSP) or "red
tide". PSP is a toxin generated by plankton (scallops' food) at particular times
of the year. The toxin is passed to the scallop when plankton is digested, but
the toxin does not harm the shellfish. However, the shellfish containing the
toxin can be harmful to humans who consume it. Although only a limited number of
human deaths caused by red-tide poisoning have been reported, the public
announcement of red tide has a devastating effect on most shellfish sales. The
exception is scallop meat, because the adductor muscle of the scallop does not
concentrate the toxin; shucked scallops are safe to eat at any time of the year.
Nevertheless, public perception could still influence demand over short periods
of time. To monitor for PSP, the federal Fisheries Inspection Branch constantly
monitors samples of shellfish production and wild shellfish populations.
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Tenure Expansion and Compliance with Environmental Laws
Our planned tenure expansions will require that we undergo an environmental
screening from Transports Canada pursuant to Canadian Environmental Assessment
Act, which includes a review of factors such as the environmental effects of the
planned expansions, including the environmental effects of malfunctions or
accidents that may occur in connection with the planned expansions and any
cumulative environmental effects that are likely to result from such planned
expansions; the significance of such environmental effects and any comments from
the public that are received in accordance with the CEA Act and applicable
regulations; and measures that are technically and economically feasible and
that would mitigate any significant adverse environmental effects of the planned
expansions.
Our Deep Bay and Hindo Creek tenures have received final CEA Act approval, which
lasts for twenty years and which allows us to expand these 2 tenures. We still
needhave
CEA Act approval andapprovals but are waitiong on re-zoning approval for our Denman tenure,
and approval
of our Management Plan, along with a satisfactory environmental assesment ofapprovals for our Bowser bottom lease. Please see our risk factor,
If we are unable to expand our tenures, our projected production may be delayed.
12
COMPETITION
Fisheries Industry in General
Island Scallops is in the farmed seafood business. The main concentration of
marine farming in British Columbia has traditionally been in the salmon sector.
The salmon farming business has developed into a mature industry dominated by
Norwegian farmers. The rest of the British Columbia marine farming sector is in
the shellfish industry, mainly in oysters and Manila clams and more recently
mussels. This sector is rapidly expanding and it accounted for approximately
US$16 million in British Columbia in 2002, according to the British Columbia
Shellfish Growers Association website. Given Island Scallops' expertise and
significant research and development experience, we believe that there is little
or no direct competition in the production of farmed scallops or farmed
sablefish.
Scallops
There are no significant direct competitors in the scallop farming business in
British Columbia. The United States will not allow farming this species in their
waters, as this species is considered "exotic". Although scallop farming is a
very significant industry in Japan and China, only frozen shucked scallops are
currently sold into North America from these countries. Recent examination by
the United States and Canadian Food Inspection authorities of the growing waters
in China resulted in reduced exporting due to high levels of pollution.
Island Scallops is the only hatchery, outside of China, that has successfully
produced the Japanese scallop, and the only company that has successfully,
hybridized the weathervane and the Japanese scallop. Island Scallops is uniquely
positioned as the sole producer of live Pacific Scallops in North America. There
currently are no other hatcheries in North America that we are aware of that are
capable of producing this unique breed. Although a large commercial scallop
13
fishery exists on the east coast of North America, the majority of the scallops
are shucked at sea with only limited quantities sold live. These scallops are
sold as "Digby" or "Sea" scallops. A number of companies have attempted to grow
the bay scallop and the sea scallop on the east coast, but these companies have
only achieved limited success.
The primary British Columbia participants in scallop farming are Island Scallops
joint venture farmers or independent scallop farmers, which receive their supply
of seed scallops solely from Island Scallops. These farmers are chronically
underfinanced and are generally able to purchase and growproduction from these growers usually totals less than
300,0001,000,000 scallops per farm.year. Island Scallops is uniquely positioned to rapidly
expand these farms (up to six farms) under an exclusive farming and marketing
contract. Three joint venture farmers are currently farming scallops and receive
free scallop seed, technology and support for a 12% royalty on the harvest and
exclusive marketing of their product through Island Scallops.
Due to its large size and small count per pound, the sea scallop is the prime
competitor in the United States market. The fishery for this scallop is located
primarily on the North American east coast, in particular Georges Bank off New
England and the Maritime provinces. This is a limited opportunity fishery, with
actual fishing time being dictated by sea and other environmental conditions.
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Sablefish
Island Scallops is currently only one of two hatcheries to produce quantities of
juvenile sablefish. These fish were sold to five commercial salmon farming
facilities and the fish have been marketed successfully. Little demand for a new
species has materialized. Although hatcheries have been constructed in British
Columbia, neither has successfully produced large quantities of sablefish. The
farming of sablefish is still in its infancy and only limited production has
occurred.
This limited production is not a matter of biological barriers but rather a lack
of interest by the major producers to venture into a new marine species. Alaska
sablefish fishermen have expressed interest in farming sablefish and the
Sablefish Association of Alaska has voted unanimously to start farming sablefish
in southern Alaska. Island Scallops has been in discussion with this association
and has been told that due to "anti-aquaculture" policy in Alaska, it is very
unlikely that any farming will occur there in the near future.
Washington State contains two parties interested parties in sablefish farming.
The first is the Makah Tribe and the second is a private company, which is
trying to obtain farming permits in Port Angeles. These parties have made
inquiries to Island Scallops for juvenile sablefish. However, to date, no orders
have been placed.
RESEARCH AND DEVELOPMENT
Due to changes in Canadian Federal Government's Research and Development tax
credits (SRED) program, which prevents any part of the research to be combined
with commercial production, no Research and Development claims were made in
fiscal 20052006 and 2006.2007. Research did continue on the genetic selection of superior
14
strains of scallops, as did developments in the culture process for both marine
algae and developments in re-circulation systems. In the near future Island Scallops plans to
conduct research and development under a separate company called RKS
Laboratories Ltd., which has no commercial production and whose primary goal is
the genetic improvement in breeds of the Pacific Scallops and other marine
species. We believe that this will allow the continued support from the SRED
program.
EMPLOYEES
At August 31, 2006,2007, we had 2545 full time employees. We anticipate hiring between
10 and 15 temporary workers during the upcoming spring and summer growing
seasons.
None of our employees is represented by a labor union and we consider our
relationships with our employees to be good.
ITEM 2. DESCRIPTION OF PROPERTY
14
For the fiscal year ended August 31, 2006,2007, our U.S. corporate office was located
at 400 Professional Drive, Suite 310, Gaithersburg, Maryland 20878. This space
was provided on a rent free basis by one of our shareholders.
Island Scallops' main office and hatcheries are located on the east side of
Vancouver Island in the town of Qualicum Bay at 5552 West Island Highway,
Qualicum Beach, British Columbia, Canada V9K 2C8. The shellfish hatchery and
processing facilities areis
housed in a 930 square meter building. A 600300 square meter sablefish hatcheryshellfish processing
plant is also located at this site. Corporate scallop farms are situated along
the east and west coasts of Vancouver Island. These facilities represent the
largest private marine research hatchery and the first fully integrated
shellfish producer in Canada.
Island Scallops has a total of seven farm sites (including two joint ventures)
for scallops. Five of these farm sites are located at Island Scallops held
tenures (shellfish tenures are government-granted rights that allow use of
offshore waters to cultivate shellfish). Three of those five scallop farms are
located in Baynes Sound, 25 minutes north of the main facility. These farms
sites total approximately 200 acres and can currently accommodate more than 8
million scallops. Approximately 30% of the farm area is currently being farmed.
As part of our expansion plans, we are currently adding additional main lines
and plan to increase our capacity at these tenures to more than 24 million
scallops in the near future. An additional bottom tenure of 926 acres is located
10 minutes north of the main facility (at Bowser) and is capable of producing at
least 30 million scallops annually. The final farm site on the west coast of
Vancouver Island near Tofino is capable of producing at least three million
scallops, although that site is currently under-developed. Baynes Sound, the
marine waterway situated between eastern Vancouver Island and the western shore
of Denman Island, is considered the most productive and highly utilized
shellfish growing area in coastal British Columbia. The area supports extensive
beach culture (manila clams and oysters) as well as deepwater culture that
produces oysters, scallops and some mussels.
- --------------------- ------------------- ------------------- ------------------
Common Site Name Lands File No. Acres Type
- --------------------- ------------------- ------------------- ------------------
Denman 1406063 38.64 Deepwater
- --------------------- ------------------- ------------------- ------------------
15
Hindoo Creek 1406664 123.32 Deepwater
- --------------------- ------------------- ------------------- ------------------
Deep Bay 1406711 43 Deepwater
- --------------------- ------------------- ------------------- ------------------
Tofino 1406061 9.6 Deepwater
- --------------------- ------------------- ------------------- ------------------
Bowser 1407517 926 Bottom lease
- --------------------- ------------------- ------------------- ------------------
The three Baynes Sound tenures (Denman, Hindoo Creek and Deep Bay) and the
Tofino tenure offer unique features, which will add additional value to these
properties. These include the split of tenures between east and west shores of
Baynes Sound as well as the east and west coast of Vancouver Island, allowing
continual accessibility to shellfish despite managed closures (harvest
restrictions) due to incidental water quality or Paralytic Shellfish Poisoning
(PSP or red tide). The seasonal closures caused by short-term bacteriological
contamination related to rainfall and upland bacterial sources, are limited to
the western shore of the Baynes Sound and thus to only two of the three tenures
retained by Island Scallops. The result of having operating tenures on both
sides of the Baynes Sound ensures that product can be continually harvested
despite closures that may occur within this management area. The expanded
tenures should easily accommodate our increasing scallop harvest in 2009 and
15
beyond. At their current size and with the introduction of sufficient main
lines, our tenures have the capacity to accommodate approximately 13-15 million
scallops without any increase in their footprints.
Expansion of our Deep Bay and Hindo Creek has been approved and such approval
does not need to be renewed for twenty years. We are seeking approvalAn amended tenure agreement has
been signed with the government of ourBC to expand the Denman tenure and our Bowser bottom lease, which once approved, will allow us to
accommodate 30-50 million scallops at harvest.Island site. The
biggest hurdle to obtainingcompleting the Denman tenure approvalexpansion process is the corresponding re-zoning
application, that alsowhich must be approved before we can expanduse the expanded tenure.
At the Bowser tenure, we are waiting for approval to convert the method of
farming from bottom to off-bottom culture in one-third of the tenure area. Once
approved, this will allow us to accommodate about 20 million scallops.
Island Scallops' location is a distinct advantage for producing marine species.
The waters off British Columbia are pristine and unspoiled by large populations
or major industries. The close proximity to major western cities allows us to
effectively put our products into the hands of the consumer within 24 hours.
The source of our raw material comes from our own hatchery brood stock. In the
case of the Pacific Scallop, we have been selectively breeding this species for
superior growth and survival for the past 15 years. The breeding program has
produced a vigorous, rapid growing, disease resistant scallop with exceptional
meat yield. In the case of sablefish we have been selecting fast growing fish
for the past 5 years, these display a high degree of domestication. The spawning
season has been extended for both of these species allowing for juvenile
production almost year round. This ability to hold seed stock and select
superior strains gives Island Scallops an advantage in the industry. It also
allows Island Scallops to tailor its production to varying seasonal and market
demands.
ITEM 3. 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
16
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.
As of August 31, 2006,2004, 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On July 16, 2006, our Board of Directors approved increasing our authorized
capital by 50,000,000 shares of common stock, forWe did not submit any matters to a total of 100,000,000 shares
of common stock, and amending our articles of incorporation accordingly. A
16
majorityvote of our shareholders (67.87%) also approved, by written consent,security holders during the
fourth quarter of the fiscal year covered buy this action on July 16, 2006.Report.
17
PART II
ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL
BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES
The common stock is currently quoted on the over-the-counter Bulletin Board
under the symbol "EDWT."
The following table sets forth the quarterly high and low bid prices for the
common stock since the quarter ended December 31, 2004.November 30, 2005. The prices set forth
below represent inter-dealer quotations, without retail markup, markdown or
commission and may not be reflective of actual transactions.
HIGH LOW
---- ---
Quarter ended December 31, 2004 $0.25 $0.25
Quarter ended March 31, 2005 $0.30 $0.25
Quarter ended June 30, 2005 $0.55 $0.30
Quarter ended August 31, 2005 $1.95 $0.52
Quarter ended November 30, 2005 $1.80 $1.45
Quarter ended February 28, 2006 $1.64 $1.10
Quarter ended May 31, 2006 $1.45 $0.80
Quarter ended August 31, 2006 $1.70 $1.20
Quarter ended November 30, 2006 $1.85 $1.01
Quarter ended February 28, 2007 $1.70 $1.01
Quarter ended May 31, 2007 $1.70 $1.01
Quarter ended August 31, 2007 $1.65 $1.05
At August 31, 2006,2007, the closing bid price of the common stock was $1.40$1.10 and we
had approximately 4958 record holders of our common stock.stock, 15 record holders of
our Series A Preferred Stock and 2 record holders of our Series B Preferred
Stock. This number excludes any estimate by us of the number of beneficial
owners of shares held in street name, the accuracy of which cannot be
guaranteed.
At November 27, 2006,23, 2007, the closing bid price of the common stock was $1.40$1.01 and we
had approximately 4657 record holders of our common stock, and 1315 record holders of
our preferred stock.Series A Preferred Stock, 2 record holders of our Series B Preferred Stock
and 1 record holder of our Series C Preferred Stock. This number excludes any
estimate by us of the number of beneficial owners of shares held in street name,
the accuracy of which cannot be guaranteed.
Dividends
We have not paid cash dividends on any class of common equity since formation
and we do not anticipate paying any dividends on our outstanding common stock in
the foreseeable future.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
17
2005 Equity Incentive Plan
18
Our 2005 Equity Incentive Plan is intended to further our growth and financial
success by providing additional incentives to our directors, executives and
selected employees and consultants so that such participants may acquire or
increase their proprietary interest in us. The term "Corporation" shall include
any parent corporation or subsidiary corporation of Edgewater as those terms are
defined in Section 424(e) and (f) of the Internal Revenue Code of 1986, as
amended. Stock options granted under the Plan may be either "Incentive Stock
Options", as defined in Code section 422 and any regulations promulgated under
that Section, or "Nonstatutory Options" at the discretion of our Board of
Directors and as reflected in the respective written stock option agreements
granted pursuant to this Equity Plan. Stock Appreciation Rights, Restricted
Stock, Restricted Stock Unit, Performance Awards, Dividend Equivalents, or Other
Stock-Based Awards may also be granted under the Equity Plan. The Board believes
that the Equity Plan will maintain the flexibility that Edgewater needs to keep
pace with its competitors and effectively recruit, motivate, and retain the
caliber of employees, directors and consultants essential for achievement of our
success.
Individuals eligible to receive awards under the Equity Plan include officers,
directors, employees of and consultants to Edgewater and its affiliates. The
number of shares available under the Equity Plan shall be 5,000,000 shares of
our common stock, as well as the following: As of January 1 of each year,
commencing with the year 2006 and ending with the year 2008, the aggregate
number of Shares available for granting Awards under the Equity Plan shall
automatically increase by a number of Shares equal to the lesser of (x) 5% of
the total number of Shares then outstanding or (y) 1,000,000. The Board may
distribute those shares in whatever form of award they so choose within the
Equity Plan's guidelines. There are no restrictions on the amount of any one
type of award that may be granted under the Equity Plan.
As of August 31, 2006,2007, our Board of Directors had granted 282,0002,962,000 options to
employees, directors and consultants under the Equity Plan. As of August 31,
2006,2007, there are 6 Directors, 2 executive officers, 103 consultants and
approximately 2526 employees other than executive officers, who are eligible to
receive awards under the Equity Plan.
The Board may delegate a Committee to administer the Equity Plan. The Committee
shall not consist of fewer than two members, each of whom is a member of the
Board and all of whom are disinterested persons, as contemplated by Rule 16b-3
promulgated under the Securities Exchange Act of 1934, as amended and each of
whom is an outside director for purposes of Section 162(m) of the Code, acting
in accordance with the provisions of Section 3.
Currently, we do not have any definitive plans for granting further awards under
the Equity Plan and no determination has been made as to the number of awards to
be granted, or the number or identity of recipients of awards.
Had the Equity
Plan been in effect last year, the options granted under the 2004 Plan would
have been the awards granted under the Equity Plan.
AMENDING THE PLAN. The Board may amend, alter, suspend, discontinue, or
terminate the Equity Plan, including, without limitation, any amendment,
alteration, suspension, discontinuation, or termination that would impair the
rights of any Participant, or any other holder or beneficiary of any Award
theretofore granted, without the consent of any share owner, Participant, other
18
holder or beneficiary of an Award, or other Person. The Board may also waive any
conditions or rights under, amend any terms of, or amend, alter, suspend,
discontinue, or terminate, any Awards theretofore granted, prospectively or
retroactively, without the consent of any Participant, other holder or
19
beneficiary of an Award. Except as provided in the following sentence, the Board
is authorized to make adjustments in the terms and conditions of, and the
criteria included in, Awards in recognition of unusual or nonrecurring events
affecting the Company, any Affiliate, or the financial statements of the Company
or any Affiliate, or of changes in applicable laws, regulations, or accounting
principles, whenever the Board determines that such adjustments are appropriate
in order to prevent dilution or enlargement of the benefits or potential
benefits to be made available under the Equity Plan. In the case of any Award
that is intended to qualify as performance-based compensation for purposes of
Section 162(m) of the Code, the Board will not have authority to adjust the
Award in any manner that would cause the Award to fail to meet the requirements
of Section 162(m).
OPTIONS AND RIGHTS. Options and Stock Appreciation Rights may be granted under
the Equity Plan. The exercise price of options granted shall be determined by
the Board or the Committee; provided, however, that such exercise price per
Share under any Incentive Stock Option shall not be less than 100% (110% in the
case of a "10-percent shareholder as such term is used in Section 422(c)(5) of
the Code) of the Fair Market Value of a Share on the date of grant of such
Incentive Stock Option. The Board or Committee shall fix the term of each
Option, provided that no Incentive Stock Option shall have a term greater than
10 years (5 years in the case of a "10-percent shareholder" as such term is used
in Section 422(c)(5) of the Code).
A Stock Appreciation Right granted under the Equity Plan shall confer on the
holder thereof a right to receive, upon exercise thereof, the excess of (1) the
Fair Market Value of one Share on the date of exercise or, if the Board or
Committee shall so determine in the case of any such right other than one
related to any Incentive Stock Option, at any time during a specified period
before or after the date of exercise over (2) the grant price of the right as
specified by the Board or Committee. Subject to the terms of the Plan, the grant
price, term, methods of exercise, methods of settlement, and any other terms and
conditions of any Stock Appreciation Right shall be as determined by the Board
or the Committee. The Board and the Committee may impose such conditions or
restrictions on the exercise of any Stock Appreciation Right as it may deem
appropriate.
FEDERAL INCOME TAX CONSEQUENCES. The current federal income tax consequences of
grants under the Equity Plan are generally described below. This description of
tax consequences is not a complete description, and is based on the Internal
Revenue Code as presently in effect, which is subject to change, and is not
intended to be a complete description of the federal income tax aspects of
options and stock awards under the Equity Plan. Accordingly, the discussion does
not deal with all federal income tax consequences that may be relevant to a
particular recipient, or any foreign, state or local tax considerations.
Accordingly, potential recipients are urged to consult their own tax advisors as
to the specific federal, foreign, state and local tax consequences to them as a
result of receiving an Award under the Equity Plan.
NONQUALIFIED STOCK OPTIONS. A recipient will not be subject to federal income
tax upon the grant of a nonqualified stock option. Upon the exercise of a
nonqualified stock option, the recipient will recognize ordinary compensation
19
income in an amount equal to the excess, if any, of the then fair market value
of the shares acquired over the exercise price. We will generally be able to
take a deduction with respect to this compensation income for federal income tax
purposes. The recipient's tax basis in the shares acquired will equal the
20
exercise price plus the amount taxable as compensation to the recipient. Upon a
sale of the shares acquired upon exercise, any gain or loss is generally
long-term or short-term capital gain or loss, depending on how long the shares
are held. The required holding period for long-term capital gain is presently
more than one year. The recipient's holding period for shares acquired upon
exercise will begin on the date of exercise.
INCENTIVE STOCK OPTIONS. A recipient who receives incentive stock options
generally incurs no federal income tax liability at the time of grant or upon
exercise of the options. However, the spread will be an item of tax preference,
which may give rise to alternative minimum tax liability at the time of
exercise. If the recipient/optionee does not dispose of the shares before the
date that is two years from the date of grant and one year from the date of
exercise, the difference between the exercise price and the amount realized upon
disposition of the shares will constitute long-term capital gain or loss, as the
case may be. Assuming both holding periods are satisfied, no deduction will be
allowable to us for federal income tax purposes in connection with the option.
If, within two years of the date of grant or within one year from the date of
exercise, the holder of shares acquired upon exercise of an incentive stock
option disposes of the shares, the recipient/optionee will generally realize
ordinary compensation income at the time of the disposition equal to the
difference between the exercise price and the lesser of the fair market value of
the stock on the date of exercise or the amount realized on the disposition. The
amount realized upon such a disposition will generally be deductible by us for
federal income tax purposes.
STOCK AWARDS. If a recipient receives an unrestricted stock award, he/she will
recognize compensation income upon the grant of the stock award. If a recipient
receives a restricted stock award, he/she normally will not recognize taxable
income upon receipt of the stock award until the stock is transferable by the
recipient or no longer subject to a substantial risk of forfeiture, whichever
occurs earlier. When the stock is either transferable or no longer subject to a
substantial risk of forfeiture, the recipient will recognize compensation income
in an amount equal to the fair market value of the shares (less any amount paid
for such shares) at that time. A recipient may, however, elect to recognize
ordinary compensation income in the year the stock award is granted in an amount
equal to the fair market value of the shares (less any amount paid for the
shares) at that time, determined without regard to the restrictions. We will
generally be entitled to a corresponding deduction at the same time, and in the
same amount, as the recipient recognizes compensation income with respect to a
stock award. Any gain or loss recognized by the recipient upon subsequent
disposition of the shares will be capital gain or loss.
TAX DEDUCTIBILITY UNDER SECTION 162(M). Section 162(m) of the Internal Revenue
Code disallows a public company's deductions for employee compensation exceeding
$1,000,000 per year for the chief executive officer and the four other most
highly compensated executive officers. Section 162(m) contains an exception for
performance-based compensation that meets specific requirements. The Equity Plan
is intended to permit all options to qualify as performance-based compensation
at the Board of Directors or Committee's discretion. If an Award is to qualify
as such, it shall clearly state so in the award agreement.
20
WITHHOLDING. We have the right to deduct any taxes required to be withheld with
respect to grants under the Equity Plan. We may require that the participant pay
to us the amount of any required withholding. The Compensation Committee may
21
permit the participant to elect to have withheld from the shares issuable to him
or her with respect to an option or restricted stock the number of shares with a
value equal to the required tax withholding amount.
The following table provides information as of August 31, 20062007 with respect to
compensation plans (including individual compensation arrangements) under which
our securities are authorized for issuance:
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Plan Category Number of securities to be Weighted average exercise Number of securities
issued upon exercise of price of outstanding remaining available for
outstanding options, options, warrants and future issuance under
warrants and rights rights equity compensation plans
(excluding securities
reflected in column (a))
(a) (b) (c)
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Equity Compensation plans 2,962,000 $1.26 4,038,000*
approved by security holders 282,000 $1.50 5,718,000*
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Equity compensation plans not approved by security holders N/A N/A N/A
approved by security holders
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Total 282,000 $1.50 5,718,0002,962,000 $1.26 4,038,000
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
*As of January 1 of each year, commencing with the year 2006 and ending with the
year 2008, the aggregate number of shares available for granting Awards under
the Equity Plan shall automatically increase by a number of Shares equal to the
lesser of (x) 5% of the total number of Shares then outstanding or (y)
1,000,000.
RECENT SALES OF UNREGISTERED SECURITIES
To accomplish the Share Exchange with Edgewater, we issued an aggregate of
19,000,000 shares of common stock in exchange for all of the issued and
outstanding capital stock of Edgewater. The shares were issued to 17 accredited
investors pursuant to the exemption from registration provided by Section 4(2)
of the Securities Act for issuances not involving any public offering.
In October 2005, we engaged Aurelius Consulting to provide marketing and
investor relations services. The initial term of the agreement is one year.
Aurelius is entitled to receive 100,000 shares of our restricted common stock
during the term of its agreement (25,000 per quarter), in consideration for
their services. The shares were valued at $1.45 per share, the closing bid price
21
for shares of our common stock on the date of the contract. 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.
22
On October 21, 2005 and November 11, 2005, our board approved issuing a total of
25,000 shares of our common stock to The Shemano Group, LLC for preparing a
research report for us. The shares were valued at $1.50 per share, the closing
market bid of our common stock on the date of the resolution. 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.
On January 31, 2006, we issued 400,000 shares of our restricted common stock to
World Wide Mortgage as consideration for agreeing to extend the due date for us
to repay our CDN $1,500,000 loan pursuant to the bridge loan agreement dated
November 9, 2004 and amended on April 15, 2005 between us and World Wide. The
shares have piggy-back registration rights that require us to register the
shares in our next registration statement. The shares were valued at $1.30 per
share, the closing bid price for shares of our common stock on the date we
issued the shares. 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.
Pursuant to the financings we closed on April 12, May 30, June 30 and July 11,
2006, we issued an aggregate of 30,905,619 shares of our preferred stock. The
shares were issued to 109 accredited investors pursuant to the exemption from
registration provided by Section 4(2) of the Securities Act for issuances not
involving any public offering.
On June 30, 2006, we issued 22,860 shares of common stock to the two accredited
investors of our April 12 and May 30, 2006 financings as payment of the
semi-annual dividend (8% per annum) per the terms of the Certificate of
Designation of the Relative Rights and Preferences of the Series A Convertible
Preferred Stock. 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, 2006, we issued 138,565 shares of common stock to the investors
of our April 12, May 30, 2006, June 30, 2006 and July 11, 2006 financings as
payment of the semi-annual dividend (8% per annum) per the terms of the
Certificate of Designation of the Relative Rights and Preferences of the Series
A Convertible Preferred Stock. 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.
Pursuant to the financing we closed on January 16, 2007, we issued 207 shares of
our Series B Preferred Stock. The shares were issued to two accredited investors
pursuant to the exemption from registration provided by Section 4(2) of the
Securities Act for issuances not involving any public offering.
In connection with the January 16, 2007 financing, we issued the placement
consultant a placement consultant warrant, exercisable for a period of three
years from the date of issue with an exercise price of $1.15 per share. The
warrant allows the placement consultant to purchase up to (i) 20 shares of
Series B Preferred Stock, and each of the following warrants, which are
identical to the warrants issued to the investors of the financing: (i) Series A
Warrant, (ii) Series B Warrant, (iii) Series C Warrant, (iv) Series D Warrant,
23
(v) Series J Warrant, (vi) Series E Warrant, and (vii) Series F Warrant, each to
purchase 90,004 shares of common stock, except for the Series J Warrants, which
shall entitle the consultant to purchase 180,008 shares of common stock. 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.
On February 1, 2007 we issued Kitsilano Capital Corp. four 100,000 options to
purchase our common stock, pursuant to our Consulting Agreement with them. The
first option vests on May 1, 2007, the second on August 1, 2007, the third on
February 1, 2008 and the fourth on June 1, 2008, so long as Kitsilano continues
to provide services to us under the Consulting Agreement. Each option is
exercisable for a period of three years from the vesting date and has an
exercise price of $1.20, $1.40, $1.60 and $1.80 respectively. The shares
underlying the options have piggy-back registration rights that required us to
register the shares in our last 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.
On April 12, 2007, we issued 88,000 shares of common stock to an investor of our
April 12th financing in connection with the exercise of 88,000 Series J warrants
received by such investor as part of the financing. We received net proceeds of
approximately $45,600 pursuant to the exercise of these warrants. The shares
were issued pursuant to the exemption from registration provided by Section 4(2)
of the Securities Act for issuances not involving any public offering.
On April 12, 2007 we issued 1,266,667 shares of common stock to an investor of
our April 12th financing in connection with such investor's exercise of
1,266,667 Series J warrants he received as part of the April 12th financing. We
received net proceeds of approximately $655,500 pursuant to the exercise of
these warrants. The shares were issued pursuant to the exemption from
registration provided by Section 4(2) of the Securities Act for issuances not
involving any public offering.
On April 12, 2007, we issued 188,800 shares of our Series A Preferred Stock and
the following warrants: (i) Series A Warrant, (ii) Series B Warrant, (iii)
Series C Warrant, (iv) Series D Warrant, (v) Series J Warrant, (vi) Series E
Warrant, (vii) Series F Warrant, (viii) Series G Warrant, and (ix) Series H
Warrant, each to purchase a number of shares of Common Stock equal to 50% of the
number of shares of Series A Preferred Stock purchased, except for the Series J
Warrants, which entitled the investor to purchase a number of shares of our
common stock equal to 100% of the number of shares of Series A Preferred Stock
purchased. We issued a total of 944,000 Warrants. Each of the Warrants has a
term of 5 years, except for the Series J Warrants, which have a term of 1 year.
Each share of the Series A Preferred Stock is convertible into one fully paid
and nonassessable share of our common stock. These shares and warrants were
issued pursuant to the exercise of 188,800 placement consultant warrants
received as a result of our April 12, 2006 financing. We received net proceeds
of approximately $106,000 pursuant to the exercise of these warrants. The shares
were issued pursuant to the exemption from registration provided by Section 4(2)
of the Securities Act for issuances not involving any public offering.
24
On April 12, 2007, we issued 188,800 shares of common stock to the placement
consultant of our April 12, 2006 financing in connection with the exercise of
188,800 Series J warrants, which the placement consultant received from his
exercise of his placement consultant warrant, as described above. We received
net proceeds of approximately $106,000 pursuant to the exercise of these
warrants. The shares were issued pursuant to the exemption from registration
provided by Section 4(2) of the Securities Act for issuances not involving any
public offering.
On May 8, 2007 we issued 30,000 shares of our common stock pursuant to a
shareholders conversion of 30,000 shares of our Series A Preferred Stock that he
owned. We did not receive any proceeds from this conversion. The shares were
issued pursuant to the exemption from registration provided by Section 4(2) of
the Securities Act for issuances not involving any public offering.
On May 10, 2007 we issued 500,000 shares of our common stock pursuant to a
shareholders conversion of 500,000 shares of our Series A Preferred Stock that
he owned. We did not receive any proceeds from this conversion. The shares were
issued pursuant to the exemption from registration provided by Section 4(2) of
the Securities Act for issuances not involving any public offering. On August
31, 2007, this shareholder rescinded the conversion of 430,000 of the 500,000
shares. As a result, we issued this shareholder 430,000 shares of our Series A
Preferred Stock and cancelled the 430,000 shares of common stock issued on the
conversion to treasury. The preferred shares were issued pursuant to the
exemption from registration provided by Section 4(2) of the Securities Act for
issuances not involving any public offering.
On May 12, 2007 we issued 70,800 shares of our common stock pursuant to a
shareholders conversion of 70,800 shares of our Series A Preferred Stock that he
owned. We did not receive any proceeds from this conversion. The shares were
issued pursuant to the exemption from registration provided by Section 4(2) of
the Securities Act for issuances not involving any public offering.
On June 14, 2007, our board approved issuing a total of 100,000 shares of our
common stock to Pacific Crab Seafood Company, Inc. for the consulting and
marketing services that they will provide to us. We issued 40,000 shares upon
execution of our agreement with Pacific Crab and the remaining 60,000 will be
issued in twelve (12) equal installments during the term of the agreement. 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.
On June 30, 2007, we issued 171,274 shares of common stock to the investors of
our 2006 and 2007 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 and Certificate of Designation of
the Relative Rights and Preferences of the Series B Convertible Preferred Stock.
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 August 20, 2007, a holder of our series A preferred stock exercised their
right to convert 65,335 shares of our series A preferred stock into 65,335
25
shares of common stock. As such, we issued 65,335 shares of common stock and
canceled 65,335 shares of our series A. The shares were issued pursuant to the
exemption from registration provided by Section 4(2) of the Securities Act for
issuances not involving any public offering.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
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.
22
OVERVIEW
In the secondfirst quarter of 2006,our 2007 fiscal year, we started harvesting the
remaining balance of our 2004 year class of scallops and began inspectingcompleted transferring
our 2005 year-class scallops that were still maturing in our tenured growing
sites and joint venture locations, to final stage large grow-out nets on our
farm sites. During the third quarter of our 2007 fiscal year, classwe started
harvesting our 2005 year-class scallops, continued moving our 2006 scallop crop
into final large grow-out nets at our tenure (farm) sites and started the spawn
of scallops as we prepare to
begin moving these scallops to their final grow-out stage in the second half of
2006.our 2007 year-class. 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. Originally, we planned to ear-hang our
entire 2005 scallop crop and subsequent year-classes, but after inspection of
growth rates of the 2004 ear-hung crops and an analysis of the labor costs of
ear-hanging versus the cost of additional netslantern-style netting, we decided to use nets for the final
grow-out stage of the 2005 crop.crop and subsequent classes.
During the third quarter of 2007, harvest and sales of our 2005 scallop class
started slower than expected as we worked to develop improved sales and
marketing efforts as well as our continuing efforts to improve our processing
and handling facilities. These issues coupled with handling and harvesting
problems associated with our 2004 ear-hung scallops (during the first and second
quarters of 2007) resulted in lower than anticipated revenues during 2007.
In October 2005,June 2007, we installed twentyhired marketing consultants with over 40 years of combined
service in the seafood sales and distribution industry. Traditionally, we have
sold live scallops within the Pacific Northwest market. Our seafood sale and
distribution consultants have began to introduce new longlines atproduct lines of fresh meat
and a new unique frozen on the half-shell product that is generating significant
interest. We are currently in the process of expanding our Hindoo Creeklive scallop
farm in Baynes Sound (1). Each longline is 108 yds (324 feet) longdistribution network into Hong Kong and submerged
at approximately 25 ft depth. In July 2006, we received approval forthe western United States to up to an
additional 23 longlines.15,000 lbs. per week in the near future. We are also in the process
of introducing fresh scallop meat into high end restaurants in Toronto and
Montreal and frozen on the half-shell product into the eastern United States and
Canada. In 2008, we expect our overall product mixture to consist of 40% live
26
scallops, 30% fresh meat, 30% frozen on the half-shell and in 2009 and
thereafter increase the frozen on the half-shell to 50%, and the remainder of
30% live and 20% fresh.
Management believes that these new marketing efforts, coupled with the recently
completed processing plant will begin yielding significant revenue increases
starting as early as first quarter of 2008 and continuing thereafter. The
Octobercompleted processing plant supplies us with an improved processing facility and
July additions bringwill provide us with several important advantages, including a significantly
larger inventory holding and handling area and the tenure upability to its management plan of 67. Atmitigate future
weather related harvest eachdelays to our sales. We believe that this will lead to
expedited sale processes in the upcoming months. In addition, recent experience
gained from harvesting and sorting scallops on the new longline hassystems should
allow for greater future harvesting rates. Additionally, we plan on generating
additional near term revenues via the capacity to
hold 90,000 scallops in final stage grow-out nets, thereby increasingsale of scallop and possibly other
shellfish seed.
During the productionharvesting of this farm to 6 million scallops. Additionally, the Deep Bay tenure
has been expanded to 32 longlines, which has the capacity to hold 2.8 million at
harvest.
In the fourth quarter of 2006, we transferred our 2005 year-classand sorting of our 2006 scallops which had been maturing inclasses, we
were able to review our tenured growing sitesmortality rates and joint venture
locations,update our class size projections.
Based on this review, we expect to final stage large grow-out nets on our farm sites. We anticipate
commencing harvesting up to approximately fourbring as many 2 million 2005 year-classyear class
scallops during Aprilto market over the next twelve months and harvest over 1 million 2006
year class scallops starting in the fall of 2007. The2008. Originally, we believed that
our 2006 year-class scallop spawning season commenced in
March of 2006would yield between 5 and was completed in April 2006. The scallop brood-stock
conditioning for these spawning began in mid-December 2005. We expect to begin
harvesting the 2006 year-class10 million scallops during the Spring of 2008, however, we
could begin harvesting portions of the class sooner ifat full
maturity/harvest. However, mortality rates (at
various pointswere at the higher end of our
projections due to the growth cycle) are significantly better thanhandling and sorting learning curve associated with the
roll-out of our current
projection or if growth rates are substantially higher.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 significantly
improve due to the addition of more lines and anchors, better spacing and
sorting within each lantern net, experience gained from the over 350 million larvae that were spawnedsorting 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.
During the third quarter of our 2007 fiscal year, we began spawning season,our 2007
scallop year-class. Due to improved hatchery technology and infrastructure (due
to improvements from recent capital investments) and lessons learned from the
2006 spawn, we were able to increase early stage survival rates. As of August
2007, at least 10100 million scallops could reach full maturity and thus be harvested.
During the fourth quarter of 2006, wehad reached 2 mm size in our onshore
hatchery ponds. We recently began moving the 2006 scallop crop from
the onshore ponds at our harvest facilityto move these scallops into grow-out nets at
our tenure
sites. This transferfarm sites and will continue duringto do so in the first quartercoming months. Based on the
recent lessons learned and improved farm infrastructure, we anticipate that the
2007 spawning will yield up to 20 million scallops at full maturity/harvest. In
fact, we are already noticing significant 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. In addition, we plan to hold up to 5 million
scallops (from 2007 spawning) in our onshore ponds until February 2008 as
reserve scallops. We expect that at least 2.5 million of 2007.these scallops will
eventually reach harvest size.
The use of DNA based family analysis that started in 2005early 2000 and will
continue through 2006,2008, with the goal of breeding high meat yield scallops.scallops, began
showing results in the harvest of our 2004 scallop class. Average weight per
scallop increased from 150-180 grams to approximately 225-250 grams --
representing an increase of over 20% from the previous year. Management believes
27
that the improved meat yield will allow us to continue to demand higher scallop
prices per animal. Also, the Pacific scallop, farmed by us, continues to prove
itself highly disease resistant, with up to a 95% survival rate during the
grow-out phase.
As a result of the above, we believe that the remaining 2005 scallop-class will
produce at least $5.5$3.0 million of gross revenue over athe next twelve month period beginning in April of
2007. We anticipatemonths.
Although we originally anticipated that the harvest of our 2006 scallop class
willwould eventually result in total gross revenue of at leastup to $14.0 million over the
twelve month period beginning in April 2008.2008, we now believe the gross revenue
from the harvest of the 2006 scallop class will only result in up to $2.0
million gross revenue over a much shorter period beginning in the fall of 2008
due to the higher than expected mortality rates and problems with handling of
long lines discussed above. Based on our current projections for the 2007
scallop class, we believe this year's class could produce more than $40.0
million over the life of its harvest. Although the 2006 class is expected to
produce less revenue than originally expected, the improving survival rates of
the 2007 class coupled with the short harvest time of 2006 class is expected to
maintain our overall revenue levels within range of our original projections
over the next 24 to 36 months. In 2007, our cost of goods sold increased more
rapidly than our overall revenues. Part of this increase was attributable to
extreme circumstances related to costs associated with handling problems with
our 2004 ear-hang scallop class and initial operations in our improved
processing plant. In future years, we expect this trend to reverse (as the many
of the reasons for the increased cold of goods sold were unique to this fiscal
year) and to have our sales increase significantly faster than our cost of goods
sold. As such, we expect our margins to improve in future years.
If our mortality rates are better than our current projections, our revenues
from the 2005, 2006 and 20062007 scallop class could be higher,
however,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 near term,anticipated growth
rates, projected harvesting cycles and large fluctuations in the salesprice of
scallops or the remainder ofUS-Canadian exchange rate could impact our 2004 scallop class between October 2006 and
March 2007 are expected to produce more the $1.0 million of revenue.
Additionally, we plan on generating additional revenues via the sale of scallop
and possibly other shellfish seed.
23
current projections.
LIQUIDITY AND CASH RESOURCES
At August 31, 2006,2007, we had a cash balance of approximately $1,817,000.$1,657,000. We
originally expected to reach positive operating cash flow during the second half
of our 2007 fiscal year, but slower than expected harvest rates and handling and
harvesting problems resulted in lower than expected revenues. As a result of
recent processing improvements, experience gained in 2007 and new marketing
efforts, we now expect to achieve operating positive cash flow in 2007.first half of
2008. 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
completedrelied on four private equity financings that resulted in net proceeds of
approximately $5,140,000. These 2006 and 2007 financings contain warrants which
if fully exercised, could raise approximately an additional $34,350,000.$49,350,000. To
date, exercises of these warrants resulted in net proceeds of approximately
$1,200,000; accordingly, if all of the remaining warrants from the 2006 and 2007
financings are exercised, we could receive an additional $48,150,000. The
exercise of the warrants is, however, to a large extent dependent upon the price
of our stock in the public market. As a result, we cannot guarantee when any of
the warrants will be exercised, if at all and, as a result, the proceeds from
the exercise of the warrants may not be available to us should we require
additional financing or ever. Prior to the three months third quartercompletion of the private equity
28
financings in 2006, our recentinitial expansion had been largely funded by a short
term note with a maximum limit of approximately $1,451,000. Previously, we have
also relied on short term loans from certain shareholders to assist with our
working capital needs and to meet short term cash requirements. We used a
portion of our recentthe 2006 private equity financing to repay these short term loans and
as a result we have beenwere able to deploy the bulk of the proceeds from our financing
toward our business strategy.
SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the
acquired entities since their respective dates of acquisition. All significant
inter-company amounts have been eliminated.
Cash and equivalents
Cash and equivalents include cash, bank indebtedness, and highly liquid short
term market investments with terms to maturity of three months or less. The
Company considersWe
consider all highly liquid investments with original maturities of 90 days or
less to be cash equivalents. The Company maintains itsWe maintain our cash balances primarily in on
financial institution, which exceeded federally insured limits by $1,653,378$1,561,136 at
August 31, 2006. The Company has2007. We have not experienced any losses, in such accounts and
believes it is not exposed to any significant credit risk on cash and cash
equivalents.
Accounts receivable
Accounts receivable is presented net of allowance for doubtful accounts. The
allowance for doubtful accounts reflects estimates of probable losses in
accounts receivable. The allowance is determined based on balances outstanding
for over 90 days at the period end date, historical experience and other current
information.
Loans receivable
Loans receivable is presented net of an allowance for loan losses, as necessary.
The loans are written off when collectibility becomes uncertain.
24
Inventory
We maintain inventories of raw materials for our 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.
29
Long term investments
Long term investments are recorded at cost. We review our investments
periodically to assess whether there is an "other than temporary" decline in the
carrying value of the investment. We consider whether there is an absence of an
ability to recover the carrying value of the investment by reference to
projected undiscounted future cash flows for the investment. If the projected
undiscounted future cash flow is less than the carrying amount of the asset, the
asset is deemed impaired. The amount of the impairment is measured as the
difference between the carrying value and the fair value of the asset.
Property, plant, and equipment
Property plant, and equipment are recordedcarried at cost, less accumulated amortizationdepreciation.
Depreciation is calculated by using the straight-line method for financial
reporting and accelerated methods for income tax purposes. The recovery
classifications for these assets are amortized in the following manner based on estimated useful
lives:
Buildings 4% - 5% declining balance
Seawater pipinglisted as follows:
Years
------------------
Headend Facility and tanks 6% declining balance
Boats 15% declining balance
Field equipment 20% declining balanceFiber Infrastructure 20
Manufacturing Equipment 3-7
Furniture and Fixtures 2-7
Office equipment 20% declining balanceEquipment 5
Leasehold Improvements Life of lease
Property and Equipment 5
Vehicles 30% declining balance
Computer equipment 30% declining balance5
Expenditures for maintenance and repairs are charged against income as incurred
whereas major improvements are capitalized.
Impairment of long-lived assets
We monitor the recoverability of long-lived assets, including property and
equipment and intangible assets, based upon estimates using factors such as
expected future asset utilization, business climate, and undiscounted cash flows
resulting from the use of the related assets or to be realized on sale. Our
policy is to write down assets to the estimated net recoverable amount in the
period in which it is determined likely that the carrying amount of the asset
will not be recoverable.
Government assistance
Government assistance we receive, such as grants, subsidies, and tax credits, is
recorded as a recovery of the appropriate related expenditure in the period that
the assistance is received.
25
We have received government assistance in the form of loans, for which repayment
is
may not be required if we fail to meet sufficient future revenue levels to repay
these loans based on a percentage of gross sales for certain products over a
30
defined period of time. If we receive any such assistance, it is initially
recorded as a liability, until such time as all conditions for forgiveness are
met, and is then recognized as other income in that period.
Farm license costs
We must pay annual license costs in respect to government-granted tenures that
it holds,we hold, which give us the right to use certain offshore ocean waters for the
purpose of aquaculture farming. Such license costs are recognized as an expense
when incurred.
Research and development costs
Development costs include costs of materials, wages, and reasonably attributable
indirect costs incurred by us which are directly attributable to the development
of hatchery techniques for sablefish and shellfish, these costs are expensed
when incurred.
Research costs are expensed when incurred.
Income taxes
We calculate our provision for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 (Accounting for Income Taxes) ("SPAS
109"), which requires an asset and liability approach to financial accounting
for income taxes. This approach recognizes the amount of taxes payable or
refundable for the current year, as well as deferred tax assets and liabilities
attributable to the future tax consequences of events recognized in the
financial statements and tax returns. Deferred income taxes are adjusted to
reflect the effects of enacted changes in tax laws or tax rates. Deferred income
tax assets are recorded in the financial statements if realization is considered
more likely than not.
Revenue recognition
We recognize revenue when it is realized or realizable, and earned. We consider
revenue realized or realizable and earned when there is persuasive evidence of a
contract, the product has been delivered or the services have been provided to
the customer, the sales price is fixed or determinable, and collectibility is
reasonably assured.
Our revenue is derived principally from the sale of scallops we produce or
purchase from third parties, and from the sale of seed and farm supplies to
other aquaculture farms.
Cost of goods
Cost of goods sold consists primarily of farming, harvesting and processing
costs associated with the growth, transfer and sales preparation of our products
(principally scallops). These costs consist primarily of salaries and benefits
and allocated overhead costs for consulting and support personnel engaged in the
farming, harvesting and processing of our products. All costs are recognized at
time of delivery.
31
Financial instruments
The carrying amount of our financial instruments, which includeincludes cash, accounts
receivable, loans receivable, bank indebtedness, accounts payable and accrued
26
liabilities, short term debt and long term debt approximate fair value. It is
management's opinion that the Company iswe are not exposed to significant interest, currency
or credit risk arising from these financial instruments unless otherwise noted.
Derivative financial instruments
In connection with the sale of debt or equity instruments, we may sell options
or warrants to purchase our common stock. In certain circumstances, these
options or warrants may be classified as derivative liabilities, rather than as
equity. Additionally, the debt or equity instruments may contain embedded
derivative instruments, such as embedded derivative features, which in certain
circumstances may be required to be bifurcated from the associated host
instrument and accounted for separately as a derivative instrument liability.
We account for all derivatives financial instruments in accordance with SFAS No.
133. Derivative financial instruments are recorded as liabilities in the
consolidated balance sheet, measured at fair value. When available, quoted
market prices are used in determining fair value. However, if quoted market
prices are not available, we estimate fair value using either quoted market
prices of financial instruments with similar characteristics or other valuation
techniques.
The identification of, and accounting for, derivative instruments is complex.
Our derivative instrument liabilities are re-valued at the end of each reporting
period, with changes in the fair value of the derivative liability recorded as
charges or credits to income, in the period in which the changes occur. For
options, warrants and bifurcated embedded derivative features that are accounted
for as derivative instrument liabilities, we estimate fair value using either
quoted market prices of financial instruments with similar characteristics or
other valuation techniques. The valuation techniques require assumptions related
to the remaining term of the instruments and risk-free rates of return, our
current common stock price and expected dividend yield, and the expected
volatility of our common stock price over the life of the option. The
identification of, and accounting for, derivative instruments and the
assumptions used to value them can significantly affect our financial
statements.
Derivative financial instruments that are not designated as hedges or that do
not meet the criteria for hedge accounting under SFAS No. 133 are recorded at
fair value, with gains or losses reported currently in earnings. All derivative
financial instruments held by us at August 31, 20062007 were not designated as
hedges.
Foreign exchange
The functional currency of our foreign subsidiaries is the local foreign
currency. All assets and liabilities denominated in foreign currencies are
translated into U.S. dollars at the exchange rate prevailing on the balance
sheet date. Revenues, costs and expenses are translated at average rates of
exchange prevailing during the period. Translation adjustments resulting from
32
translation of the subsidiaries' accounts are accumulated as a separate
component of shareholders' equity. Gains and losses resulting from foreign
currency transactions are included in the consolidated statements of operations
and have not been significant.
27
Use of estimates
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues,
expenses and disclosure of contingent assets and liabilities. Such estimates
include providing for amortization of property, plant, and equipment, and
valuation of inventory. Actual results could differ from these estimates.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off-balance sheet arrangements that have or are reasonably
likely to have a current or future effect on our financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources that is material to our investors.
INVESTMENTS IN TENURES AS COMPARED TO ESTIMATED MARKET VALUE OF TENURES
We currently carry our investment in Island Scallops' tenures at $3,609.$3,770. This
amount represents the initial carrying costs of certain tenures acquired by
Island Scallop'sScallops' subsidiary. These tenures do not expire until various dates
ranging from 2021 - 2024, however, we believe that they have an indefinite
useful life because renewal on expiration is anticipated. The area available for
shellfish aquaculture within Baynes Sound is fully subscribed, and as a result
new tenures for new companies are not available through the Canadian Provincial
application and review process. The shellfish companies within the Sound are
also well established and sales of tenures are quite rare, making the assessment
of the market value for the Island Scallops tenures difficult. Historical sales
and government auction of tenures have received as much as $300,000 (CDN) for a
small beach tenure (less than 4 acres) and $65,000 CDN) for a small deepwater
tenure without infrastructure. The few tenures on the market over the previous
1224 months suggest that the current market value is approximately $10,000 to
$25,000 (CDN) per acre. Based on listings of tenures on the coast of British
Columbia, discussions with local shellfish growers and individuals from the BC
Assets and Land Corporation, and an independent appraisal (commissioned by
Island Scallops) that recently estimated the value of our roughly 1018 acres of
tenures, the value is estimated to be approximately $8,600,000. If the proposed
expansion of two of our tenures is approved, the estimated market value of our
overall tenures would increase to roughly $10,600,000. The estimated market
value is based on the size, location and whether they are beach or deepwater in
nature. However, given the variable nature of the shellfish tenures market, the
actual value that we receive from the sale of a tenure or a partial tenure could
vary significantly from these estimated values.
Although we cannot determine the exact amount we would ultimately receive from
the sale of our tenure(s), based upon the information stated above we expect to
receive more than the carrying cost ($3,609)3,770) from such sale. Accordingly, the
carrying cost of our tenures is not indicative of their actual value. This
analysis indicates our cash generating capabilities after considering
investments in capital assets necessary to maintain and enhance existing
operations.
33
COMPARISON OF RESULTS FOR THE FISCAL YEAR ENDED AUGUST 31, 2006,2007, TO THE FISCAL
YEAR ENDED AUGUST 31, 2005.
28
2006.
Revenues. Revenues for the fiscal year ended August 31, 2006,2007, were approximately
$528,000.$657,000. We had revenues of approximately $316,000$528,000 for the fiscal year ended
August 31, 2005.2006. This is an increase of approximately $212,000$129,000 or 67%24%. The
increase in our revenue was mainly the result of an increase in the sales of our
own scallops. In fact, sales of our own scallops increased by more than 281%.
Previously, our increase in sales was the result of an increase in oyster seed and
scallop seed sales and increased joint venture sales. As was the case in 2005,2006,
management continued its emphasis on the development and production of larger 2005 and 2006
scallop crops. Management believes that our emphasis on expansion of future
crops will yield a significant increase in revenues starting in 20072008 and beyond.
Gross profit (loss). Gross loss for the year ended August 31, 2006,2007, was
approximately $48,000,$379,000, a decreaseincrease of approximately $3,000$331,000 as compared to
gross loss of roughly $51,000,$48,000, for the year ended August 31, 2005.2006. The slight decreaseincrease
in the amount of gross loss for 20062007 (as compared to 2005)2006) was mainly
attributable to management's continued focus on the expansion and development of
larger scallop crops and larger scallop yields for future years. Part of this
increase was attributable to extreme circumstances related to costs associated
with handling problems with our 2004 ear-hang scallop class. We do not expect
these problems to continue in future years. Our cost of sales also increased due
to higher processing plant and trucking costs as we began to establish a larger
sales effort. In the crop year 2005future, we expect our sales to increase more rapidly that
these costs and 2006.margins to quickly improve. We continued to focus resources on
the maintaining, developing and tending to our scallop crops in 2005 and 2006 and believe that we
have already seen the initial benefits in increased sales of our own scallops
and that we will begin seeingcontinue to see additional benefits from our efforts in
developing larger crops as early asin the first quarter of 2007.2008 and beyond.
General and administrative. General and administrative expenses for the fiscal
year ended August 31, 2006,2007, were approximately $653,000.$1,222,000. Our general and
administrative expenses were approximately $221,000$512,000 for the fiscal year ended
August 31, 2005.2006. This is an increase of approximately $432,000$710,000 or 195%109%. Our
increase in general and administrative expenses for the year ended August 31,
2006 were2007 was attributable to costs associated with establishing, building, and
supporting our infrastructure and included various consulting costs, legal and
accounting fees compensation paid as result of our recent financing, overhead,
realized stock compensation, stock option expenses and salaries. We anticipate
that these costs may continue to slightly rise as we continue to expand our
operations. However, we believe that we now have the necessary general and
administrative staff in place to maintain our expansion into scallop crops of 30
million and beyond.
Stock compensation expense. During the year ended August 31, 2007, we had stock
compensation expense of approximately $62,000. The expense was for outside
seafood sale and distribution consultants who we hired to help develop new sales
and marketing programs. During the year ended August 31, 2006, we had stock
compensation expense of approximately $183,000. The expense was for two
consulting groups who would provide services to us. As such, we incurred a stock
compensation expense of approximately $183,000 for year ended August 31, 2006.
During the year ended August 31, 2005, our Board of Directors authorized the
issuance of shares of our restricted common stock to an individual who would
provide services to Edgewater. Based upon the common stock trading price at the
times of issuance, and FASB rules, we were required to incur non-cash expenses
for the issuance of stock of approximately $10. Since these shares were issued
by Edgewater in June 2005 prior to the share exchange, these shares were valued
based on the par value, $0.0001 of the stock at time of issuance and we recorded
a $10 stock compensation expense for the issuance of these shares during the
year ended August 31, 2005.34
Other income (expense), net. Interest expense for the year ended August 31, 20062007
was approximately $696,000.$16,000. Interest expense for the year ending August 31, 20052006
was approximately $81,000.$696,000. The increasedecrease in interest expense was mainly due to
the issuancerepayment of common stock fora large short term note in the extension of the due date of debt.late 2006. Other income for the
year ended August 31, 20062007 was approximately $45,000$167,000 as opposed to other income
of approximately $2,600$45,000 for the year ending August 31, 2005.2006. The increase in
other income was mainly the result of a one time gain of approximately $122,000
related to the forgiveness of a third-party debt in 2007. For the year ended
August 31, 2007, we recognized a one-time gain of approximately $5,827,000 which
was related to the change in fair value of warrants issued to 10 institutional
and accredited investors in conjunction with preferred stock. We recognized a
loss of approximately $2,666,000 which was related to the change in the fair
value of warrants issued to 10 institutional and accredited investors in
conjunction with preferred stock financings on April 12, May 30, June 30 and
29
July 11 and the market price of the common stock underlying such warrants at
August 31, 2006.
No such loss was recordedAs a result, other income for the year ended August 31, 2005.
As a result, other expense for the year ended August 31, 20062007 was approximately
$3,316,000$5,978,000 as compared to other expense of approximately $78,000$3,316,000 for the year
ended August 31, 2005.2006. This increase was primarily attributed to loss associated
with the change in fair value of the recently issued warrants and interest
expense related to the extension of a former bridge financing loan. This
increase was primarily attributed to gain associated with the reclassification
of certain liabilities associated with warrants issued to investors in our
Series A and B Preferred Stock financings and the resultant change in fair value
of the warrants following the reclassification (See Foot Note 12 to our
Financial Statements "Reclassification of Warrant Liabilities Associated with
Series A and Series B Preferred Financings.").
Net profit (loss). As a result of the above, the net lossincome for the year ended
August 31, 2006,2007, was approximately $4,200,000$3,538,000 as compared to a net loss of
approximately $350,000$4,235,000 for the year ended August 31, 2005.2006.
RISK FACTORS
You should carefully consider the risks described below before making an
investment in us. All of these risks may impair our business operations. If any
of the following risks actually occurs our business, financial condition or
results of operations could be materially adversely affected. In such case, the
trading price of our common stock could decline, and you may lose all or part of
your investment.
RISKS RELATING TO AQUACULTURE
We are subject to a number of biological and environmental risks.
Our business would be adversely affected if our scallop crop is infected by
Perkinsus Quagwadi. Perkinsus affects a variety of scallops. In 1992, mortality
due to Perkinsus infection was large and mortality was high, but Island Scallops
was able to overcome this disease by breeding the remaining stock. Eight years
of successfully breeding hardy individuals resulted in the remaining populations
of scallops being Perkinsus-free. Although there is a chance that other diseases
35
may occur, the Island Scallops hybrid scallop has proven resistant to Perkinsus
disease for the last ten years.
Paralytic Shellfish Poisoning (PSP or Red Tide) could limit the amount
of scallops available for sale.
Paralytic Shellfish Poisoning (PSP or red tide) is another concern when
farming scallops. The adductor muscle can be processed for sale to the
traditional scallop meat market even when there is a PSP closure. On the other
hand, the live animal market is stopped by PSP toxicity. Sewage Contamination
(faecal coliform) is also monitored by the Canadian Food Inspection Agency
(CFIA) to avoid this problem. These types of contaminants do not threaten the
crop, it only causes a temporary displacement to the marketing of the product.
Island Scallops' aquaculture is not without total risk; however, the development
program over the last decade has reduced the risk of disease and increased the
historical grow-out survival rate to 95% over the past six years. Despite these
advances, however, an outbreak of PSP, even if it did not affect Island
Scallops' stock, could have a depressive effect on the shellfish market in
general, which could then adversely affect our business.
30
Aquaculture and scallop farming is subject to a variety of general disease
risks.
Bacteria are almost always associated with mortalities in the larval stages of
growth. Control of disease outbreaks in the hatchery consists of regular
inspection, growth rates, color and larvae is checked for proper shape. Proper
hygiene practices within the hatchery minimize problems with Bacteria. In
general, scallops are harder to handle and transport and care needs to be taken
when moving them. Scallops can develop a stress related disease that can be
avoided by proper handling conditions such as temperature, moisture rates and
time before getting back in the water (maximum time being 24 hours).
Boring sponges and worms can adversely impact our scallop yield.
Boring sponges and worms are organisms that make holes in the scallop's shell,
weakening it and requiring the scallop to make repairs. Secreting additional
layers of shell material to mend these holes directs energy away from growth and
maintenance of the scallop. In cases of severe infestation, the adductor muscle
may be reduced in weight by up to 50%, and the meat may be discolored.
Our business would be adversely affected if our scallop crop is infected by
flatworm.
Flatworms can be devastating, destroying all seed within 2 weeks. Island
Scallops has managed to minimize this problem and keep mortalities down by
keeping the seeds in the pond a little longer so it becomes larger, making the
time spent in the first net culture less. We then move the seeds to a larger
mesh net culture, which causes the flatworms to fall off and no longer pose a
problem. This husbandry technique alleviates the problem to a large degree.
Scallops raised in the open ocean are subject to a variety of predators that
could adversely impact crop yield.
36
Starfish are a major predator of scallops, particularly in bottom culture. If
the hanging techniques are far enough from the bottom, even during extreme low
tides, then this does is not problematic. Since starfish and crabs have a
free-swimming larval stage as part of their life cycle, it is possible that
these larvae can settle within the "grow-out" nets and settle there and prey on
these scallops. However, with proper husbandry techniques these effects can be
minimized.
Our business would be adversely affected if a majority of our scallop crop
experiences fouling.
Fouling is caused by settlement and growth of several organisms such as
macroalgae, bryozoans, barnacles and mussels on the nets. Heavy fouling of
culture nets and scallops impedes growth of the scallops. Since most fouling
occurs in shallower waters, hanging scallops at deeper depths can reduce
fouling. If culture systems are managed properly, fouling is not a problem.
Aquaculture can be subject to a variety of growing conditions that can adversely
affect product growth and development.
31
Certain growing conditions and sea conditions can affect the quality and
quantity of scallops produced, decreasing the supply of our products and
negatively impacting profitability. Extreme wave actions tend to make scallops
seasick. In cases of extreme seasickness, scallops stop feeding and growth is
reduced. This may create mortality by weakening the scallops and making them
susceptible to other problems and diseases. Currently, the water leases owned by
Island Scallops are located in areas where this will prove to be less
problematic. Additionally, if other environmental conditions are unfavorable,
growing conditions in the ocean can greatly inhibit scallop growth. Generally
this risk is mitigated by year-to-year variations in growing conditions.
However, we cannot guarantee that we will not be negatively affected, at least
in the short term, if we experience poor growing conditions.
Increased mortality rates would adversely impact our business.
In general, increased mortality rates in juveniles are due to improper feeding
and hatchery husbandry. Once scallops are introduced to the ocean, increased
mortality rates are caused by the above factors as well as fluctuations in
salinity and currents. Given the location of Island Scallops' current farming
areas, the salinity and currents should not be problematic. Mortality rates can
also increase due to overcrowding problems. In cases of extreme overcrowding
scallops actually bite each other and their shells become damaged.
If we are unable to expand our tenures, our projected production may be delayed.
To increase our production capacity, we must expand our tenures. However,
expanding tenures requires government approval, which can be a timely and costly
process. Two of our tenures, Hindoo Creek and Deep Bay, have been approved for
expansion. Our Denman tenure must be re-zoned before expansion thereof will be
approved and our Bowser bottom lease Management Plan must be reconfigured before
expansion of that area is approved. Although we are confident that such approval
will be granted after issues raised by local residents and fisherman, such as
the use of surface floats for our longlines have been addressed, there is no
37
guarantee that it will be granted. In the future, we will seek expansion of our
other tenures, which also may not be granted. If we do not receive expansion
approval for our Denman tenure and Bowser bottom lease, it will delay our
proposed expansion.
BUSINESS RISKS
We will require additional capital to fund our current business plan.
Our success is dependent on future financings. The aquaculture or marine farming
industry is a capital-intensive business, which requires substantial capital
expenditures to develop and acquire farms and to improve or expand current
production. Further, the farming of marine life and acquisition of additional
farms may require substantial amounts of working capital. We project the need
for significant capital spending and increased working capital requirements over
the next several years. There can be no assurance that we will be able to secure
such financing on terms, which are acceptable, if at all. The failure to secure
future financing with favorable terms could have a material adverse effect on
our business and operations.
We are dependent on certain key existing and future personnel.
32
Our success will depend, to a large degree, upon the efforts and abilities of
our officers and key management employees such as Mr. Saunders, Mr. Bruce Evans
and Ms. Patti Greenham and Ms. Leslie Chapman.Greenham. The loss of the services of one or more of these or
other key employees could have a material adverse effect on our operations. We
currently maintain key man life insurance on Mr. Saunders for a value of
$1,000,000. We also have an employment agreement with Mr. Saunders. We do not
maintain key man insurance for, nor do we currently have employment agreements
with, any of our other key employees. In addition, as our business plan is
implemented, we will need to recruit and retain additional management and key
employees in virtually all phases of our operations. Key employees will require
a strong background in the marine aquaculture industry. We cannot assure that we
will be able to successfully attract and retain key personnel.
The fact that our directors and officers own approximately 49%43% of our capital
stock and 68%60% of our voting capital stock may decrease your influence on
shareholder decisions.
Our executive officers and directors, in the aggregate, beneficially own
approximately 49%43% of our capital stock and 68%60% of our voting capital stock. As a
result, our officers and directors, will have the ability to influence our
management and affairs and the outcome of matters submitted to shareholders for
approval, including the election and removal of directors, amendments to our
bylaws and any merger, consolidation or sale of all or substantially all of our
assets.
Our acquisitions and potential future acquisitions involve a number of risks.
Our potential future acquisitions involve risks associated with assimilating
these operations into our company; integrating, retaining and motivating key
personnel; integrating and managing geographically-dispersed operations
integrating the technology and infrastructures of disparate entities; and risks
inherent in the husbandry and farming of marine species.
We may have difficulty competing with larger and better-financed companies in
our sector.
38
In general, the aquaculture industry is intensely competitive and highly
fragmented. Many of our competitors have greater financial, technical, marketing
and public relations resources than we presently have. Our sales may be harmed
to the extent we are not able to compete successfully against such seafood
producers.
Contamination of our seafood would harm our business.
Because our products are designed for human consumption, our business is subject
to certain hazards and liabilities related to food products, such as
contamination. A discovery of contamination in any of our products, through
tampering or otherwise, could result in a recall of our products. Any such
recall would significantly damage our reputation for product quality, which we
believe is one of our principal competitive assets, and could seriously harm our
business and sales. Although we maintain insurance to protect against such
risks, we may not be able to maintain such insurance on acceptable terms and
such insurance may not be adequate to cover any resulting liability.
33
We may experience barriers to conducting business due to potential government
regulations.
There are no hatchery/producer competitors in the scallop farming business in
British Columbia. The United States will not allow the farming of the species
farmed by Island Scallops in their waters, aswithout undergoing an extensive environmental review
which may prove costly and difficult. If these reviews are successful and US
approval obtained, then this species is considered an
"exotic". It is unlikely thatcould be cultured in US waters. which may
provide increased competition for our products in the Canadian government would decide to regulate
this species like the United States does (as the Canadian government developed
the technology) however if it does, this would have a material adverse affect on
our business.US..
Our business may be adversely affected by price volatility.
If market prices for Island Scallops' products decrease, we will incur a loss of
profits. However, our operational costs will increase because we will have to
produce the same quantity to meet the current demand, which will decrease profit
margin. This form of price volatility would be detrimental for our business.
Foreign exchange rates risks, political stability risk, and/or the imposition of
adverse trade regulations could harm our business.
We conduct some of our business in foreign currencies. Our profitability depends
in part on revenues received in United States dollars as a result of sales into
the United States. A decline in the value of the United States dollar against
the Canadian dollar would adversely affect earnings from sales in the United
States. As part of our plans to acquire other businesses we may expand our
operations to other countries, operate those businesses in foreign currencies,
and export goods from those countries. Thus far, we have not engaged in any
financial hedging activities to offset the risk of exchange rate fluctuations.
We may in the future, on an as-needed basis, engage in limited financial hedging
activities to offset the risk of exchange rate fluctuations. There is a risk
that a shift in certain foreign exchange rates or the imposition of unforeseen
and adverse political instability and/or trade regulations could adversely
impact the costs of these items and the liquidity of our assets, and have an
adverse impact on our operating results. In addition, the imposition of
39
unforeseen and adverse trade regulations could have an adverse effect on our
exported seafood operations. We expect the volume of international transactions
to increase, which may increase our exposure to future exchange rate
fluctuations.
Our common stock may be considered a "penny stock" and may be difficult to sell.
The SEC has adopted regulations which generally define a "penny stock" to be an
equity security that has a market price of less than $5.00 per share or an
exercise price of less than $5.00 per share, subject to specific exemptions. The
market price of our common stock is less than $5.00 per share and, therefore, it
may be designated as a "penny stock" according to SEC rules. This designation
requires any broker or dealer selling these securities to disclose certain
information concerning the transaction, obtain a written agreement from the
purchaser and determine that the purchaser is reasonably suitable to purchase
the securities. These rules may restrict the ability of brokers or dealers to
sell our common stock and may affect the ability of investors to sell their
shares.
34Our Auditors have given the Company a "Going Concern" opinion, raising
substantial doubt about our ability to continuing to fund our operations.
We have suffered operating losses since inception in our efforts to establish
and execute our business strategy. As of August 31, 2007, we had a cash balance
of approximately $1,657,000. Although management believes that we have adequate
funds to maintain our business operations into the next fiscal year and/or until
we become cash flow positive, we continued to suffer operational losses in our
2007 fiscal year. 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. Based on these factors, there is substantial doubt about our ability
to continue as a going concern.
40
ITEM 7. FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Edgewater Foods International, Inc.
Qualicum Beach, British Columbia, Canada
We have audited the accompanying consolidated balance sheet of Edgewater Foods
International, Inc. (the "Company") as of August 31, 2006,2007, and the related
consolidated statements of operations, stockholders' deficit,equity (deficit), and cash
flows for each of the two years then
ended.in the two-year period ended August 31, 2007. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion ofon these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standardstandards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includesstatements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statementstatements referred to above present fairly, in
all material respects, the consolidated financial position of Edgewater Foods
International, Inc. as of August 31, 2006,2007, and the results of its operations and
its cash flows for each of the two years thenin the two-year period ended August 31,
2007 in conformity with the accounting principles generally accepted in the United
States of America.
The accompanying financial statements have been prepared assuming that Edgewater
will continue as a going concern. As discussed in Note 1619 to the consolidated financial statements, Edgewater has incurredthe Company's
absence of significant revenues, recurring losses from operations, for the year ended
August 31, 2006 and has suffered operating losses since its inception in its
efforts to establish and execute our business strategy. Edgewater will require
additional working capital to develop its business until Edgewater either (1)
achieves a level of revenues adequate to generate sufficient cash flows from
operations; or (2) obtainsneed
for additional financing necessaryin order to supportfund its working
capital requirements. These conditionsprojected loss in 2008 raise
substantial doubt about Edgewater'sits ability to continue as a going concern. Management's plans with regard to this
matter are described in Note 16. The accompanying2007
consolidated financial statements do not include any adjustments that might
resultsresult from the outcome of these
uncertainties.this uncertainty.
/s/ LBB & Associates Ltd., LLP
- --------------------------------------------------------
LBB & Associates Ltd., LLP
Houston, Texas
October 26, 200628, 2007
F-1
EDGEWATER FOODS INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEET
AUGUST 31, 20062007
2007
------------
ASSETS
Current assets:
Cash $ 1,816,7421,656,868
Accounts receivable, net of allowance for
doubtful accounts of $386 38,85073,423
Inventory 1,252,0511,827,513
Other current assets 67,59661,242
------------
Total current assets 3,175,2393,619,046
Property, plant and equipment, net 1,824,3942,963,234
Loans receivable, related party 82,260
Investments in other assets 3,6093,770
------------
Total assets $ 5,003,2426,668,310
============
LIABILITIES AND STOCKHOLDERS' DEFICITEQUITY
Current Liabilities:
Bank indebtedness $ 689liabilities:
Short term debt 462,249
Current portion of warrant liabilities 1,743,996$ 110,800
Current portion of long term debt 948,732462,306
Accounts payable and accrued liabilities 687,405721,292
------------
Total current liabilities 3,843,071
Warrant liabilites, net of current portion 20,415,4541,294,398
Long term debt, net of current portion 40,217526,299
------------
Total liabilities 24,298,7421,820,697
------------
Stockholders' DeficitEquity
Series A preferredPreferred stock, par $0.001, 10,000,000 7,774
authorized, 7,887,9997,773,998 issued and outstanding
7,888Series B Preferred stock, par $0.001, 100 --
authorized, 207 issued and outstanding
Common stock, par $0.001,$0.0001, 100,000,000 authorized, 20,983,2602,371
23,712,700 issued and outstanding 2,098
Additional paid in capital --22,471,315
Accumulated deficit (19,049,166)(17,528,303)
Accumulated other comprehensive income (loss) - (105,544)
foreign exchange adjustment
(256,320)
------------
Total stockholders' deficit (19,295,500)equity 4,847,613
------------
Total Liabilitiesliabilities and Stockholders' Deficitstockholders' equity $ 5,003,2426,668,310
============
See accompanying summary of accounting policies and notes to financial
statements
F-2
EDGEWATER FOODS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDINGENDED AUGUST 31, 2007 and 2006
and 20052007 2006 2005
------------ ------------
Revenue $ 527,623657,065 $ 315,869527,623
Cost of goods sold 1,036,313 576,069 366,724
------------ ------------
Gross profit (loss) (379,248) (48,446) (50,855)
------------ ------------
Operating
Expenses:
General and administrative expenses (329,870) (137,337)1,222,184 512,370
Salaries and benefits (323,186) (83,653)
Stock compensation expense (182,500) --319,008 323,186
------------ ------------
Total operating expenseexpenses (1,541,192) (835,556) (220,990)
------------ ------------
Loss from operations (1,920,440) (884,002) (271,845)
------------ ------------
Other income (expense):
Interest expense,(expense), net (15,876) (695,889) (80,868)
Change in fair value of warrants 5,826,631 (2,665,571) --
Other income (expense) 167,144 45,185 2,637
------------ ------------
OtherTotal other income (expense), net 5,977,899 (3,316,275) (78,231)
------------ ------------
Net lossincome (loss) 4,057,458 (4,200,277)
(350,076)============ ============
Dividend on preferred stock (518,900) (34,709) --
------------ ------------
Net lossincome (loss) applicable to
common shareholders 3,538,558 (4,234,986)
Foreign currency translation 150,776 (85,917)
------------ ------------
Accumulated other comprehensive
income (loss) $ (4,234,986)3,689,334 $ (350,076)(4,320,903)
============ ============
Net lossincome (loss) per shareShare
Basic and diluted$ 0.16 $ (0.20)
Diluted $ (0.03)
============ ============0.11 $ (0.20)
Weighted average shares outstanding
Basic and diluted 20,794,784 11,899,320
============ ============22,228,633 20,969,400
Diluted 32,273,888 20,969,400
See accompanying summary of accounting policies and notes to financial
statements
F-3
EDGEWATER FOODS INTERNATIONAL
CONSOLIDATED STATEMENTSSTATEMENT OF STOCKHOLDERS'
DEFICIT
YEARSEQUITY FOR THE YEAR ENDED AUGUST 31, 2006
Other
Accumulated Comprehensive
Paid Income2007
Preferred Stock
Series A Series B Common Stock
in Foreign Exchange---------------------------------------------------------------------------------
Number Value Number Value Capital Adjustment
------------ ------------ ------------ ------------ ------------ ------------Number Value
----------- ----------- ----------- ----------- ----------- -----------
Balance at August 31, 20042005 -- $ -- 10,300,000 $ 1,030 $ (1,029) $ 144,012
Comprehensive loss
Net loss
Foreign exchange adjustment (314,415)
Total comprehensive loss
Common stock issued for services -- -- 100,000 10 --
Common stock issued in
connection Island Scallops, Ltd.
with -- -- 8,600,000 860 (860)
Forgiveness of shareholder debt 3,153,848
Common stock issued in
connection with Heritage
Management recapitalization -- -- 1,585,400 159 (159)
------------ ------------ ------------ ------------ ------------ ------------
Balance at August 31, 2005 -- -- 20,585,400 2,059
3,151,800 (170,403)
Comprehensive loss
Net lossincome (loss)
Foreign (85,917)
Total comprehensive loss
Common stock cancelled -- -- -- -- (150,000) (15) 15
Common stock issued for services -- -- -- -- 525,000 52 702,448
Common stock issued for dividends -- -- -- -- 22,860 2 34,707
Preferred Series A stockStock issued in
connection with financing 7,887,999 7,888 -- -- 5,132,136-- --
Value Assigned to Warrants liability incurred in
connection with financings (9,021,106)
------------ ------------ ------------ ------------ ------------ -------------- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Balance at August 31, 2006 7,887,999 $ 7,888 -- -- 20,983,260 $ 2,098
$ 0 $ (256,320)
============ ============ ============ ============ ============ ============
Accumulated
Deficit=========== =========== =========== =========== =========== ===========
Comprehensive loss
Net income (loss)
Foreign
Total ------------ ------------comprehensive loss
Conversion of Series A Preferred Stock (302,801) (303) -- -- 302,801 30
Common stock issued for dividends -- -- -- -- 309,839 31
Preferred Series B Stock issued in
connectionwith financing -- -- 207 -- -- --
Value Assigned to Series B Warrants -- -- -- -- -- --
Issue of Common and Series A preferred
Stock for warrants, net of expense 188,800 189 -- -- 2,076,800 208
Stock Option expense -- -- -- -- -- --
Series A Warrants reclassification -- -- -- -- -- --
Series B Warrants reclassification -- -- -- -- -- --
Common Stock issues for Services -- -- -- -- 40,000 4
----------- ----------- ----------- ----------- ----------- -----------
Balance at August 31, 2004 $ (3,991,330) $ (3,847,317)2007 7,773,998 7,774 207 -- 23,712,700 2,371
=========== =========== =========== =========== =========== ===========
Other
Comprehensive
loss
Net loss (350,076) (350,076)Additional Income -
Paid in Foreign exchange adjustment (314,415)
------------Exchange Accumulated
Capital Adjustment Deficit Total
comprehensive loss
(664,491)
10
Common stock issued for services
Common stock issued in
connection Island Scallops, Ltd.
with --
Forgiveness of shareholder debt 3,153,848
Common stock issued in
connection with Heritage
Management recapitalization --
------------ ----------------------- ----------- ----------- -----------
Balance at August 31, 2005 3,151,800 (170,403) (4,341,406) (1,357,950)
Comprehensive loss
Net lossincome (loss) (4,200,277) (4,200,277)
Foreign (85,917) ------------(85,917)
-----------
Total comprehensive loss
(4,286,194)
Common stock cancelled 15 -- -- --
Common stock issued for services 702,448 -- -- 702,500
Common stock issued for dividends 34,707 -- (34,709) --
Preferred Series A stockStock issued in
connection with financing 5,132,136 -- -- 5,140,024
Value Assigned to Warrants liability incurred in
connection with financings(9,021,106) -- (10,472,774) (19,493,880)
------------ ----------------------- ----------- ----------- -----------
Balance at August 31, 2006 $(19,049,166) $(19,295,500)
============ ============-- (256,320) (19,049,166) (19,295,500)
=========== =========== =========== ===========
Comprehensive loss
Net income (loss) 4,057,458 4,057,458
Foreign 150,776 150,776
-----------
Total comprehensive loss
4,208,234
Conversion of Series A Preferred Stock 273 -- -- --
Common stock issued for dividends 518,869 -- (518,900) --
Preferred Series B Stock issued in
connectionwith financing 1,864,502 -- -- 1,864,502
Value Assigned to Series B Warrants (2,099,044) -- (2,017,695) (4,116,739)
Issue of Common and Series A preferred
Stock for warrants, net of expense 1,189,042 -- 1,189,439
Stock Option expense 486,118 -- -- 486,118
Series A Warrants reclassification 17,364,812 -- -- 17,364,812
Series B Warrants reclassification 3,084,747 -- -- 3,084,747
Common Stock issues for Services 61,996 -- -- 62,000
----------- ----------- ----------- -----------
Balance at August 31, 2007 22,471,315 (105,544) (17,528,303) 4,847,613
=========== =========== =========== ===========
See accompanying summary of accounting policies and notes to financial
statements
F-4
EDGEWATER FOODS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASHFLOWSCASH FLOWS
YEARS ENDED AUGUST 31, 2007 and 2006
and 20052007 2006 2005
------------ ------------
Cash flows from operating activities:
Net income (loss) $ (4,200,277)4,057,458 $ (350,076)(4,200,277)
Adjustments to reconcile net lossincome (loss) to net
cash used in operating activities:
Depreciation and amortization 351,092 123,008 80,435
Changes in fair value of warrants (5,826,630) 2,665,570
Stock option expense 486,118 --
Common stock issued for services 62,000 702,500
10
BadGain on forgiveness of debt expense(158,728) -- 347
Changes in current assets and liabilities:
Accounts receivable (34,573) (38,850) 25,069
Prepaid expenses (16,661) (16,061) --
Other current assets -- (2,628) (22,338)
Loan receivable --(59,245) --
Inventory (575,462) (711,925) (540,126)
Accounts payable 33,198 197,681 221,644
Bank overdrafts -- (38,538) 38,538
------------ ------------
Net cash used in operating activities (1,681,433) (1,319,520) (546,497)
------------ ------------
Cash flows from investing activities:
Purchase of property, plant and equipment (1,408,247) (784,291) (493,018)
------------ ------------
Net cash provided by (used in)used in investing activities (1,408,247) (784,291) (493,018)
------------ ------------
Cash flows from financing activities:
LineNet proceeds from line of credit net-- (64,675) 6,591
Proceeds from short term debt 4,175 862,451 1,125,247
Payment of short term debt (199,384) (1,609,901) (38,128)
Proceeds from long term debt 237,486 62,112 --
Payment of long term debt (259,688) (382,456)
(25,408)
Proceeds from the sale of commonCommon stock issued for cash 1,083,239 --
860
Proceeds from sale of preferredPreferred stock issued for cash 1,970,702 5,140,024 --
------------ ------------
Net cash provided by financing activities 2,836,530 4,007,555 1,069,162
------------ ------------
Foreign currency translation effect 93,276 (87,562)
(41,997)------------ ------------
Net increase (decrease) in cash (159,874) 1,816,182
(12,350)F-5
Cash, beginning of period 1,816,742 560 12,910
------------ ------------
Cash, end of period $ 1,816,7421,656,868 $ 5601,816,742
============ ============
Supplemental disclosure of cash flow information:information
Net cash paid during year ended
Interest $ --31,533 $ --160,269
============ ============
Income taxes $ -- $ --
Supplement============ ============
Supplemental disclosure of non-cash transactions:flow
information
Issuance of common stock for dividends $ 34,709518,900 $ --
============ ============
Warrant liability incurred in connection with financing $ 19,493,8804,116,739 $ --
============ ============
Reclassification of warrant liability to equity $(20,449,559) $ --
============ ============
F-5
See accompanying summary of accounting policies and notes to financial
statements
F-7
Edgewater Foods International, Inc.
Notes to ConsolidatedEDGEWATER FOODS INTERNATIONAL , INC.
NOTES TO CONSOLIDATED Financial Statements
NOTE 1. BASIS OF PRESENTATION, ORGANIZATION AND NATURE OF OPERATIONS
Edgewater Foods International Inc., 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 15 years has successfully 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 and sablefish.
On June 29, 2005, Edgewater Foods International, Inc. ("Edgewater"), a holding
private company established under the laws of Nevada in order to acquire assets
in the aquaculture industry, issued 10,300,000 shares of common stock in
exchange for a 100% equity interest in Island Scallops, Ltd. As a result of the
share exchange, Island Scallops, Ltd. become the wholly own subsidiary of
Edgewater Foods International, Inc. As a result, the shareholders of Island
Scallops owned a majority (54.21%) of the voting stock of Edgewater Foods
International, Inc. The transaction was regarded as a reverse merger whereby
Island Scallops was considered to be the accounting acquirer as its shareholders
retained control of Edgewater Foods after the exchange, although Edgewater is
the legal parent company. The share exchange was treated as a recapitalization
of Edgewater Foods. As such, Island Scallops, Ltd. (and its historical financial
statements) is the continuing entity for financial reporting purposes.
On August 15, 2005, we completed a reverse acquisition of Heritage Management
Corporation, a public shell company, as that term is defined in Rule 12b-2 of
the Exchange Act, established under the laws of Nevada on June 12, 2000. To
accomplish the share exchange we issued 19,000,000 shares of common stock on a
one to one ratio for a 100% equity interest in Edgewater Foods. Per the terms of
the Share Exchange and Bill of Sale of Heritage Funding Corporation and E. Lee
Murdoch, Heritage was delivered with zero assets and zero liabilities at time of
closing. Following the reverse acquisition, we changed the name of Heritage
Management Corporation to "Edgewater Foods International, Inc." The transaction
was regarded as a reverse merger whereby Edgewater was considered to be the
accounting acquirer as it retained control of Heritage after the exchange.
Although the Company is the legal parent company, the share exchange was treated
as a recapitalization of Edgewater. Edgewater is the continuing entity for
financial reporting purposes. The Financial Statements have been prepared as if
Edgewater had always been the reporting company and then on the share exchange
date, had changed its name and reorganized its capital stock.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the
acquired entities since their respective dates of acquisition. All significant
inter-company amounts have been eliminated.
F-6
Cash and equivalents
Cash and equivalents include cash, bank indebtedness, and highly liquid short
term market investments with terms to maturity of three months or less. The
Company considersWe
consider all highly liquid investments with original maturities of 90 days or
less to be cash equivalents. The Company maintains itsWe maintain our cash balances primarily in on
financial institution, which exceeded federally insured limits by $1,653,378$1,561,136 at
August 31, 2006. The Company has2007. We have not experienced any losses, in such accounts and
believes it is not exposed to any significant credit risk on cash and cash
equivalents.
Accounts receivable
Accounts receivable is presented net of allowance for doubtful accounts. The
allowance for doubtful accounts reflects estimates of probable losses in
accounts receivable. The allowance is determined based on balances outstanding
for over 90 days at the period end date, historical experience and other current
information.
Loans receivable
Loans receivable is presented net of an allowance for loan losses, as necessary.
The loans are written off when collectibility becomes uncertain.
Inventory
The Company maintainsWe maintain 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).
F-8
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.
At August 31, 2006,2007, inventory consisted of the following:
Biomass (Scallops): $1,252,051$1,827,513
Reclassification
Certain amounts in the 20052006 financial statements have been reclassified to
conform to the 20062007 financial statement presentation.
Long term investments
Long term investments are recorded at cost. The Company reviews itsWe review our investments
periodically to assess whether there is an "other than temporary" decline in the
carrying value of the investment. The Company considersWe consider whether there is an absence of an
ability to recover the carrying value of the investment by reference to
projected undiscounted future cash flows for the investment. If the projected
undiscounted future cash flow is less than the carrying amount of the asset, the
asset is deemed impaired. The amount of the impairment is measured as the
difference between the carrying value and the fair value of the asset.
F-7
Property, plant, and equipment
Property plant, and equipment are recordedcarried at cost, less accumulated amortizationdepreciation.
Depreciation is included with general and are amortizedadministrative expenses in the
following manner basedaccompanying statement of operations and calculated by using the straight-line
method for financial reporting and accelerated methods for income tax purposes.
The recovery classifications for these assets are listed as follows:
Years
------------------
Headend Facility and Fiber Infrastructure 20
Manufacturing Equipment 3-7
Furniture and Fixtures 2-7
Office Equipment 5
Leasehold Improvements Life of lease
Property and Equipment 5
Vehicles 5
Expenditures for maintenance and repairs are charged against income as incurred
whereas major improvements are capitalized.
F-9
Change in Depreciation Method
Effective September 1, 2006, as a result of management's evaluation of
long-lived depreciable assets, we adopted the straight-line method of
depreciation for all property, plant and equipment. Under the new provisions of
SFAS No. 154 "Accounting Changes and Error Corrections, a replacement of APB
Opinion No. 20 and FASB Statement No. 3," which becomes effective as of
September 1, 2006, a change in depreciation method is treated as a change in
estimate. The effect of the change in depreciation method will be reflected on a
prospective basis beginning September 1, 2006, and prior period results will not
be restated. As the results of management's evaluation indicated the current
estimated useful lives:
Buildings 4% - 5%lives of our assets were appropriate, the depreciable lives of
property, plant and equipment will not be changed. We believe that the change
from the declining balance Seawater pipingdepreciation method to the straight-line method will
better reflect the pattern of consumption of the future benefits to be derived
from those assets being depreciated and tanks 6% declining balance
Boats 15% declining balance
Field equipment 20% declining balance
Office equipment 20% declining balance
Vehicles 30% declining balance
Computer equipment 30% declining balancewill provide a better matching of costs
and revenues over the assets' estimated useful lives.
Impairment of long-lived assets
The Company monitorsWe monitor the recoverability of long-lived assets, including property, plant
and equipment and intangible assets, based upon estimates using factors such as
expected future asset utilization, business climate, and undiscounted cash flows
resulting from the use of the related assets or to be realized on sale. The
Company'sOur
policy is to write down assets to the estimated net recoverable amount, in the
period in which it is determined likely that the carrying amount of the asset
will not be recoverable. At August 31, 20062007 no indication of impairment werewas
present.
Government assistance
Government assistance received by the Company,we receive, such as grants, subsidies, and tax credits, is
recorded as a recovery of the appropriate related expenditure in the period that
the assistance is received.
The Company hasWe have received government assistance in the form of loans, for which repayment
may not be required if the Company failswe fail to meet sufficient future revenue levels to repay
these loans based on a percentage of gross sales for certain products over a
defined period of time., Such assistance, if received, by the
Company is initially recorded as a
liability, until such time as all conditions for forgiveness are met, and is
then recognized as other income in that period.
Farm license costs
The CompanyWe must pay annual license costs in respect to government-granted tenures that
it holds, which give the Companygives us the right to use certain offshore ocean waters for the
purpose of aquaculture farming. Such license costs are recognized as an expense
when incurred.
Research and development costs
Development costs include costs of materials, wages, and reasonably attributable
indirect costs incurred by the Companyus which are directly attributable to the development
of hatchery techniques for sablefish and shellfish. These costs are expensed
when incurred.
F-8F-10
Research costs are expensed when incurred.
Income taxes
The Company calculates itsWe calculate our provision for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 (Accounting for Income Taxes) ("SFAS
109"), which requires an asset and liability approach to financial accounting
for income taxes. This approach recognizes the amount of taxes payable or
refundable for the current year, as well as deferred tax assets and liabilities
attributable to the future tax consequences of events recognized in the
financial statements and tax returns. Deferred income taxes are adjusted to
reflect the effects of enacted changes in tax laws or tax rates. Deferred income
tax assets are recorded in the financial statements if realization is considered
more likely than not.
Revenue recognition
The Company recognizesWe recognize revenue when it is realized or realizable, and earned. The Company considersWe consider
revenue realized or realizable and earned when it has persuasive evidence of a
contract, the product has been delivered or the services have been provided to
the customer, the sales price is fixed or determinable, and collectibility is
reasonably assured.
Revenue of the CompanyOur revenue is derived principally from the sale of scallops produced
by the Companywe produce or
purchasedpurchase from third parties, and from the sale of seed and farm supplies to
other aquaculture farms.
Cost of goods
Cost of goods sold consists primarily of farming, harvesting and processing
costs associated with the growth, transfer and sales preparation of our products
(principally scallops). These costs consist primarily of salaries and benefits
and allocated overhead costs for consulting and support personnel engaged in the
farming, harvesting and processing of our products. All costs are recognized at
time of delivery. Financial instruments
The carrying amount of the Company'sour financial instruments, which includeincludes cash, accounts
receivable, loans receivable, bank indebtedness, accounts payable and accrued
liabilities, short term debt, shareholder debt, and long term debt, approximate
fair value. It is management's opinion that the Company iswe are not exposed to significant
interest, currency or credit risk arising from these financial instruments
unless otherwise noted.
Derivative Financial Instruments
In connection with the sale of debt or equity instruments, we may sell options
or warrants to purchase our common stock. In certain circumstances, these
options or warrants may be classified as derivative liabilities, rather than as
equity. Additionally, the debt or equity instruments may contain embedded
derivative instruments, such as embedded derivative features, which in certain
circumstances may be required to be bifurcated from the associated host
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instrument and accounted for separately as a derivative instrument liability.
The Company accountsWe account for all derivatives financial instruments in accordance with SFAS No.
133. Derivative financial instruments are recorded as liabilities in the
consolidated balance sheet, measured at fair value. When available, quoted
market prices are used in determining fair value. However, if quoted market
prices are not available, the Company estimateswe estimate fair value using either quoted market
prices of financial instruments with similar characteristics or other valuation
techniques.
The identification of, and accounting for, derivative instruments is complex.
Our derivative instrument liabilities are re-valued at the end of each reporting
F-9
period, with changes in the fair value of the derivative liability recorded as
charges or credits to income, in the period in which the changes occur. For
options, warrants and bifurcated embedded derivative features that are accounted
for as derivative instrument liabilities, we estimate fair value using either
quoted market prices of financial instruments with similar characteristics or
other valuation techniques. The valuation techniques require assumptions related
to the remaining term of the instruments and risk-free rates of return, our
current common stock price and expected dividend yield, and the expected
volatility of our common stock price over the life of the option. The
identification of, and accounting for, derivative instruments and the
assumptions used to value them can significantly affect our financial
statements.
Derivative financial instruments that are not designated as hedges or that do
not meet the criteria for hedge accounting under SFAS No. 133 are recorded at
fair value, with gains or losses reported currently in earnings. All derivative
financial instruments we held by the Company as of August 31, 20062007, were not designated as
hedges.
Foreign exchange
The functional currency of the Company'sour foreign subsidiary is the local foreign currency
(Canadian dollars). All assets and liabilities denominated in foreign currencies
are translated into U.S. dollars at the exchange rate prevailing on the balance
sheet date. Revenues, costs and expenses are translated at average rates of
exchange prevailing during the period. Translation adjustments resulting from
translation of the subsidiaries' accounts are accumulated as a separate
component of shareholders' equity. Gains and losses resulting from foreign
currency transactions are included in the consolidated statements of operations
and have not been significant.
Use of estimates
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues,
expenses and disclosure of contingent assets and liabilities. Such estimates
include providing for amortization of property, plant, and equipment, and
valuation of inventory. Actual results could differ from these estimates.
Concentration of risk
The Company operatesWe operate in the regulated aquaculture industry. Material changes in this
industry or the applicable regulations could have a significant impact on the Company.our
business.
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The quality and quantity of the aquaculture products cultivated, harvestedwe cultivate, harvest and
processed by the Companyprocess could be impacted by biological and environmental risks such as
contamination, parasites, predators, disease and pollution. These factors could
severely restrict theour ability of the Company to successfully market itsour products.
During the year ended August 31, 2006, three2007, four customers, Summer Breeze,Sea World Fisheries,
TriStar Seafood Supply Ltd., Port Hardy Seafood Ltd. and Sea World,Lobsterman,
individually accounted for 30%17%, 15%13%, 12% and 13%12% or our revenues respectively,
and we therefore are materially dependent upon such customers. The
Company'sOur ongoing
operations are dependent on continued business from these customers.
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Location risk
Most, if not all, of our aquaculture are concentrated in one growing region off
the coast of Vancouver Island, British Columbia. As such, if there were a major
environmental disaster, our ongoing operations could be materially impacted.
Stock-based compensation
The Company accountsWe account for stock-based employee compensation arrangements using the intrinsicfair
value method in accordance with the provisions of Accounting
Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to
Employees," and complies with the disclosure provisions of SFAS No. 123
"Accounting for Stock-Based Compensation," as amended by SFAS No. 148. Under APB
Opinion No. 25, compensation cost is generally recognized based on the
difference, if any, on the date of grant between the fair value of the Company's
common stock and the amount an employee must pay to acquire the stock.
The Company periodically issues common stock for acquisitions and services
rendered. Common stock issued is valued at the estimated fair market value, as
determined by management and the board of directors of the Company. Management
and the board of directors consider market price quotations, recent stock
offering prices and other factors in determining fair market value for purposes
of valuing the common stock.
The following table illustrated the effect on net income and earnings per share
if Edgewater had applied the fair value recognition provisions of FASB Statement
No. 123, Accounting for Stock-Based Compensation, to stock-based employee
compensation.
Year Ended
August 31,
2006 2005
----------------------------
Net loss, as reported $ (4,200,277) $(350,076)
Add: Stock based intrinsic value included
in report loss -- --
Less: Total stock-based employee compensation
expense determined under the fair value based
method for all awards -- (370,565)
---------------------------
Pro-forma net loss $ (4,200,277) $(720,641)
---------------------------
Basis and diluted net loss per share
As reported $ (0.20) $ (0.03)
Pro-forma $ (0.20) $ (0.03)
The fair value of each option granted is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions: dividend yield $0, expected volatility of 93%, average risk-free
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interest rate of 4.15%, and expected lives of 10 and 5 years (for 2006) and
dividend yield $0, expected volatility of 100%, average risk-free interest rate
of 4.70% and 4.71%, and expected lives of 10 and 5 years (for 2005).
Basic and diluted net loss per share
Basic income or loss per share includes no dilution and is computed by dividing
net income or loss by the weighted-average number of common shares outstanding
for the period. Diluted income or loss per share includes the potential dilution
that could occur if securities or other contracts to issue common stock were
exercised or converted into common stock. For all periods presented, diluted
loss per share equaled the basic loss per share as all convertible instruments
were anti-dilutive.
Recent accounting pronouncements
In December of 2004, the FASB issued Statement of
Financial Accounting Standards No, 123 (revised 2004) (Share-Based Payment)
("SFAS 123R"). SFAS 123R is a revision of SFAS 123 (Accounting for Stock-Based
Compensation), and supersedes Accounting Principles Beard ("APB") Opinion No. 25
(Accounting for Stock Issued to Employees). SFAS 123R requires that the fair
value of employees awards issued, modified, repurchased or cancelled after
implementation, under share-based payment arrangements, be measured as of the
date the award is issued, modified, repurchased or cancelled. The resulting cost
is then recognized in the statement of earnings over the service period.
SFAS 123RWe periodically issue common stock for acquisitions and services rendered.
Common stock issued is required to be adoptedvalued at the estimated fair market value, as determined
by our management and board of directors. Management and the board of directors
consider market price quotations, recent stock offering prices and other factors
in determining fair market value for purposes of valuing the common stock. The
fair value of each option granted is estimated on the date of grant using the
Black-Scholes option-pricing model with the various weighted average
assumptions, including dividend yield, expected volatility, average risk-free
interest rate and expected lives
Basic and diluted net loss per share
Basic income or loss per share includes no dilution and is computed by dividing
net income or loss by the Company not later thanweighted-average number of common shares outstanding
for the period. Diluted income or loss per share includes the potential dilution
that could occur if securities or other contracts to issue common stock were
exercised or converted into common stock (using the treasury stock method for
stock options and using the if-converted method for convertible notes), if
dilutive.
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The following is a reconciliation of the numerators and denominators of the
basic and diluted net income per share computations (in thousands, except per
share data):
Year ending August 31,
2007
Numerator:
Net income $ 3,358,558
Denominator: --
Denominator for basic net income per share: 22,228,633
Weighted average dilutive potential common shares
Series A Preferred Stock 7,752,699
Series B Preferred Stock 1,114,574
Options and warrants 1,177,982
----------
Denominator for diluted net income per share 32,273,888
==========
Basic net income per share $0.16
Diluted net income per share $0.11
The computation of diluted net income per share for the fiscal year.
Inyear ended August
31, 2007, excludes the opinionimpact of Management,options to purchase 2.86 million shares of
common stock and warrants to purchase 24.04 shares of common stock,
respectively, as such an impact would be anti-dilutive. The treasury stock
effect of options and warrants to purchase shares of common stock outstanding at
August 31, 2006 has not been included in the calculation of the net loss per
share as such effect would have been anti-dilutive. As a result of these items,
the basic and diluted loss per share for the year ending August 31, 2006 are
presented are identical.
Recent accounting pronouncements
During September 2006, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 108 ("SAB 108"), Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial
Statement. This SAB provides guidance on how the effects of the carryover or
reversal of prior year misstatements should be considered in quantifying a
current year misstatement. This interpretation is effective for the first fiscal
year ending after November 15, 2006. We do not expect the adoption of this
statement will notinterpretation to have a
significantan impact on the Company's consolidatedour financial statements.position or results of
operations.
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In December of 2004,2006, the FASB issued Statement of Financial Accounting Standards
No. 153 (Exchanges of Nonmonetary Assets - An Amendment of APB Opinion No. 29,FASB Staff Position EITF 00-19-2, Accounting
for Nonmonetary transactions)Registration Payment Arrangements ("SFAS 153"FSP EITF 00-19-2"). SFAS 153 eliminates the
exception from fair value measurement for nonmonetary exchanges of similar
productive assets in paragraph 21(b) of APB Opinion No. 29 and replaces it with
an exception for exchanges that do not have commercial substance, SFAS 153FSP EITF 00-19-2
specifies that the contingent obligation to make future payments or otherwise
transfer consideration under a nonmonetary exchange has commercial substanceregistration payment arrangement, whether issued
as a separate agreement or included as a provision of a financial instrument or
other agreement, should be separately recognized and measured in accordance with
FASB Statement No. 5, Accounting for Contingencies. A registration payment
arrangement is defined in FSP EITF 00-19-2 as an arrangement with both of the
following characteristics: (1) the arrangement specifies that the issuer will
endeavor (a) to file a registration statement for the resale of specified
financial instruments and/or for the resale of equity shares that are issuable
upon exercise or conversion of specified financial instruments and for that
registration statement to be declared effective by the US SEC within a specified
grace period, and/or (b) to maintain the effectiveness of the registration
statement for a specified period of time (or in perpetuity); and (2) the
arrangement requires the issuer to transfer consideration to the counterparty if
the future
cash flowsregistration statement for the resale of the entity are expectedfinancial instrument or
instruments subject to change significantly as a resultthe arrangement is not declared effective or if
effectiveness of the exchange. SFAS 153registration statement is not maintained. FSP EITF 00-19-2
is effective for fiscal periods beginning after June 15,
2005,registration payment arrangements and the financial instruments
subject to those arrangements that are entered into or modified subsequent to
December 21, 2006. For registration payment arrangements and financial
instruments subject to those arrangements that were entered into prior to the
issuance of FSP EITF 00-19-2, this guidance is required to be adopted by the Company in the second quarter of the
2006 fiscal year. We do not currently believe that the adoption of SFAS No. 153
will have a material impact on its consolidated financial statements.
In May 2005, SFAS No. 154, "Accounting Changes and Error Corrections" (a
replacement of APB Opinion No. 20 and SFAS No. 3) was issued. Statement 154
requires that all voluntary changes in accounting principles and changes
required by a new accounting pronouncement that do not include specific
transition provisions be applied retrospectively to prior periods'effective for financial
statements unless it is impracticable to do so. APB Opinion 20 required that
most voluntary changes in accounting principle be recognized by including the
cumulative effect of changing to the new accounting principle as a component of
net income in the period of change. Statement 154 is effective prospectivelyissued for
accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005, with earlier application encouraged. Earlier
application is permitted for accounting changes2006, and
corrections of errors made
ininterim periods within those fiscal years beginning after the date the Statement was issued (May 2005).
SFAS 154 does not change the transition provisions of any existing accounting
pronouncements, including those that are in a transition phase as of the
effective date of the Statement. Accordingly, the Company will implement the
provisions of this accounting pronouncement in the fiscal reporting period
ending August 31, 2007.years. We do not currently believe thatexpect the adoption of SFAS
145 No. 154 willFSP
EITF 00-19-2 to have a material impact on our consolidated financial statements.
In June 2006,February 2007, the FASB issued FASB InterpretationSFAS No. 48, Accounting159, The Fair Value Option for
Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109Financial Assets and Financial Liabilities ("FIN
48"SFAS 159"). FIN 48 clarifies the accounting for uncertainty in income taxes recognized
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in a company's which permits entities
to choose to measure many financial statementsinstruments and prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of
a tax position expectedcertain other items at fair
value that are not currently required to be taken in a tax return. The Interpretation also
provides guidance on de-recognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. FIN 48 ismeasured at fair value. SFAS 159
will be effective for fiscal years beginning after December 15, 2006. Currently, there would be no
effectus on September 1, 2008. We are currently evaluating the
impact of this interpretationadopting SFAS 159 on the company'sour financial position, cash flows, and results
of operations.
Management has evaluated other recent accounting pronouncements and do not
believe that the adoption of these would have a material impact on our
consolidated financial statements.
NOTE 3. PROPERTY, PLANT AND EQUIPMENT
Property, Plantplant and Equipmentequipment at August 31, 20062007 consisted of the following:
Accumulated Net Book
Cost Amortization Value
-----------------------------------------------------------------------------
Land $ 227,355237,534 $ -- $ 227,355237,534
Buildings 451,445 230,302 221,143953,896 (256,913) 696,983
Seawater piping and tanks 473,376 268,965 204,411630,877 (308,509) 322,368
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Boats and Barge 286,489 118,063 168,426barge 398,551 (151,355) 247,196
Field equipment 1,701,247 716,419 984,8282,425,922 (1,012,682) 1,413,240
Office equipment 13,673 12,373 1,30019,556 (14,044) 5,512
Vehicles 38,168 33,283 4,88566,466 (39,778) 26,688
Computer equipment 17,149 5,103 12,046
------------------------------------
$3,208,902 $1,384,508 $1,824,394
Accumulated amortization was $1,384,508 year28,021 (14,308) 13,713
----------- ----------- -----------
$ 4,760,823 $(1,797,589) $ 2,963,234
=========== =========== ===========
Depreciation expense for the years ended August 31, 2006. Depreciation
expenses are $123,0002007 and $10,195 for the year ended August 31, 2006 was
approximately $351,000 and 2005123,000, respectively.
NOTE 4. RELATED PARTY TRANSACTIONS
The Company has twoWe have eight secured notes receivable from RKS Laboratories, Inc.
("RKS"), 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.) The first
seven non-interest bearing notes in the combined amount of $73,701 are secured
by all assets of RKS were originally due on or before various dates between June
15, 2007 and May 31, 2008, but were recently extended to August 31, 2008. The
eighth non-interest bearing note in the amount of $18,044 is secured by all assets of RKS is due on
or before June 15, 2007. The second non-interest bearing note in the amount of
$4,971$8,559 is also secured by all
assets of RKS is due on or before August 31, 2007.2008. These amounts are included in
other current assets.
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assets as loans receivable.
NOTE 5. INVESTMENTS IN TENURES
The Company carries itsWe carry our Investment in Tenures at $3,609$3,770 at August 31, 2006.2007. This amount
representrepresents the carrying costs of certain shellfish tenures acquired by theIsland
Scallops' subsidiary, of the Company's wholly-owned subsidiary Island Scallops Ltd., 377332 B.C. Ltd. Shellfish tenures are government-granted
rights allowing limited use of offshore waters for the purposes of cultivation
of shellfish. The granting of shellfish tenure rights are the responsibility of
the Provincial (British Columbia) Government and not the Canadian Federal
Government. As such, the government assistance that we receive via loan
agreement with various Federal Agencies has no effect on our ability to renew
and/or modify these tenure agreements. The tenure held by 377332 B.C. Ltd. has
an expiration date of July 10, 2021. Other shellfish tenures held by the Companyus and itsour
subsidiaries have expiration dates ranging from 2021 to 2024.
These tenures are considered to have an indefinite useful life because renewal
on expiration is anticipated, and therefore are not subject to amortization.
NOTE 6. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Included in accounts payable and accrued liabilities are balances outstanding
related to credit cards held in the name of the shareholderone of our shareholders totaling
$13,325$25,578 at August 31, 2006. The Company2007. We used these credit cards as a means of short term
financing and incursincur interest charges on such unpaid balances.
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Included in accounts payable and accrued liabilities at August 31, 20062007, is an
amount of $118,963$124,290 in respect to an agreement to purchase geoduck seed from the
Companyus
(for additional information see Note 1013 - Contingent Liabilities).
Included in accounts payable and accrued liabilities at August 31, 20062007 is an
amount of $59,856$87,869 payments due and interest accrued in respect to the loan from
the National Research Council of Canada Industrial Research Assistance Program
(see Note 8 - Long Term Debt for additional information).
NOTE 7. SHORT TERM DEBT
These consolidated financial statements include Island Scallop's mortgage loan
repayable at $2,030 per month including interest calculated at the greater of
10% and (Canadian) prime plus 6% (12% as of August 31, 2006). The loan, which is
due on April 1, 2007, is secured by a second charge on the real property of
Island Scallops. At August 31, 2006, the principal due is $192,690.
These consolidated financial statements include a non-interest bearing loan to
Island Scallops from Industry Science and Technology Canada requiring repayment
equal to 0.5% of gross scallop sales of the Company's wholly owned subsidiary
(Island Scallops) for each preceding year, which is due January 1, 2007. If at
the due date the Company has not generated sufficient revenues to be required to
repay the original amount of $164,254, the remaining portion of the loan is to
be forgiven. Amounts currently due bear interest based on the published rates of
90 day (Canadian) treasury bills.
Included in short-term debt at August 31, 20062007, is estimated royalties of
$60,045$62,734 payable to a third party from whowhom the former sole shareholder of Island
Scallops Ltd. originally acquired the shares of Island Scallops Ltd.Scallops. The 1992 share
purchase agreement (for Island Scallops) provided that the third party was to
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receive from the Company 3% of revenues of the Companyfrom Island Scallops as earned, on a quarterly basis,
throughout the period from December 1, 1992 to November 30, 2002. The third
party holds a first charge (or first lien) over our inventory of the Company (including
broodstock) in the amount of $315,770$326,909 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 $60,045$62,734 as a current
liability and we plan to pay it with available funds in the near future.
Included in short-term notes payable at August 31, 20062007, is an unsecured
non-interest bearing demand loan from an individual with a face value of $45,260$47,287
and no specific terms of repayment. However, the lender has informally requested
that the loan be repaid in full by October 6, 2008.
Included in short-term debt is an unsecured bank loan repayable at $490 per
month plus interest calculated at (Canadian) prime plus 3% per annum (9.25% as
of August 31, 2007), and is due October 23, 2007. At August 31, 2007, the
principal due is $779.
These consolidated financial statements formerly included a non-interest bearing
loan to Island Scallops from Industry Science and Technology Canada requiring
repayment equal to 0.5% of Island Scallops' gross scallop sales for each
preceding year. Per the terms of the loan, if we were unable to generate
sufficient revenues to repay the original amount of the loan by January 1, 2007,
the remaining balance would be forgiven. As such, the remaining balance of
approximately $159,000 was forgiven on January 1, 2007.
NOTE 8. LONG TERM DEBT
These consolidated financial statements include a Western Diversification
Program non-interest bearing loan to Island Scallops that requires repayment
equal to 12% of gross revenues from our scallop sales, of the Company, payable semi-annually,
with no specified due date. In September 2006, we entered into a Settlement
Agreement with the Minister of Western Economic Diversification to amend the
repayment terms of our non-interest bearing loan of $597,103 (to Island
Scallops) with the Western Diversification Program. We agreed to repay the
$170,981 due as of August 31, 2006, in accordance with a payment schedule
beginning with a payment of $62,736 in September 2006 and continuing with
monthly payments of roughly $9,840 until August 15, 2007. The parties agreed
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that the remaining balance of the $426,122 shall be repaid via quarterly
payments equal to the greater of $30,856 or 4% of the gross scallop sales
starting in the quarter beginning on June 1, 2007 and each quarter thereafter
until the balance is repaid. Under the terms of this agreement, the first
quarter payment was due on September 30, 2007. At August 31, 2006 as Island Scallops2007, the balance
due is $422,613, of which $131,963 is reflected in arrears in respect to the paymentcurrent portion of these amounts,long
term debt and the full principalremaining balance of $611,055$290,650 is reflected as a current liability. Our management of the
Company is seeking to renegotiate terms of repayment of this debt (for
additional information see Note 15 - Subsequent Events).long term debt.
These consolidated financial statements include the Company's wholly owned
subsidiary's (Island Scallops)Island Scallops' unsecured
non-interest bearing 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 black
cod revenues of the Island Scallops until
the earlier of full repayment or December 1, 2012. The amount repayable is up to
150% of the original advance of $397,532,$418,212, if repayment is before December 1,
2007. 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, 2006,2007, bear interest
at a rate of 1% per month. At August 31, 2006,2007, 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 $59,856$87,869 that
they claim is owed under this loan agreement. As such, at August 31, 2006, $59,8562007,
$87,869 is included in accounts payable and accrued liabilities and the
remaining full principal balance of $337,676$330,343 is reflected as ain the current liability. The Company isportion
of long term debt. We are seeking to renegotiate the repayment terms.
These consolidated financial statements include two bank loans for Island Scallops. The first bankScallop's mortgage loan is
repayable at $1,128$2,062 per month plus(currently interest only) calculated at the floating base rate of the Business Development Bank of Canada
plus 1.5% annum (7.5% as of August 31, 2006), is due February 23, 2009, and10.5%. The
loan is secured by a General Security Agreement over the assets of the Company's wholly
owned subsidiary (Island Scallops), a mortgagesecond charge on Island Scallop'sthe real property and a personal guarantee of $45,110 by our Chairman, President and CEO,
and former sole shareholder of Island Scallops. At
August 31, 2006,2007, the principal due is $33,833. The second bank loan is repayable at $470$235,649.
NOTE 9. SERIES B PREFERRED STOCK FINANCING
We completed a private equity financing of $2,070,000 on January 16, 2007, with
two accredited investors. Net proceeds from the offering are approximately
$1,864,500. We issued 207 shares of our Series B Preferred Stock, par value
$0.001 per month
plus interest calculated at (Canadian) prime plus 3%share and stated value of $10,000 per annum (9% asshare and each investor also
received one of August
31, 2006), is unsecured and is due October 23, 2007. At August 31, 2006, the
principal due is $6,384.
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As a result, at August 31, 2006, the Company had $988,949 of long-term debt less
a current portion of $948,732 for a balance of $40,217. Principal payments due
within each of the next five fiscalfollowing warrants: (i) Series A Warrant, (ii)
Series B Warrant, (iii) Series C Warrant, (iv) Series J Warrant, (v) Series D
Warrant, (vi) Series E Warrant, and (vii) Series F Warrant, each to purchase a
number of shares of common stock equal to fifty percent (50%) of the number of
shares of common stock issuable upon conversion of the purchaser's preferred
stock, except for the Series J Warrants, which shall entitle the investor to
purchase a number of shares of our common stock equal to one hundred percent
(100%) of the number of shares of common stock issuable upon conversion of the
purchaser's preferred stock. Each of the Warrants has a term of 6 years, except
for the Series J Warrants, which have a term of 1 year. Each share of the
preferred stock is convertible into a number of fully paid and subsequently,nonassessable
shares of our common stock equal to the quotient of the liquidation preference
amount per share ($10,000) divided by the conversion price, which initially is
$1.15 per share, subject to certain adjustments, or approximately 8,696 shares
of common for each share of converted preferred stock. We issued a total of
7,200,345 Warrants.
In connection with this financing, we paid cash compensation to a placement
consultant in respectthe amount of $165,600 and issued him placement consultant
warrants, exercisable for a period of three years from the date of issue. The
F-18
placement consultant's warrants allow him to long
term debtpurchase up to (i) 20 shares of
Series B Preferred Stock, and each of the following warrants, which are
approximatelyidentical to the warrants issued to the investors of the financing: (i) Series A
Warrant, (ii) Series B Warrant, (iii) Series C Warrant, (iv) Series D Warrant,
(v) Series J Warrant, (vi) Series E Warrant, and (vii) Series F Warrant, each to
purchase 90,004 shares of common stock, except for the Series J Warrants, which
shall entitle the Consultant to purchase 180,008 shares of common stock. The
placement consultant warrant is exercisable at a price of $1.15, for a period of
three years. The fees were recorded as follows:a cost of capital.
The net proceeds from the January 16, 2007 $948,732
2008 $6,384
2009 $33,833
-------------------
$988,949
===================financing are to be used for capital
expenditures necessary to expand our operations into clam farming in Morocco
(approximately $1.0 million and any remaining proceeds may be used for working
capital and general corporate purposes). We are currently conducting due
diligence on a North African based aquaculture company that farms shellfish
products in Morocco and pending the successful completion of such inquiry, may
acquire a majority ownership interest in the company. At the date of this
filing, we have not entered into any binding agreements for the purchase of such
company and may or may not do so depending on the results of our due diligence
investigation.
NOTE 9.10. SERIES A PREFERRED STOCK WARRANT LIABILITIES
The warrants that each investor received as a result of our April 12, May 30,
June 30 and July 11 Preferred Stock Financing (see Note 13 - Preferred Stock
Financing for additional details) contained a cashless exercise
provision that becomes effective one year after the original issuance date of
such warrants if our registration statement (that we are required to file under
the Series A Preferred Stock Financing's corresponding registration rights
agreement) is not declaredthen in effect by the date such registration statement was
required to be effective one-year
afterpursuant to the initial issue dateRegistration Rights Agreement of each warrant.the
Preferred Stock Financing or not effective at any time during the Effectiveness
Period (as defined in the Registration Rights Agreement) in accordance with the
terms of the Registration Rights Agreement. As such and in accordance with the
accounting guidelines under SFAS No. 133, we valued the warrants as a derivative
financial instrument and the corresponding liabilities were entered onto our
consolidated balance sheet, measured at fair value. The CompanyWe determined the fair value
of the warrants as follows as of April 12, 2006, May 30, 2006, June 30, 2006 and
July 11, 2006 (the issuance date):
The Companydates).
We used the Black Scholes option-pricing model with the following assumptions:
an expected life equal to the contractual term of the warrants (one, three or
five), underlying stock price of $1.10 (at April 12), $1.40 (at May 30), $1.35
(at June 30) and $1.40 (July 11) no dividends; a risk free rate of 4.91%, 4.90%
and 4.91%, which equals the one, three and five-year yield on Treasury bonds at
constant (or fixed) maturity (for those warrants issued on April 12), a risk
free rate of 4.99%, which equals three and five-year yield on Treasury bonds at
constant (or fixed) maturity (for those warrants issued on May 30), a risk free
rate of 4.71% and 4.70%, which equals the three and five-year yield on Treasury
bonds at constant (or fixed) maturity (for those warrants issued on June 30) and
a risk free rate of 4.71% and 4.70%, which equals the three and five-year yield
on Treasury bonds at constant (or fixed) maturity (for those warrants issued on
July 11); and volatility of 93%. Under the assumptions, the Black-Scholes option
pricing model yielded an aggregate value of approximately $19,494,000 with a current portion of approximately $1,225,000.
The Company$19,494,000. We
performed the same calculations as of August 31, 2006, to revalue the warrants
as of that date. In using the Black Scholes option-pricing model, the Companywe used an
underlying stock price of $1.40 per share; no dividends; a risk free rate of
5.00%5.01%, 4.71% and 5.70%4.70%, which equals the one, three and five-year yield on
F-19
Treasury bonds at constant (or fixed); and maturity volatility of 97%93%. The
resulting aggregate allocated value of the warrants as of August 31, 2006
equaled approximately $22,160,000. The change in fair value of approximately
$2,666,000 (with a current portion of roughly $519,000) was recorded for the period ended August 31, 2006.
We performed the same calculations as of November 30, 2006, to revalue the
warrants as of that date. In using the Black Scholes option-pricing model, we
used an underlying stock price of $1.50 per share; no dividends; a risk free
rate of 4.94%, 4.52% and 4.45%, which equals the one, three and five-year yield
on Treasury bonds at constant (or fixed); and maturity volatility of 100%. The
resulting aggregate allocated value of the warrants as of November 30, 2006
equaled approximately $24,928,000. The change in fair value of approximately
$2,768,000 was recorded for the period ended November 30, 2006.
We performed the same calculations as of February 21, 2007 (date of
reclassification of warrant liability, see Note 12 for additional information),
to revalue the warrants as of that date. In using the Black Scholes
option-pricing model, we used an underlying stock price of $1.15 per share; no
dividends; a risk free rate of 5.05%, 4.74% and 4.68%, which equals the one,
three and five-year yield on Treasury bonds at constant (or fixed); and maturity
volatility of 96%. The resulting aggregate allocated value of the warrants as of
February 21, 2007, equaled approximately $17,365,000. The change in fair value
(gain) of approximately $7,563,000 was recorded for the period ended February
21, 2007.
Upon the earlier of the warrant exercise or the expiration date, the warrant
liability will be reclassified into shareholders' equity. Until that time, the
warrant liability will be recorded at fair value based on the methodology
described above. Liquidated damages under the registration rights agreement will
be expensed as incurred and will be included in operating expenses.
F-16NOTE 11. SERIES B PREFERRED STOCK WARRANT LIABILITIES
The warrants that each investor received as a result of our January 16, 2007
Series B Preferred Stock Financing contained a cashless exercise provision that
becomes effective one year after the original issuance date of such warrants if
our registration statement (that we are required to file under the Series B
Preferred Stock Financing's corresponding registration rights agreement) is not
then in effect by the required date or not effective at any time during the
Effectiveness Period (as defined in the Registration Rights Agreement). As such
and in accordance with the accounting guidelines under SFAS No. 133, we valued
the warrants as a derivative financial instrument and the corresponding
liabilities were entered onto our consolidated balance sheet, measured at fair
value. We determined the fair value of the warrants as follows as of January 16,
2007 (the issuance date):
We used the Black Scholes option-pricing model with the following assumptions:
an expected life equal to the contractual term of the warrants (one, three or
six), underlying stock price of $1.40 (at January 16), no dividends; a risk free
rate of 5.06%, 4.79% and 4.74%, which equals the one, three and six-year yield
on Treasury bonds at constant (or fixed) maturity and volatility of 93%. Under
the assumptions, the Black-Scholes option-pricing model yielded an aggregate
value of approximately $4,117,000.
We performed the same calculations as of February 2, 2007 (date of
reclassification of warrant liability, see Note 12 for additional information),
to revalue the warrants as of that date. In using the Black Scholes
option-pricing model, we used an underlying stock price of $1.15 per share; no
dividends; a risk free rate of 5.05%, 4.74% and 4.68%, which equals the one,
F-20
three and six-year yield on Treasury bonds at constant (or fixed); and maturity
volatility of 96%. The resulting aggregate allocated value of the warrants as of
February 21, 2007, equaled approximately $3,085,000. The change in fair value
(gain) of approximately $1,033,000 was recorded for the period ended February
21, 2007.
Upon the earlier of the warrant exercise or the expiration date, the warrant
liability will be reclassified into shareholders' equity. Until that time, the
warrant liability will be recorded at fair value based on the methodology
described above. Liquidated damages under the registration rights agreement will
be expensed as incurred and will be included in operating expenses.
NOTE 10.12. RECLASSIFICATION OF WARRANT LIABILITIES ASSOCIATED WITH SERIES A AND
SERIES B PREFERRED FINANCINGS
The warrants that each investor received as a result of our April 12, May 30,
June 30 and July 11, 2006, Series A Preferred Stock Financing and our January
16, 2007 Series B Preferred Stock Financing contained a cashless exercise
provision that becomes effective one year after the original issuance date of
such warrants if our registration statements (that we are required to file under
the registration rights agreement for both financings) are not then in effect by
the date such registration statement was required to be effective pursuant to
the each Registration Rights Agreement of the Preferred Stock Financings or not
effective at any time during the Effectiveness Period (as defined in each of the
Registration Rights Agreements) in accordance with the terms of each of the
Registration Rights Agreement. As such and in accordance with the accounting
guidelines under SFAS No. 133 and ETIF Issue No. 00-19 (Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in a,
Company's Own Stock), we classified the warrants as a liability because the
cashless exercise provision did not specify whether the contract could be
settled via the delivery of unregistered shares of our common stock. As such and
per the terms of paragraph 14 of ETIF 00-19 (see below), we assumed net-cash
settlement and the warrants were classified as a derivative financial instrument
and the corresponding liabilities were entered onto our consolidated balance
sheet, measured at fair value. We determined the fair value of the warrants as
follows as of April 12, 2006, May 30, 2006, June 30, 2006, July 11, 2006 and
January 16, 2007 (the issuance dates) and we preformed the same calculation as
of May 31, August 31, November 30 and February 28 to revalue the warrants at the
end of each period (as described above in Notes 9 and 10). The change in fair
value was then recorded for each period.
On February 21, 2007, the cashless exercise provision for all warrants issued in
conjunction with both the Series A and Series B Preferred Stock financings was
modified to clarify that any shares issued in connection with the cashless
exercise will be "restricted." As a result, we determined that (per the
accounting guidelines under SFAS No. 133 and ETIF Issue No. 00-19) we are now
able to net-share settle the contract by delivery of unregistered shares and
that the warrant liability should be reclassified as permanent equity.
The initial fair value of the Series A warrant liability was determined to be
approximately $19,494,000 (with a current portion of approximately $1,225,000).
Since this value exceeded our additional paid in capital ("APIC") balance,
approximately $9,021,000 of the liability was allocated to APIC and the
remaining $10,472,000 was allocated to retained deficit. We made this decision
because the changes in the fair value of the warrants are marked through our
profit and loss.
F-21
The initial fair value of the Series B warrant liability was determined to be
approximately $4,117,000 (with a current portion of approximately $1,058,000).
Since this value exceeded our additional paid in capital ("APIC"), approximately
$2,099,000 of the liability was allocated to APIC and the remaining $2,018,000
was allocated to retained deficit. We made this decision because the changes in
the fair value of the warrants are marked through our profit and loss.
As described above, a portion of the fair value of the warrant liability was
allocated to APIC and the remaining balance was allocated to retained deficit.
Subsequent changes in the fair value of the warrants (at May 31, August 28,
November 30, and February 21) were marked through our profit and loss. Since the
terms of the cashless provision have been clarified and the warrants were
reclassified as equity, we reversed the liabilities and allocated approximately
$20,450,000 to APIC ($17,365,000 from the Series A financing warrants and
$3,085,000 from the Series B financing warrants).
NOTE 13. CONTINGENT LIABILITIES
The Company'sOur wholly owned subsidiary, Island Scallops, entered into an Agreementagreement in the 1998 year
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 the 2002 year of approximately $64,140 and recognized related
revenue of $43,705 in respect to seed delivered in the 2002 year. The balance of
the deposits received (advance payments), net of sales, totaling $118,963,$124,290, is
included in accounts payable and accrued liabilities.
Management's position is that the two parties violated the terms of the
agreement such that the Company isand we are therefore entitled to retain the balance of the deposits.
Per the terms of the original agreement, Island ScallopScallops 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.year.
As of August 31, 2004, one of the two parties had made claims that the CompanyIsland Scallops
owed to it amountsan 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 ScallopScallops 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 $34,708.$36,332.
Any additional liability to the Company,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 the Companywe nor itsour wholly owned subsidiary maintain insurance in
respect tocovering the
replacement of itsour inventory. Consequently, the Company iswe are exposed to financial losses
or failure as a result of this risk.
NOTE 11.14. INCOME TAXES
The CompanyWe did not provide any current or deferred United States federal, state or
foreign income tax provision or benefit for the period presented because it
haswe have
experienced operation losses since inception. The Company hasWe have provided a full valuation
F-22
allowance on the deferred tax asset, consisting primarily of unclaimed research
and development expenditures, because of uncertainty regarding the Company'sour ability to
realize the benefit.
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the net deferred taxes at August 31, 20062007 are as follows:
August 31,
20062007
---------------
Deferred tax asset attributable to:
Net operating loss carryover $ 884,2191,967,312
Less, valuation allowance (884,219)(1,967,312)
---------------
Total net deferred tax asset $ -
===============
F-17
Edgewater followsWe follow Statement of Financial Accounting Standards Number 109 (SFAS 109),
"Accounting for Income Taxes." SFAS No. 109 requires a valuation allowance, if
any, to reduce the deferred tax assets reported if, based on the weight of the
evidence, it is more likely than not that some portion or all of the deferred
tax assets will not be realized. Management has determined that a valuation
allowance of $884,219approximately $2,416,000 at August 31, 20062007 is necessary to reduce
the deferred tax assets to the amount that will more than likely than not be
realized. The change in valuation allowance for 2007 and 2006 was approximately
$438,661.$1,083,000 and $439,000 respectively.
At August 31, 2006 Edgewater2007, we had net operating loss carryforwards amounting to
approximately $524,000$2,491,000 for U.S. and Canadian tax purposes, respectively, that
expires in various amounts beginning in 2009 and 2009 in the U.S. and Canada,
respectively.
The federal statutory tax rate reconciled to the effective tax rate for 2006 is
as follows:
2007 2006
2005
------------------------------- -----------
Tax at U.S. statutory rate 34.0% 34%
State tax rate, net of federal benefits 0.0 0.0
Foreign tax rate in excess of U.S. statutory rate 17.6% 17.6%
Change in valuation allowance 51.6% 51.6%
--------------------(51.6%) (51.6%)
----------- -----------
Effective tax rate 0.0% 0.0%
=============================== ===========
NOTE 12.15. STOCK-COMPENSATION EXPENSE
In October 2005, we engaged Aurelius Consulting to provide marketing and
investor relations services. The initial term of the agreement is one year.
Aurelius is entitled to receive 100,000 shares of our restricted common stock
during the term of its agreement (25,000 per quarter), in consideration for
their services. The shares were valued at $1.45 per share, the closing bid price
for shares of our common stock on the date of the contract. Therefore, the total
aggregate value of the transaction recognized by the Company in the first
quarter of 2006 was $145,000.
At October 21, 2005 and November 11, 2005, our board approved the issuing a
total of 25,000 shares of the Company's common stock to The Shemano Group, LLC
for preparing a research report for the Company. The shares were valued at $1.50
per share, the closing market bid of our common stock on the date of the
resolution. Therefore, the total aggregate value of the transaction recognized
by the Company in the first quarter of 2006 was $37,500.
On JanuaryDecember 31, 2006, we issued 400,000 shares of our restricted common stock to
World Wide Mortgage as consideration for agreeing to extend the due date to
April 15, 2006 for us to repay our CDN $1,500,000 loan pursuant to the bridge
loan agreement dated November 9, 2004 and amended on April 15, 2005 between us
and World Wide. The shares have piggy-back registration rights that require us
to register the shares in our next registration statement. The shares were
valued at $1.30 per share, the closing bid price for shares of our common stock
on the date we issued the shares. Therefore, the total aggregate value of the
transaction is $520,000 which was recorded as interest expense.
F-18
On June 30, 2006, we issued 22,860138,565 shares of common stock to the two accredited
investors of our April 12 and May 30, 2006 financings as payment of the
semi-annual dividend (8% per annum) per the terms of the Certificate of
Designation of the Relative Rights and Preferences of the Series A
Convertible Preferred Stock (see Note 13 - Preferred Shares Financing for additional
information on the Series A Convertible Preferred Stock).holders. 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, and $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
F-23
the VWAP for the twenty (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 $34,700$234,000 and the total aggregate value of the
transaction was recorded as a preferred stock dividend.
In June 2007, our wholly owned subsidiary, Island Scallops, Ltd. entered into a
Consulting Agreement with Pacific Crab Co., pursuant to which ISL will issue a
total of 100,000 shares of our common stock in exchange for consulting and
marketing services Pacific will provide to ISL. Pursuant to the agreement, ISL
issued 40,000 of such shares to Pacific when the Agreement was signed; the
remaining 60,000 shares will vest ratably (5,000 shares per month) at the
beginning of each month for each month during the term of the agreement, which
initially is twelve months. ISL also agreed that if certain goals are met within
the agreed upon timeframe, it will issue 15,000 shares to Pacific at such time
as the goals are reached, in which case the remaining 45,000 shares will
continue to vest as described above. The 40,000 shares issued were valued at
$1.55 per share, the closing bid of our common stock on the date of issue.
Therefore, total aggregate value of the transaction recognized by the company in
2007 was $62,000. Going forward the cost of these shares will be expense at
current market price as they are issued.
On June 30, 2007, we issued 137,685 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 (8% per annum) 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 $228,000 and the
total aggregate value of the transaction was recorded as a preferred stock
dividend.
On June 30, 2007, we issued 33,589 shares of common stock to the investors of
our January 16, 2007 financing as payment of the semi-annual dividend (6% per
annum) per the terms of the Certificate of Designation of the Relative Rights
and Preferences of the Series B Convertible Preferred Stock (see Note 9 - Series
B Preferred Shares Financing for additional information on 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 $56,000 and the total aggregate value of the transaction was
recorded as a preferred stock dividend.
Stock Options
In August 2005, our Board of Directors approved the "Edgewater Foods
International 2005 Equity Incentive Plan." The Board of Directors reserved
5,000,000 shares of our common stock to be issued in the form of incentive
F-24
and/or non-qualified stock options for employees, directors and consultants to
Edgewater. As of August 31, 2006, our Board of Directors had authorized the
issuance of 282,000 options to employees.
In September 2006, we engaged PR Global Concept GBR to provide international
investor relations services. The initial term of the agreement was for two
years. Pursuant to the consulting agreement, we were to pay PR Global $5,000 per
month for the term of the agreement. As additional compensation, we originally
agreed to issue a total of 500,000 options to purchase our common stock in
quarter installments, the first 125,000 of which was to vest immediately upon
signing of the agreement and the remainder of which was to vest in three equal
amounts of 125,000 after 3 months, 12 months and the final installment, 15
months after the date of signing; the options are exercisable at strike prices
ranging from $1.40 to $2.25. The options were to be exercisable for a period of
three years from the date of the vesting.
In December 2006, we entered into an Amended and Restated Agreement with PR
Global Concept GBR. Under the terms of the amended agreement, PR Global was only
eligible to receive a total of 350,000 (as opposed to 500,000 in the original
agreement) options to purchase our common stock in the following installments:
25,000 options every 3 months after the date of the Amended Agreement for a
total of four installments; one installment of 125,000 options 18 months from
the date of the Amended Agreement; and, one installment of 125,000 options 24
months from the date of the Amended Agreement. The options issued in the first
four installments were to be exercisable at a strike price of $1.52 and the last
two installments were to be exercisable at a strike price of $2.25. The options
were to be exercisable for a period of three years from the date of the vesting.
Additionally, PR Global would no longer receive the $5,000 monthly payment; we
did, however, pay the one month owed to PR Global under the original agreement
when the Amended Agreement was signed. The Amended Agreement was otherwise
unchanged from the originally entered into agreement with PR Global. On January
12, 2007, however, we terminated our Amended and Restated Agreement with PR
Global and ended our relationship with the firm. As such, we rescinded the
350,000 options that were to be issued under the amended agreement and PR Global
is to receive no additional compensation.
On February 1, 2007, we issued Kitsilano Capital Corp. four 100,000 options to
purchase our common stock, pursuant to our Consulting Agreement with them. The
first option vests on May 1, 2007, the second on August 1, 2007, the third on
February 1, 2008, and the fourth on June 1, 2008, so long as Kitsilano continues
to provide services to us under the Consulting Agreement. Each option is
exercisable for a period of three years from the vesting date and has an
exercise price of $1.20, $1.40, $1.60 and $1.80 respectively. The shares
underlying the options have piggy-back registration rights that required us to
register the shares in our last 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. To
date, we have incurred stock option expense of approximately $267,000 and will
incur an approximately an additional $84,000 through May 31, 2008. We used the
Black Scholes option-pricing model with the following assumptions: an expected
life equal to the contractual term of the options (one, three or six),
underlying stock price of $1.30 per share, no dividends; a risk free rate of
4.88%, which equals the one, three and six-year yield on Treasury bonds at
constant (or fixed) maturity and volatility of 100%.
F-25
On April 18, 2007, our board of directors authorized the issuance of 190,000
options to purchase our common stock to 29 employees, directors and consultants
pursuant to the "Edgewater Foods International 2005 Equity Incentive Plan." The
options vest on April 18, 2008. Each option is exercisable for a period of five
years from the vesting date and has an exercise price of $1.25 respectively. To
date, we have incurred stock option expense of approximately $76,000 and will
incur an approximately an additional $105,000 through May 31, 2008. We used the
Black Scholes option-pricing model with the following assumptions: an expected
life equal to the contractual term of the options (one, three or six),
underlying stock price of $1.25 per share, no dividends; a risk free rate of
4.65%, which equals the one, three and six-year yield on Treasury bonds at
constant (or fixed) maturity and volatility of 100%.
In August 17, 2007, our board of directors authorized the issuance of an
aggregate of 2,090,000 options to purchase our common stock to 19 of our
directors, employees and consultants pursuant to the "Edgewater Foods
International 2005 Equity Incentive Plan." The options vest on August 17, 2008.
Each option is exercisable for a period of five years from the vesting date and
has an exercise price of $1.21 respectively. To date, we have incurred stock
option expense of approximately $144,000 and will incur an approximately an
additional $1,582,000 through August 31, 2008. We used the Black Scholes
option-pricing model with the following assumptions: an expected life equal to
the contractual term of the options (one, three or six), underlying stock price
of $1.10 per share, no dividends; a risk free rate of 4.55%, which equals the
one, three and six-year yield on Treasury bonds at constant (or fixed) maturity
and volatility of 100%.
Stock option activity during the yearperiod ending August 31, 20062007 was as follows:
Weighted Average
Number of Exercise Price
Shares
---------------------------------------------------------------------
Outstanding, August 31, 2005 282,000 $ 1.50
Granted -- --
Exercised -- --
Forfeited -- --
Expired -- --
---------------------------------------------------------------------
Outstanding, August 31, 2006 282,000 1.50
Granted 2,680,000 1.25
Exercised -- --
Forfeited -- --
Expired -- --
----------------------------------
Outstanding, August 31, 2007 2,962,000 $ 1.50
===================================1.26
==================================
Exercisable, August 31, 2006 282,0002007 482,000 $ 1.50
===================================1.42
==================================
F-26
At August 31, 2006,2007, 200,000 of the exercisable options expire in May 2010,
62,000 of the outstandingexercisable options expire in August 2010 with the remaining
balance of 220,000 having an expiration date of August 2015. Warrant activity
during the period ending August 31, 2007 was as follows:
Weighted Average
Number of Exercise Price
Warrants
----------------------------------
Outstanding, August 31, 2005 -- --
Granted 22,207,487 $ 1.52
Exercised -- --
Forfeited -- --
Expired -- --
----------------------------------
Outstanding, August 31, 2006 22,207,487 1.52
Granted 8,144,365 1.87
Exercised 2,265,600 0.56
Forfeited -- --
Expired -- --
----------------------------------
Outstanding, August 31, 2007 28,086,252 $ 1.75
==================================
Exercisable, August 31, 2007 28,086,252 $ 1.75
==================================
NOTE 13.16. SERIES A PREFERRED STOCK FINANCINGCONVERSION AND WARRANT EXERCISE
On April 12,November 7, 2006, we completed a private equity financingholder of $1,062,000 with
two accredited investors. Net proceeds from the financing were approximately
$952,000. We issued 1,888,000our series A preferred stock exercised their
right to convert 66,666 shares of our Seriesseries A Preferred Stock, par value
$0.001 perpreferred stock into 66,666 share
and stated value of $0.75 per share, at a purchase price of
$0.5625 per share. Each investor also received one of each of the following
warrants: (i) Series A Warrant, (ii) Series B Warrant, (iii) Series C Warrant,
(iv) Series D Warrant, (v) Series J Warrant, (vi) Series E Warrant, (vii) Series
F Warrant, (viii) Series G Warrant, and (ix) Series H Warrant, each to purchase
a number ofcommon stock. As such, we issued 66,666 shares of common stock equaland canceled
66,666 shares of our series A.
On May 8, 2007, a holder of our series A preferred stock exercised their right
to 50%convert 30,000 shares of the numberour series A preferred stock into 30,000 shares of
Series A
Preferred Stock purchased, except for the Series J Warrants, which entitled the
investor to purchase a number ofcommon stock. As such, we issued 30,000 shares of common stock equaland canceled
30,000 shares of our series A.
On May 10, 2007, a holder of our series A preferred stock exercised their right
to 100%convert 500,000 shares of our series A preferred stock into 500,000 shares of
common stock. As such, we issued 500,000 shares of common stock and canceled
500,000 shares of our series A.
On May 12, 2007, a holder of our series A preferred stock exercised their right
to convert 70,800 shares of our series A preferred stock into 70,800 shares of
common stock. As such, we issued 70,800 shares of common stock and canceled
70,800 shares of our series A.
F-27
On April 12, 2007, we issued 1,354,667 shares of common stock to the investors
of our April 12, 2006 financing in connection with the exercise of 1,354,667
Series J warrants received by investor as part of the number offinancing. We also issued
188,800 series A preferred shares and 188,800 shares of Series A Preferred Stock purchased. We issued a total of
9,440,000 Warrants. Each ofcommon stock to the
Warrants has a term of 5 years, except for the
Series J Warrants, which have a term of 1 year.
F-19
In connection withplacement consultant from the April 12, 2006 financing we paid cash compensationin conjunction with the
exercise of 188,880 placement agent warrants and 188,800 series J warrants. We
received net proceeds of approximately $913,000 pursuant to the exercise of
these warrants.
On August 20, 2007, a placement consultant in the amount of $84,960 and issued him 188,800 warrants.
Each of the placement consultant's warrants allow him to purchase one shareholder of our Seriesseries A Preferred Stock, and one half of each of the Series A-I Warrants
and one Series J warrant. Each of the placement consultant's warrantspreferred stock exercised their
right to purchase the securities described above is exercisable at a price of $0.5625 per
warrant, for a period of three years. The fees were recorded as a cost of
capital.
On May 30, 2006, we completed another round of private equity financing of
$1,500,000 with one accredited investor pursuant to a Series A Convertible
Preferred Stock Purchase Agreement. Net proceeds from this financing were
approximately $1,380,000. We issued 2,000,000convert 65,335 shares of our Series A Preferred
Stock, stated value of $0.75 per share, at a purchase price of $0.75 per share
and the investor also received one of each of the following warrants: (i) Series
A Warrant, (ii) Series B Warrant, (iii) Series C Warrant, and (iv) Series D
Warrant, each to purchase a 1,000,000 shares of Common Stock; therefore, we
issued a total of 4,000,000 Warrants. Each of the Warrants has a term of 5 years
and is identical to the Series A-D Warrants we issued to investors pursuant to
the financing we closed on April 12, 2006 as disclosed in our Current Report on
Form 8-K filed on April 14, 2006. Each share of the Series A Preferred Stock is
convertible into one fully paid and nonassessable share of our common stock.
In connection with the May 30, 2006 financing, we paid cash compensation to a
placement consultant in the amount of $120,000 and issued him 200,000 warrants.
Each of the placement consultant's warrants allow him to purchase one share of
our Seriesseries A preferred stock and one halfinto 65,335
shares of each of the Series A-D Warrants.
Each of the placement consultant's warrants to purchase the securities described
above is exercisable at a price of $0.75 per warrant, for a period of 3 years.
The fees were recorded as a cost of capital.
On June 30, 2006 and July 11, 2006, we completed two final rounds of private
equity financing, accepting subscriptions in the aggregate amount of $2,840,000
from nine institutional and accredited investors pursuant to the May 30, 2006
Series A Convertible Preferred Stock Purchase. On June 30, 2006 and July 11,
2006, we entered into separate Joinder Agreements to each of the Series A
Convertible Preferred Stock Purchase Agreement and the Registration Rights
Agreement, each dated as of May 30, 2006, with each of the new investors which
addedcommon stock. As such, investors as additional parties to the May 30, 2006 financing
documents. Net cash proceeds from these two rounds were approximately
$2,808,000. Pursuant to these round two final financings, we issued a total65,335 shares of 3,786,666common stock and
canceled 65,335 shares of our Series A Preferred Stock, stated value of $0.75 per
share, atseries A.
On August 31, 2007, a purchase price of $0.75 per share and each investor also received
one of each of the following warrants: (i) Series A Warrant, (ii) Series B
Warrant, (iii) Series C Warrant, and (iv) Series D Warrant, each to purchase
1,893,338 shares of Common Stock ; therefore, we issued a total of 7,573,352
Warrants in these two final rounds of financing. Each of the Warrants has a term
of 5 years and is identical to the Series A-D Warrants we issued to investors
pursuant to the financings we closed on April 12, 2006 and May 30, 2006. Each
share of the Series A Preferred Stock is convertible into one fully paid and
nonassessable shareholder of our common stock.
In connection with the June 30, 2006 and July 11, 2006 financing, we paid a
total placement consultant feeseries A preferred stock rescinded their
right to converting of $217,000. The placement consultant received
$160,000 of his fee in securities (as described below) and $57,000 in cash. As a
result, we issued the placement consultant 213,333430,000 shares of our Seriesseries A Preferred Stock, and onepreferred stock into
430,000 shares of each of the A-D Warrants, each to purchase 106,667common stock. As such, we issued 500,000 shares of our Common Stock. The A-D Warrants issued to the placement consultant
are identical to the Series A-D Warrants we issued to the investors as described
above. The fees were recorded as a cost of capital.
F-20
We used a portion of the proceeds of the above referenced private equity
financings to repay the entire balance of short-term loan with an authorized
limit of $1,451,510 secured by our assets, including a mortgage charge in the
amount of $1,451,510 on landseries
A and building of the Company, and by a personal
guarantee of Robert Saunders, our Chairman, President and CEO, and former sole
shareholder of Island Scallops. (For additional information on this note, please
see Note 7 - Short Term Debt above)
Series A Preferred Stock
Our Board of Directors of has designated 10,000,000 shares of our
authorized preferred stock as Series A Convertible Preferred Stock. The
principal terms of the preferred stock are as follows:
Voting. Except with respect to specified transactions that may affect
the rights, preferences, privileges or voting power of the Series A Preferred
Stock and except as otherwise required by Nevada law, the Series A Preferred
Stock has no voting rights. We shall not affect such specified transactions,
which include authorizing, creating, issuing or increasing the authorized or
issued amount of any class or series of stock, ranking pari passu or senior to
the Series A Preferred Stock, with respect to the distribution of assets on
liquidation, dissolution or winding up, without the affirmative vote or consent
of the holders of at least 75% of the shares of the Series A Preferred Stock
outstanding at the time, given in person or by proxy, either in writing or at a
meeting, in which the holders of the Series A Preferred Stock vote separately as
a class. The common stock into which the Series A Preferred Stock is convertible
shall, upon issuance, have all of the same voting rights as other issued and
outstanding common stock and none of the rights of the Series A Preferred Stock.
Dividends. The holders of record of shares of Series A Preferred Stock
are entitled to receive, out of any assets at the time legally available
therefor and when and as declared by the Board of Directors, dividends at the
rate of 8% per annum incanceled 430,000 shares of our common stock.
The number of shares of
common stock to be issued to the holder shall be an amount equal to 90% of the
quotient of (i) the dividend payment divided by (ii) the average of the daily
volume weighted average price (VWAP) of our common stock for such date on the
OTC Bulletin Board for the 20 trading days immediately preceding the date the
dividend payment is due, but in no event less than $0.65. Dividends on the
Series A Preferred Stock are cumulative, accrue and are payable semi-annually.
Dividends on the Series A Preferred Stock are prior and in preference to any
declaration or payment of any distribution on any outstanding shares of junior
stock. So long as any shares of Series A Preferred Stock are outstanding, we
will not declare, pay or set apart for payment any dividend or make any
distribution on any junior stock (other than dividends or distributions payable
in additional shares of junior stock), unless at the time of such dividend or
distribution we shall have paid all accrued and unpaid dividends on the
outstanding shares of Series A Preferred Stock.
Conversion. At any time on or after the issuance date, the holder of
any such shares of Series A Preferred Stock may, at the holder's option, elect
to convert all or any portion of the shares of the Series A Preferred Stock held
by such person into a number of fully paid and nonassessable shares of common
stock equal to the quotient of (i) the liquidation preference amount ($0.75) of
the shares of Series A Preferred Stock being converted plus any accrued but
unpaid dividends divided by (ii) the conversion price, which initially is $0.75
per share, subject to certain adjustments.
F-21
If within 3 business days of our receipt of an executed copy of a
conversion notice the transfer agent shall fail to issue and deliver to a holder
the number of shares of common stock to which such holder is entitled upon such
holder's conversion of the Series A Preferred Stock or to issue a new preferred
stock certificate representing the number of shares of Series A Preferred Stock
to which such holder is entitled, we shall pay additional damages to such holder
on each business day after such 3rd business day that such conversion is not
timely effected in an amount equal 0.5% of the product of (A) the sum of the
number of shares of common stock not issued to the holder on a timely basis and
to which such holder is entitled and, in the event we failed to deliver a
preferred stock certificate to the holder on a timely basis, the number of
shares of common stock issuable upon conversion of the shares of Series A
Preferred Stock represented by such certificate, as of the last possible date
which we could have issued such certificate to such holder timely and (B) the
closing bid price of our common stock on the last possible date which we could
have issued such common stock and such certificate, as the case may be, to such
holder timely. If we fail to pay those additional damages within 5 business days
of the date incurred, then such payment shall bear interest at the rate of 2.0%
per month (pro rated for partial months) until such payments are made.
The conversion price of the Series A Preferred Stock may be adjusted in
the event of (i) combination, stock split, or reclassification of the common
stock; (ii) capital reorganization; (iii) distribution of dividends; or (iv) the
issuance or sale of additional shares of common stock or common stock
equivalents.
Liquidation. In the event of the liquidation, dissolution or winding up
of our affairs, whether voluntary or involuntary, the holders of shares of
Series A Preferred Stock then outstanding shall be entitled to receive, out of
our assets available for distribution to its stockholders, an amount equal to
$0.75 per share or the liquidation preference amount, of the Series A Preferred
Stock plus any accrued and unpaid dividends before any payment shall be made or
any assets distributed to the holders of the common stock or any other junior
stock. If our assets are not sufficient to pay in full the liquidation
preference amount plus any accrued and unpaid dividends payable to the holders
of outstanding shares of the Series A Preferred Stock and any series of
preferred stock or any other class of stock ranking pari passu, as to rights on
liquidation, dissolution or winding up, with the Series A Preferred Stock, then
all of said assets will be distributed among the holders of the Series A
Preferred Stock and the other classes of stock ranking pari passu with the
Series A Preferred Stock, if any, ratably in accordance with the respective
amounts that would be payable on such shares if all amounts payable thereon were
paid in full. The liquidation payment with respect to each outstanding
fractional share of Series A Preferred Stock shall be equal to a ratably
proportionate amount of the liquidation payment with respect to each outstanding
share of Series A Preferred Stock. All payments pursuant thereto, shall be in
cash, property (valued at its fair market value as determined by an independent
appraiser reasonably acceptable to the holders of a majority of the Series A
Preferred Stock) or a combination thereof; provided, however, that no cash shall
be paid to holders of junior stock unless each holder of the outstanding shares
of Series A Preferred Stock has been paid in cash the full Liquidation
Preference Amount plus any accrued and unpaid dividends to which such holder is
entitled as provided herein. After payment of the full liquidation preference
amount plus any accrued and unpaid dividends to which each holder is entitled,
such holders of shares of Series A Preferred Stock will not be entitled to any
further participation as such in any distribution of our assets.
F-22
NOTE 14.17. COMMITMENTS AND CONTINGENCIES
Corporate Offices
For the fiscal year ended August 31, 2006,2007, our U.S. corporate office was located
at 400 Professional Drive, Suite 310, Gaithersburg, Maryland 20878. This space
was provided on a rent free basis by one of our shareholders. As a result, the
Company did not recognize rental expense in the fiscal year.
Employment Agreements
We entered into an employment agreement with Mr. Robert Saunders as our Chairman
and President effective on June 29, 2005. Subsequently in August 2005, Mr.
Saunders was appointed CEO by our Board of Directors. Mr. Saunders will serve at
the pleasure of the Board of Director's. For serving as President, Mr. Saunders'
compensation will be US $60,000 per annum. Additionally, we agreed to grant Mr.
Saunders a signing bonus of US $150,000 to be paid on closing of at least US
$3,500,000 in third party financing and increase his compensation to $120,000
per annum if we receive at least US $5,000,000 in outside funding. After the
completion of our Preferred Stock Financing (see Note 13 - Preferred Shares
Financing for additional information on the Series A Convertible Preferred
Stock), Mr. Saunders was due the signing bonus of $150,000 and a monthly salary
of $10,000 per month beginning in August 2006. However, Mr. Saunders agreed to
reduce his monthly salary to $5,000 per month until such time that we become
significantly cash flow positive for its operations. As of August 31, 2007 we
had paid Mr. Saunders $75,000 of the $150,000 bonus that was due under the terms
of the agreement. Additionally, we are currently discussing possible
restructuring/payment terms of the $150,000 bonus
and the accrued salary of $70,000$130,000 as of August 31,
20062007 until such time that we become significantly cash flow positive for its
operations.
NOTE 15. SUBSEQUENT EVENTS (UNAUDITED)Marketing Consulting Agreements
F-28
In September 2006, the CompanyJune 2007, our wholly owned subsidiary, Island Scallops, Ltd. ("ISL") entered
into a SettlementConsulting Agreement with Pacific Crab Co. (the "consultant') to develop
new markets and facilitate the Ministersale and distribution of Western Economic Diversification to amendISL's products. As
compensation for the repayment terms ofconsultant's marketing services, ISL shall pay the
Company non-interest bearing loan of $611,055 (to Island Scallops) with the
Western Diversification Program. The Company agreed to repay the $174,976 due as
of August 31, 2006 in accordance with a payment schedule beginning with a
payment of $64,202 in September 2006 and continuing with monthly payment of
roughly $10,070 until August 15, 2007. The parties agreed that the remaining
balance of the $436,079 shall be repaid via quarterly payment equal to the
greater of $31,577 or 4% of the gross scallop sales starting the quarter
beginning on June 1, 2007 and subsequent quarters until the balance is repaid.
Under the terms of this agreement, the first quarter payment will be due on
September 30, 2007.
In September 2006, we engaged PR Global Concept GBR to provide international
investor relations services. The initial term of the agreement is two years.
Pursuant to the consulting agreement, we will pay PR Global $5,000consultant $12,500 per month for the next twelve months. In addition and
pursuant to the terms of the agreement, the Company will issue a total of
100,000 shares of our common stock (under an agreed upon schedule) in exchange
for consulting and marketing services Pacific will provide to ISL. (for
additional information on the distribution schedule see Note 15 - Stock
Compensation Expense).
NOTE 18. SUBSEQUENT EVENTS (UNAUDITED)
On October 31, we issued 25,000 shares of common stock to Pacific Crab Seafood
Company, Inc. as part of the 100,000 shares of our common stock that our Board
of Directors previously approved for the consulting and marketing services that
they will provide to us. The remaining 35,000 shares will be issued in equal
monthly installments of 5,000 shares during the remaining term of the agreement.
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 completed a private equity financing of $897,444 on November 5, 2007, with
one accredited investor. Net proceeds from the offering are approximately
$801,000. As additional compensation,part of this financing, the investor returned the Series J Warrant,
Series D Warrant, Series E Warrant and Series F Warrant that they received as a
result of our Series B financing completed on January 16, 2007. Pursuant to the
current financing, we willissued 747,870 shares of our Series C Preferred Stock, par
value $0.001 per share and the investor also issue a
totalreceived one of 500,000 optionseach of the
following warrants: (i) Series A Warrant, (ii) Series B Warrant, (iii) Series C
Warrant, (iv) Series J Warrant, (v) Series D Warrant, (vi) Series E Warrant, and
(vii) Series F Warrant, each to purchase a number of shares of common stock
equal to fifty percent (50%) of the number of shares of common stock issuable
upon conversion of the purchaser's preferred stock, except for the Series J
Warrants, which shall entitle the investor to purchase a number of shares of our
Series C Preferred Stock equal to one hundred percent (100%) of the number of
Series C Preferred Stock it received in the financing. Each of the Warrants has
a term of 5 years, except for the Series J Warrants, which have a term of 1
year. Each share of the preferred stock is convertible into one fully paid and
nonassessable share of our common stock in quarter installments,at an initial conversion price of $1.20,
subject to adjustment. We are obligated to file a registration statement on or
before December 5, 2007 providing for the firstresale of which vested immediatelythe shares of common stock
issuable upon signingconversion of the agreementpreferred stock and the remaindershares of which will vest 3 months, 12 monthscommon stock
underlying the Warrants and underlying the final installment, 15
months afterpreferred stock issuable upon
exercise of the Warrants. In connection with the financing, our management
agreed not to sell any of our securities owned by them, their affiliates or
anyone they have influence over until the registration statement has been
effective for six months.
In connection with this financing, we paid cash compensation to a placement
consultant in the amount of approximately $72,000 and issued him placement
consultant warrants, exercisable for a period of three years from the date of
signing;issue. The placement consultant's warrants allow him to purchase up to (i)
74,787 shares of Series C Preferred Stock, and each of the optionsfollowing warrants,
which are exercisable at strike prices
rangingidentical to the warrants issued to the investors of the financing:
(i) Series A Warrant, (ii) Series B Warrant, (iii) Series C Warrant, (iv) Series
F-29
D Warrant, (v) Series J Warrant, (vi) Series E Warrant, and (vii) Series F
Warrant, each to purchase 37,393 shares of common stock, except for the Series J
Warrants, which shall entitle the Consultant to purchase 74,787 shares of our
Series C Preferred Stock.
The net proceeds from $1.40the financing are to $2.25.
F-23
be used for working capital and
general corporate purposes.
NOTE 16.19. GOING CONCERN
Prior to the completion of our Preferred Stock Financing, (see Note 13 for
additional details), our 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 August 31, 20062007, we had a cash balance of approximately
$1,800,000.$1,657,000. Although management believes that we have adequate funds to maintain
our business operations into the next fiscal year andand/or until we become cash
flow positive, we are likely to continuecontinued to suffer operational losses until the first quarter ofin our 2007 fiscal
year. 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.strategy of expanding our operations. Based on these
factors, there is substantial doubt about our ability to continue as a going
concern.
The financial statements do not include any adjustments relating to the
recoverability and classification of liabilities that might be necessary should
we be unable to continue as a going concern. Our ability to continue as a going
concern is dependent upon our ability to generate sufficient cash flows to meet
our obligations on a timely basis and ultimately to attain profitability. Our
Managementmanagement intends to obtain working capital through operations and to seek
additional funding through debt and equity offerings to help fund our operations
as we expand. There is no assurance that we will be successful in our efforts to
raise additional working capital or achieve profitable operations. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
NOTE 17.20. FOREIGN OPERATIONS
The Company's share of the net assets held outside of the United States totaled
approximately $3,250,000$5,007,000 at August 31, 2006.
F-242007.
F-30
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
We have had no disagreements with our certified public accountants with respect
to accounting practices or procedures or financial disclosure.
ITEM 8A. CONTROLS AND PROCEDURES
QUARTERLY EVALUATION OF CONTROLS
As of the end of the period covered by this annual report on Form 10-KSB, the
Company evaluated the effectiveness of the design and operation of (i) their
disclosure controls and procedures, and (ii) their internal control over
financial reporting. The evaluators who performed this evaluation were our Chief
Executive Officer, Robert Saunders and Acting Chief Accounting Officer, Michael
Boswell; their conclusions, based on and as of the date of the Evaluation (i)
with respect to the effectiveness of our Disclosure Controls and (ii) with
respect to any change in our Internal Controls that occurred during the most
recent fiscal quarter that has materially affected, or is reasonably likely to
materially affect our Internal Controls are presented below.
CEO AND CFO CERTIFICATIONS
Attached to this annual report, as Exhibits 31.1 and 31.2, are certain
certifications of the CEO and Acting CAO, which are required in accordance with
the Exchange Act and the Commission's rules implementing such section (the "Rule
13a-14(a)/15d-14(a) Certifications"). This section of the annual report contains
the information concerning the Evaluation referred to in the Rule
13a-14(a)/15d-14(a) Certifications. This information should be read in
conjunction with the Rule 13a-14(a)/15d-14(a) Certifications for a more complete
understanding of the topic presented.
DISCLOSURE CONTROLS AND INTERNAL CONTROLS
Disclosure Controls are procedures designed with the objective of ensuring that
information required to be disclosed in the Company's reports filed with the
Securities and Exchange Commission under the Securities Exchange Act, such as
this annual report, is recorded, processed, summarized and reported within the
time period specified in the Commission's rules and forms. Disclosure Controls
are also designed with the objective of ensuring that material information
relating to the Company is made known to the CEO and the Acting CAO by others,
particularly during the period in which the applicable report is being prepared.
Internal Controls, on the other hand, are procedures which are designed with the
objective of providing reasonable assurance that (i) the Company's transactions
are properly authorized, (ii) the Company's assets are safeguarded against
unauthorized or improper use, and (iii) the Company's transactions are properly
recorded and reported, all to permit the preparation of complete and accurate
financial statements in conformity with accounting principals generally accepted
in the United States.
41
LIMITATIONS ON THE EFFECTIVENESS OF CONTROLS
30
The Company's management does not expect that their Disclosure Controls or their
Internal Controls will prevent all error and all fraud. A control system, no
matter how well developed and operated, can provide only reasonable, but not
absolute assurance that the objectives of the control system are met. Further,
the design of the control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their
costs. Because of the inherent limitations in all control systems, no evaluation
of controls can provide absolute assurance that all control issues and instances
of fraud, if any, within the Company have been detected. These inherent
limitations include the realities that judgments in decision-making can be
faulty and that breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management override of the
control. The design of a system of controls also is based in part upon certain
assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated objectives under all
potential future conditions. Over time, control may become inadequate because of
changes in conditions, or because the degree of compliance with the policies or
procedures may deteriorate. Because of the inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur and
not be detected.
SCOPE OF THE EVALUATION
The CEO and Acting CAO's evaluation of the our Disclosure Controls and Internal
Controls included a review of the controls' (i) objectives, (ii) design, (iii)
implementation, and (iv) the effect of the controls on the information generated
for use in this annual report. In the course of the Evaluation, the CEO and
Acting CAO sought to identify data errors, control problems, acts of fraud, and
they sought to confirm that appropriate corrective action, including process
improvements, was being undertaken. This type of evaluation is done on a
quarterly basis so that the conclusions concerning the effectiveness of our
controls can be reported in our quarterly reports on Form 10-QSB and annual
reports on Form 10-KSB. The overall goals of these various evaluation activities
are to monitor our Disclosure Controls and Internal Controls, and to make
modifications if and as necessary. Our external auditors also review Internal
Controls in connection with their audit and review activities. Our intent in
this regard is that the Disclosure Controls and the Internal Controls will be
maintained as dynamic systems that change (including improvements and
corrections) as conditions warrant.
Among other matters, the Evaluation was to determine whether there were any
significant deficiencies or material weaknesses in our Internal Controls, which
are reasonably likely to adversely affect our ability to record, process,
summarize and report financial information, or whether the Evaluators identified
any acts of fraud, whether or not material, involving management or other
employees who have a significant role in our Internal Controls. This information
was important for both the Evaluation, generally, and because the Rule
13a-14(a)/15d-14(a) Certifications, Item 5, require that the CEO and Acting CAO
disclose that information to our Board (audit committee), and our independent
auditors, and to report on related matters in this section of the annual report.
In the professional auditing literature, "significant deficiencies" are referred
to as "reportable conditions". These are control issues that could have
significant adverse affect on the ability to record, process, summarize and
42
report financial data in the financial statements. A "material weakness" is
31
defined in the auditing literature as a particularly serious reportable
condition where the internal control does not reduce, to a relatively low level,
the risk that misstatement cause by error or fraud may occur in amounts that
would be material in relation to the financial statements and not be detected
within a timely period by employee in the normal course of performing their
assigned functions. The Evaluators also sought to deal with other controls
matters in the Evaluation, and in each case, if a problem was identified, they
considered what revisions, improvements and/or corrections to make in accordance
with our ongoing procedures.
CONCLUSIONS
Based upon the Evaluation, our disclosure controls and procedures are designed
to provide reasonable assurance of achieving our objectives. Our CEO and Acting
CAO concluded that our disclosure controls and procedures are effective at that
reasonable assurance level to ensure that material information relating to us is
made known to management, including the CEO and Acting CFO, particularly during
the period when our periodic reports are being prepared, and that our Internal
Controls are effective at that assurance level to provide reasonable assurance
that our financial statements are fairly presented inconformity with accounting
principals generally accepted in the United States. Additionally, there has been
no change in our Internal Controls that occurred during our most recent fiscal
quarter that has materially affected, or is reasonably likely to affect, our
Internal Controls.
PART III.
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table and text set forth the names and ages of all directors and
executive officers as of November 27,23, 2006. The Board of Directors is comprised
of only one class. All of the directors will serve until the next annual meeting
of shareholders, which is anticipated to be held in January or February of 2007,
and until their successors are elected and qualified, or until their earlier
death, retirement, resignation or removal. To date we have not had an annual
meeting. Except as disclosed herein,Dr. Kristina Miller, our Chief
Scientific Advisor is the wife of Robert Saunders, our Chairman, CEO and
President; otherwise, there are no family relationships among our directors and
executive officers. Also provided herein are brief descriptions of the business
experience of each director, executive officer and advisor during the past five
years and an indication of directorships held by each director in other
companies subject to the reporting requirements under the Federal securities
laws.
Dr. Kristina Miller, our Chief Scientific Advisor is the wife of Robert
Saunders, our Chairman, CEO and President.
NAME AGE POSITION
- ---- --- --------
Robert Saunders 5354 Chairman, CEO and President
Douglas C. MacLellan 5051 Vice Chairman
Mark H. Elenowitz 3637 Director
Robert L. Rooks 5152 Director
Ian Fraser 4548 Director
Michael Boswell 3738 Director, Acting Chief Accounting
Officer
32Darryl Horton 57 Director
Victor Bolton 53 Director
43
ROBERT SAUNDERS, CHAIRMAN, CEO AND PRESIDENT. Mr. Saunders has directed all
research and development efforts at Island Scallops since its establishment.
After studying for his B.Sc. at the University of British Columbia in the early
1970's, Mr. Saunders has worked exclusively in the aquaculture research and
development field. His efforts have primarily involved designing and
implementing innovative culture technology and methods for new aquaculture
species in British Columbia. Mr. Saunders has direct experience with managing
projects similar to the type proposed, such as developing the hatchery
technology for producing the Japanese scallop and the development of sablefish
aquaculture.
DOUGLAS C. MACLELLAN, VICE-CHAIRMAN. Since May 1992, Mr. MacLellan has been
President and Chief Executive Officer of the MacLellan Group, Inc., a privately
held business incubator and financial advisory firm. Mr. MacLellan is currently
a member of the board of directors and chairman of the audit committee of AMDL,
Inc. (AMEX: ADL), a publicly held biotechnology firm. From 2002 until September
2005, Mr. MacLellan was Vice Chairman and a Director of AXM Pharma, Inc. (AMEX;
AXJ). From March 1998 through October 2000, Mr. MacLellan was the co-founder and
a significant shareholder of Wireless Electronique, Ltd., a China-based
telecommunications company having joint venture operations with China Unicom
(NASDAQ: CHU) in Yunnan, Inner Mongolia and Ningxia provinces. He is also a
co-founder and, since May 1997, has been a director of Datalex Corporation, a
Canadian-based legacy software solution provider. From November 1996 to March
1998, Mr. MacLellan was co-Chairman and an Investment Committee member of the
Strategic East European Fund. From November 1995 to March 1998, Mr. MacLellan
was President, Chief Executive Officer and a Director of PortaCom Wireless,
Inc., a company engaged as a developer and operator of cellular and wireless
telecommunications ventures in selected developing world markets. Mr. MacLellan
is a former member of the board of directors and co-founder of FirstCom
Corporation (NASDAQ: FCLX), an international telecommunications company that
operates a competitive access fiber and satellite network in Latin America,
which became AT&T Latin America (NASDAQ: ATTL) in August 2000. During 1996, he
was also the Vice-Chairman of Asia American Telecommunications (now Metromedia
China Corporation), a majority-owned subsidiary of Metromedia International
Group, Inc. (AMEX: MMG). Mr. MacLellan was educated at the University of
Southern California in economics and finance, with advanced training in
classical economic theory.
MARK H. ELENOWITZ, DIRECTOR. Mr. Elenowitz is a co-founder and managing director
of the TriPoint family of companies. HeCapital Advisors, LLC. Mr. Elenowitz is responsible for the overall
corporate development of the firm and assisting Tripoint'stheir clients with high-level
financial services and general business development. In this role he provides
high level advice regarding corporate finance, corporate structure, SOX 404
compliance, employee option programs and capital market navigation including
providing advice as a member of the board of directors. Mr. Elenowitz integrates
a strong, successful entrepreneurial background with extensive financial
services and capital markets experience. Mr. Elenowitz has assisted in numerous
companies in a "soup-to-nuts" process of preparing a company for the public
markets, bringing them public and advising on an ongoing basis via board seats
and executive positions to oversee further rounds of financing, strategic
acquisitions and a broader investor market via a listing on "higher" securities
exchange or market. Mr. Elenowitz is also currently a director of Global Growth
Acquisition Corp. 1, a Cayman Islands corporation. From December 2002 to
September 2005, Mr. Elenowitz was a board member of AXM Pharma formerly (AMEX:
AXJ). From September 2001 to March 2002, Mr. Elenowitz He was a Director and
President of Image World Media, Inc., an international media company
specializing in the production and distribution of various media content for
worldwide distribution across multiple media platforms, such as traditional
television, film and the Internet. From February 1998 to October 2001, Mr.
Elenowitz was Co-Chairman and Managing Director of GroupNow!, Inc., a financial
consulting firm. In this role he was responsible for the company's overall
corporate development and corporate finance. Mr. Elenowitz integrates a strong,
successful entrepreneurial background with extensive financial services and
capital markets experience. He is also the senior managing director of Investor Communications
Company, LLC (ICC), a national investor relations firm he founded
33
in 1996.
Through ICC, Mr. Elenowitz has developed ongoing relationships with other
investment banking firms, market makers, and analysts. Mr. Elenowitz has worked
44
with over 3050 publicly traded companies providing the above mentioned financial
consulting and strategic planning services. Previously, Mr. Elenowitz heldholds the Series 724,
82 and 63 licenses asand is also CEO of TriPoint Global Equities, LLC, a broker, and held a Series 24 license (Branch Manager) at regional
brokerage firm and also served as Vice President of Sales at NYSEFINRA
member firm. Mr. Elenowitz is the recipient of several entrepreneurial awards.awards
and has been profiled in BusinessWeek and CNBC, as well as several other
publications. He is a graduate of the University of Maryland School of Business
and Management, with a Bachelor of Science in Finance.
DR. ROBERT L. ROOKS, DIRECTOR. Dr. Robert L. Rooks has been Chief of Staff of
All Care Animal Referral Center (ACARC) in Fountain Valley, California, since
1990. ACARC is the largest strictly referral veterinary center in the United
States. Dr. Rooks has a staff of over 20 veterinarians in the areas of surgery,
critical care, internal medicine, oncology, dentistry, radiology and neurology.
Their services include 24-hour critical care/emergency service, MRI and CT
scans, color-flow Doppler ultrasounds, hyperbaric oxygen therapy, a complete
orthopedic program including total hip replacements and joint reconstruction,
cobalt radiation therapy, a complete neuro-diagnostic service, a kidney
transplant program and a physical rehabilitation department and much more. He is
the published author of over 100 journals, magazine and newspaper articles. Dr.
Rooks is also the author of the book "Canine Orthopedics" published in 1997 by
Howell Bookhouse. Dr. Rooks completed his undergraduate studies at Iowa State
University in 1978. He graduated from the College of Veterinary Medicine at Iowa
State. Dr. Rooks received his Masters Degree as well as completed his surgical
residency at the University of Illinois in 1981. He is a Diplomat of both the
American College of Veterinary Surgeons and the American College of Veterinary
Practitioner.
IAN FRASER, DIRECTOR. Since 1997, Mr. Ian Fraser has been President of Fraser
Yacht Sales Ltd., a successful Yacht Brokerage located in Vancouver, B.C. Prior
to establishing Fraser Yacht Sales Ltd., Mr. Fraser gained experience in sales
and marketing both nationally and internationally as a yacht broker for two top
brokerage houses in Vancouver. Previously, Mr. Fraser was worked as an
advertising sales executive with Naylor communications from 1988 to 1990 and
learned valuable communication skills while working with numerous trades
including the Truck Logger's association, the I.W.A of America, and the B.C.
Construction industry. He also operated as a commercial fisherman on the West
coast working on commercial salmon fishing boats for the B.C. Packer Corporation
over a 4 year period and gained valuable knowledge of the coastline of Vancouver
Island and along the mainland from Victoria to the Queen Charlotte Islands. Mr.
Fraser also acquired sea time and commercial shipping skills while working on
the deck department of the B.C. Ferry Corporation based out of Horseshoe Bay
during his early professional career and during the summer months while
attending school in the early 1980s. Mr. Fraser also competes internationally on
ocean racing yachts and has crossed the Pacific and sailed up and down the coast
to Mexico on numerous occasions while racing and delivering racing yachts as
captain. Mr. Fraser studied Business Administration at Simon Fraser University
and Capilano College graduating with a diploma in Business Administration.
45
MICHAEL BOSWELL, DIRECTOR AND ACTING CHIEF ACCOUNTING OFFICER. Mr. Boswell is a
co-founder and member in TriPoint Capital Advisors, LLC, a boutique merchant
bank focused on small and mid-sized growth companies and a co founder of the
TriPoint family of companies. Mr. Boswell provides high-level financial services
to start-up businesses and small to mid-sized companies. Mr. Boswell is also
currently a director of Global Growth Acquisition Corp. 1, a Cayman Islands
corporation. Mr. Boswell holds the Series 24, 82 and 63 licenses and is also
Managing Director and Chief Compliance Officer of TriPoint Global Equities, LLC,
a FINRA member firm. Prior to the founding of TriPoint, Mr. Boswell had a number
of executive positions focusing on
34
business development and management
consulting. Mr. Boswell also spent eight years as a senior analyst and/or senior
engineer for various branches of the United States Government. He earned a MBA
from John Hopkins University and a BS degree in Mechanical Engineering from
University of Maryland.
DARRYL HORTON, DIRECTOR. Mr. Horton has been a businessman successfully involved
in numerous construction and development projects for the past 35 years. He is
the President, Manager and a Partner of Abbotsford Development Corporation and
is currently managing a development project in Abbotsford, British Columbia
called Eagle Mountain. Eagle Mountain is an upscale, master planned community of
single family homes, town homes and commercial properties covering approximately
60 acres that is expected to be valued, upon completion, in excess of 200
million dollars. Prior to Eagle Mountain, Mr. Horton managed, owned and marketed
numerous other residential and commercial projects including the construction of
a 30 million dollar multi-function residential Intermediate Care Facility in
LaJolla California. For 15 years Mr. Horton was a partner in a general
contracting company that did various contracts with an average volume of about
25 million per year. In the 1970's, Mr. Horton was the Vice president of
Community Builders, the largest single family developer in British Columbia. Mr.
Horton is also the director of several other building and development companies
in British Columbia.
VICTOR BOLTON, DIRECTOR. Mr. Bolton founded a Mechanical contracting firm after
graduating from college and evolved that firm into all aspects of the
construction industry including building and raw land developing as well as
extensive property management. Retiring from this business in 2000, Mr. Bolton
now focuses time and energy towards the food manufacturing field.
Significant Employees
The following are employees who are not executive officers, but who are expected
to make significant contributions to our business:
BRUCE EVANS, FARM MANAGER. Mr. Bruce Evans has been involved in shellfish
production since 1985. He successfully established an oyster business, employing
methods of long-line and beach culture production. That business is still in
operation today, producing 7,000 gals of shucked oysters annually and employing
3 full time people and 4 part time people. He moved to Island Scallops in 1989.
Mr. Evans was responsible for securing the leases from the Provincial government
for this scallop grow-out project. He built the established long-line systems
that currently produce scallops for Island Scallops. Mr. Evans worked with a
46
Japanese scallop farmer for two years in B.C. and spent a month working on
highly acclaimed scallop farms in Japan. Mr. Evans has BS in Marine Biology from
the University of Victoria.
DR. KRISTINA M. MILLER, CHIEF SCIENTIFIC ADVISOR. Dr. Miller is currently Head
of the Molecular Genetics Section in the Pacific Region for the Department of
Fisheries and Oceans, Canada (DFO). She has been a research scientist at DFO
since obtaining her PhD in Biological Sciences from Stanford University in 1992.
The Molecular Genetics section she oversees contains a staff of 26, including
scientists, biologists, computer analysts and research technicians. Dr. Miller
conducts research on the genetic composition, adaptation, immunity and
physiology of wild and domesticated fish and shellfish species using both
35
molecular and genomic approaches. She has been a leader in the development of
molecular technologies to aid in the conservation and management of aquatic
resources. In the past 10 years, she has published over 40 scientific
peer-reviewed journal manuscripts, and her group has been the focus of numerous
magazine and newspaper articles. Dr. Miller brings a strong scientific component
to the management of Edgewater Foods, and she will serve as Chief Scientific
Advisor. In addition to her PhD, Dr. Miller received a BSc in Zoology from
University of California, Davis in 1983, and a MSc in Biology from University of
British Columbia in 1986. Dr. Miller is Robert Saunders, our Chairman, CEO and
President's wife.
BOARD COMMITTEES
We currently have six committees appointed by our Board of Directors:
o Audit Committee, which is comprised of Douglas MacLellan (Chair),
Robert Rooks and Ian Fraser. The Board has determined that all of
these members are independent, as that term is defined in Section
121(A) of the American Stock Exchange's Listing Standards.
o Finance Committee, which is comprised of Mark Elenowitz (Chair),
Douglas MacLellan and Robert Saunders.
o Compensation Committee, which is comprised of Ian Fraser (Chair), Mark
Elenowitz and Doug MacLellan.
o Disclosure Committee, which is comprised of Douglas MacLellan (Chair),
Robert Saunders and Michael Boswell.
o Nominating Committee, which is comprised of Robert Saunders (Chair),
Douglas MacLellan and Robert Rooks. The Board has determined that Mr.
Rooks and Mr. MacLellan are independent, as that term is defined in
Section 121(A) of the American Stock Exchange's Listing Standards.
o Sarbanes-Oxley Steering Committee, which is comprised of Douglas
MacLellan, Robert Saunders, Michael Boswell and Louis Taubman (Louis
Taubman is our outside corporate and securities counsel).
AUDIT COMMITTEE AND FINANCIAL EXPERT
We have an Audit Committee as specified in Section 3(a)(58)(A) of the Securities
Exchange Act of 1934, as amended, composed of Douglas MacLellan (Chair), Robert
Rooks and Ian Fraser. The Audit Committee focuses its efforts on assisting our
Board of Directors to fulfill its oversight responsibilities with respect to
our:
47
o Quarterly and annual consolidated financial statements and financial
information filed with the Securities and Exchange Commission;
o System of internal controls;
o Financial accounting principles and policies;
o Internal and external audit processes; and
o Regulatory compliance programs.
The committee meets periodically with management to consider the adequacy of our
internal controls and financial reporting process. It also discusses these
matters with our independent auditors and with appropriate financial personnel
that we employ. The committee reviews our financial statements and discusses
them with management and our independent auditors before those financial
statements are filed with the Securities and Exchange Commission.
The committee has the sole authority to retain and dismiss our independent
auditors and periodically reviews their performance and independence from
management. The independent auditors have unrestricted access and report
directly to the committee.
AUDIT COMMITTEE FINANCIAL EXPERT
Douglas MacLellan is our Audit Committee Financial Expert, as that term is
defined in Item 401407 of Regulation S-B and the Board has determined that Mr.
MacLellan is independent, as that term is useddefined in Item 7(d)(3)(iv)Section 121 of Schedule
14A under the American
Stock Exchange's Listing Standards and Section 10A(m)(3) of the Securities
Exchange Act.Act of 1934. Mr. MacLellan's qualifications as an audit committee
financial expert are described in his biography above.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Exchange Act requires our officers, directors and persons
who own more than 10% of any class of our securities registered under Section
12(g) of the Exchange Act to file reports of ownership and changes in ownership
36
with the SEC. Officers, directors and greater than 10% stockholders are required
by SEC regulation to furnish us with copies of all Section 16(a) forms they
file.
We were a voluntary filer pursuant to Section 15(d) of the Act until August 30,
2006 and, therefore, our officers, directors and 10% or greater holders of our
securities were not required to file reports pursuant to Section 16(a) during
the fiscal year ended August 31, 2006. However, afterwith the SEC. Officers, directors and greater than 10% stockholders are required
by SEC regulation to furnish us with copies of all Section 16(a) forms they
file.
Since we filed a Form 8-A to register our common stock and series A preferred stock pursuant to Section 12(g)
of the Act, on August 30, 2006, based upon our review of copies of such reports,
our officers, directors and 10% stockholders filed the reports required by
Section 16(a).
CODE OF ETHICS
On August 3, 2005, we adopted a code of ethics that applies to our Chief
Executive Officer and Principal Financial and Accounting Officer. You may obtain
a copy of any of our codes of ethics at no cost, by written request to:
Edgewater Foods International, Inc., 5552 West Island Highway, Qualicum Beach,
British Columbia, Canada V9K 2C8; or, by oral request at: (250) 757-9811.
48
ITEM 10. EXECUTIVE COMPENSATION
Summary Compensation Table
------------------------------ -----------
ANNUAL COMPENSATION AWARDS Payouts
- -------------------------------------------------------------- -------------- --------------- ---------------------------------- ------------------ ------------------ ------------------- ------------------- ----------------
Name and Principal Year Salary Bonus Stock Awards Option Awards
Position ($) ($) ($) ($)
(a) (b) (c) (d) (e) (f)
- ----------------------- ------------------ ------------------ ------------------- ------------------- ----------------
Robert Saunders 2007 60,000 (1) 0 0 20,651 (3)
Chief Executive
Officer
- ----------------------- ------------------ ------------------ ------------------- ------------------- ----------------
Robert Saunders 2006 60,000 (1) 150,000 (1) 0 0
Chief Executive
Officer
- ----------------------- ------------------ ------------------ ------------------- ------------------- ----------------
Michael Boswell 2007 0 (2) 0 0 26,847 (3)
Acting Chief
Accounting Officer
- ----------------------- ------------------ ------------------ ------------------- ------------------- ----------------
Michael Boswell 2006 0 (2) 0 0 0
Acting Chief
Accounting Officer
- ----------------------- ------------------ ------------------ ------------------- ------------------- ----------------
- --------------------- ------------------ -------------------- --------------------- -------------------- -------------
Year Non-Equity Non-Qualified
Deferred
Incentive Plan Compensation
Name and Principal Compensation Earnings All other Total
Position ($) ($) Compensation ($)
(a) (b) (g) (h) (i) Other All
Name Annual Restricted Securities Other
And Compen- Stock Underlying LTIP Compen-
Principal sation Award(s) Options/ Payouts sation
Position Year Salary($) Bonus($) ($) $ SARs (#) ($) ($)(j)
- ---------------- -------- ---------- -------------- --------- --------------- --------------- ------------ -----------
--------------------- ------------------ -------------------- --------------------- -------------------- -------------
Robert Saunders 2007 0 0 1,000,000 1,080,651
Chief Executive
Officer
- --------------------- ------------------ -------------------- --------------------- -------------------- -------------
Robert Saunders 2006 60,000 150,0000 0 1,000,000 1,210,000
Chief Executive
Officer
- --------------------- ------------------ -------------------- --------------------- -------------------- -------------
Michael Boswell 2007 0 0 0 0 0
Saunders,
Chairman,
President and
CEO(1)26,847
Acting Chief
Accounting Officer
- ---------------- -------- ---------- -------------- --------- --------------- --------------- ------------ -----------
Robert 2005 10,000 0 0 0 0 0 0
Saunders,
Chairman,
President and
CEO
- ---------------- -------- ---------- -------------- --------- --------------- --------------- ------------ -----------
37
Robert 2004 0 0 0 0 0 0 0
Saunders,
Chairman,
President and
CEO
- ---------------- -------- ---------- -------------- --------- --------------- --------------- ------------ -------------------------------- ------------------ -------------------- --------------------- -------------------- -------------
Michael Boswell 2006 0 0 0 0
0 0 0
Boswell,
President and
Acting Chief
Account
Officer (2)
- ---------------- -------- ---------- -------------- --------- --------------- --------------- ------------ -----------
Michael 2005 0 0 0 0 0 0 0
Boswell,
President and
Acting Chief
AccountAccounting Officer
- ---------------- -------- ---------- -------------- --------- --------------- --------------- ------------ -----------
Michael Boswell 2004 0 0 0 0 0 0 0
- ---------------- -------- ---------- -------------- --------- --------------- --------------- ------------ -------------------------------- ------------------ -------------------- --------------------- -------------------- -------------
(1) In June 2005, we entered into an employment agreement with Mr. Robert
Saunders as our Chairman and President effective on June 29, 2005.
Subsequently in August 2005, Mr. Saunders was appointed CEO by our
Board of Directors. Mr. Saunders will serve at the pleasure of the
Board of Director's. For serving as President, Mr. Saunders'
compensation will be US $60,000 per annum. Additionally, we agreed to
grant Mr. Saunders a signing bonus of US $150,000 to be paid on
closing of at least US $3,500,000 in third party financing and
increase his compensation to $120,000 per annum if we receive at least
US $5,000,000 in outside funding. The Board recently approved the
Compensation Committee's recommendation to reduce Mr. Saunders'
compensation to $5,000 per month until our cash flow position
improves, at which time the Committee will reconvene and recommend to
the Board that Mr. Saunders' compensation increase back to $10,000 per
month.
(2) Mr. Boswell served as our President from March to June 2005, at which
time Mr. Saunders replaced Mr. Boswell as President. Mr. Boswell has
served as our Acting Chief Accounting Officer since August 2005. Mr.
Boswell indirectly owns a minority interest in TriPoint Capital
Advisors, LLC, a significant shareholder and party with which we
maintain a consulting agreement. The Board recently approved the
Compensation Committee's recommendation to pay TriPoint $15,000 per
month, which includes fees for Mr. Boswell's services as our Acting
Chief Accounting during 2005, however TriPoint agreed to reduce such
fee to $7,000 per month until our cash flow position improves, at
which time the Committee will reconvene and recommend a return to
$15,000 per month. In addition, TriPoint has agreed not to accept any
additional fees, other than expenses, until we are sufficiently funded
to carry out our business and operations. Although Mr. Boswell did not
work for us in any capacity until 2005, we are required to include our
3849
last three fiscal years in the above table. According to the above
reasons, Mr. Boswell did not receive any compensation in 2003, 2004 or
2005.
Options/SARs
We did not grant any options or SARs to any of our named executive officers
during the last fiscal year nor did any of our executive officers exercise any
options or SARs during the last fiscal year.
Long Term Incentive Plans
No Long Term Incentive awards were granted in the last fiscal year.
BOARD OF DIRECTORS
Our directors who are employees do not receive any compensation from us for
services rendered as directors. The Board has created three classes of fees for
outside directors: (1) outside directors who are "independent," as defined in
the Exchange Act will be paid $500 per meeting, whether telephonic or in person
for director fee - there shall not be any fees for written consents in lieu of
board meetings; (2) outside directors who are not "independent" will not receive
any fees at this time, but once our cash flow position improves, the
Compensation Committee will reconvene and make recommendations; (3) the Vice
Chairman will receive $3,000 per month, which includes $1,500 per month for his
role as Chairman of our Audit Committee. Additionally, although we do not
currently provide stock based compensation to our outside directors, in the
future we may grant outside directors incentive-based stock compensation.
BOARD COMMITTEES
We currently have five committees appointed by our Board of Directors:
o Audit Committee, which is comprised of Douglas MacLellan (Chair),
Robert Rooks and Ian Fraser.
o Finance Committee, which is comprised of Mark Elenowitz (Chair),
Douglas MacLellan and Robert Saunders.
o Compensation Committee, which is comprised of Ian Fraser (Chair), Mark
Elenowitz and Doug MacLellan.
o Disclosure Committee, which is comprised of Douglas MacLellan (Chair),
Robert Saunders and Michael Boswell.
o Nominating Committee, which is comprised of Robert Saunders (Chair),
Douglas MacLellan and Robert Rooks.
39
EMPLOYMENT AGREEMENTS In June 2005, we entered into an employment agreement with Robert
Saunders, our Chairman, CEO and President. Mr. Saunders will serve at
the pleasure of the Board of Directors. Pursuant to his employment
agreement, Mr. Saunders' compensation will be $60,000 (USD) per annum
for his services as our President. Following the receipt of at least
$5,000,000 (USD) min outside funding, Mr. Saunders will receive an
additional $10,000 per month for his services as Chairman and,
thereafter, $20,000 per month provided that we achieve gross revenues
of at least $20,000,000 (USD) for our most recent fiscal year and
continuing as long as we maintain gross revenues of at least
$20,000,000 (USD) for each successive fiscal year. If we fail to
achieve gross revenue of $20,000,000 (USD) in a successive fiscal
year, Mr. Saunders compensation as Chairman shall be reduced to
$10,000 (USD) per month. Additionally, we agreed to grant Mr. Saunders
a signing bonus of $150,000 (USD) to be paid upon the closing of at
least $3,500,000 in new third party financing. In August 2006, our
Board approved the following revisions to Mr. Saunders' compensation:
reduce Mr. Saunders' compensation from $10,000 to $5,000 per month
until our cash flow position improves, at which time the Compensation
Committee will recommend that Mr. Saunders' compensation increase back
to $10,000 per month. WeAs of August 31, 2007, we had paid Mr. Saunders
$75,000 of the $150,000 bonus that was due under the terms of the
agreement. Additionally, we are currently discussing possible
restructuring/payment terms regardingof the $70,000 deferredaccrued salary of $130,000 as of
August 31, 2007, until such time that we become significantly cash
flow positive for its operations.
(2) Mr. Boswell served as our President from March to June 2005, at which
time Mr. Saunders replaced Mr. Boswell as President. Mr. Boswell has
served as our Acting Chief Accounting Officer since August 2005. Mr.
Boswell indirectly owns a minority interest in TriPoint Capital
Advisors, LLC, a significant shareholder and party with which we
maintain a consulting agreement. In August 2006, the Board approved
the Compensation Committee's recommendation to pay TriPoint $15,000
per month, which includes fees for Mr. Boswell's services as our
Acting Chief Accounting during 2005, however TriPoint agreed to reduce
such fee to $7,000 per month until our cash flow position improves, at
which time the Committee will reconvene and recommend a return to
$15,000 per month. In addition, TriPoint has agreed not to accept any
additional fees, other than expenses, until we are sufficiently funded
to carry out our business and operations. According to the above
reasons, Mr. Boswell did not receive any compensation in 2006.and only
received the options listed in the table above in 2007.
(3) On August 17, 2007, Mr. Saunders and Mr. Boswell were granted
five-year nonqualified stock options, pursuant to our 2005 Equity
Plan, that vest on a 1/12 monthly basis over a twelve month period
beginning on the grant date. The exercise price of the options is
$1.21, which represents 110% of the closing price of our common stock
on August 17, 2007. Based on the Black-Scholes option pricing model,
the total fair value of these options were determined to be $247,815
and $322,159 for Mr. Saunders and Mr. Boswell, respectively. Since
these options vest monthly, the company will incur a monthly cost of
$20,651 and $26,847 respectively. As of August 31, 2007, only one
month of these stock options costs had been realized.
50
Outstanding Equity Awards at Fiscal Year-End
- --------------------- ----------------- --------------------- -------------------- -------------------- --------------
Equity
Incentive Plan
Awards:
Number of Number of Number of
Securities Securities Securities
Underlying Underlying Underlying
Unexercised Unexercised Unexercised
Options Options Unearned Option Option
(#) (#) Options Exercise Price Expiration
Name Exercisable Unexercisable (#) ($) Date
(a) (b) (c) (d) (e) (f)
- --------------------- ----------------- --------------------- -------------------- -------------------- --------------
Robert Saunders 300,000 (1) 0 0 1.21 8-14-2007
- --------------------- ----------------- --------------------- -------------------- -------------------- --------------
Michael Boswell 390,000 (1) 0 0 1.21 8-14-2007
- --------------------- ----------------- --------------------- -------------------- -------------------- --------------
Equity Incentive Equity Incentive
Plan Awards: Number Plan Awards:
Number of Market Value of of Unearned Shares, Market or Payout
Shares or Units Shares of Units of Units or Other Value of Unearned
of Stock That Stock That Have Rights That Have Shares, Units or
Have Not Vested Not Vested Not Vested Other Rights That
(#) ($) (#) Have Not Vested
Name
(a) (g) (h) (i) (j)
- ---------------------- ----------------- -------------------- --------------------- --------------------
Robert Saunders 275,000 227,164 0 0
- ---------------------- ----------------- -------------------- --------------------- --------------------
Michael Boswell 357,500 295,312 0 0
- ---------------------- ----------------- -------------------- --------------------- --------------------
(1) Pursuant to our 2005 Equity Incentive Plan, Mr. Saunders and Mr.
Boswell were granted five-year nonqualified stock options on August
17, 2007 that vest on a 1/12 monthly basis over a twelve month period
beginning on the grant date. The exercise price of the options is
$1.21, which represents 110% of the closing price of our common stock
on August 17, 2007. As Of August 31, 2007 only 1/12 of these options
have vested.
Retirement/Resignation Plans
We do not have any plans or arrangements in place regarding the payment to any
of our executive officers following such persons retirement or resignation.
51
DIRECTOR COMPENSATION
- -------------------------- ----------------------- ---------------------- ----------------------- --------------------
Name Fees Earned or Paid Stock Awards Option Awards Non-Equity
in Cash ($) ($) incentive Plan
($)
Compensation
($)
(a) (b) (c) (d) (e)
- -------------------------- ----------------------- ---------------------- ----------------------- --------------------
Douglas MacLellan 36,000 0 13,768 (1) (2) 0
- -------------------------- ----------------------- ---------------------- ----------------------- --------------------
Mark Elenowitz 0 0 35,795 (1) (3) (4) 0
- -------------------------- ----------------------- ---------------------- ----------------------- --------------------
Darryl Horton 1,000 0 688 (1) (5) 0
- -------------------------- ----------------------- ---------------------- ----------------------- --------------------
Ian Fraser 1,000 0 5,163 (1) (6) 0
- -------------------------- ----------------------- ---------------------- ----------------------- --------------------
Victor Bolton 1,000 0 688 (1) (7) 0
- -------------------------- ----------------------- ---------------------- ----------------------- --------------------
Robert Rooks 1,000 0 3,442 (1) (8) 0
- -------------------------- ----------------------- ---------------------- ----------------------- --------------------
- ----------------------------------------------------------------------------------------------------------------------
Name Change in Pension Value All other Compensation Total
and Nonqualified Deferred ($) ($)
Compensation Earnings
(a) (f) (g) (h)
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Douglas MacLellan 0 0 49,768
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Mark Elenowitz 0 0 35,795
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Darryl Horton 0 0 1,688
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Ian Fraser 0 0 6,163
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Victor Bolton 0 0 1,688
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Robert Rooks 0 0 4,442
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
(1) At the end of the fiscal year, 2,962,000 options are outstanding.
(2) These include the five-year incentive stock options granted to such
individual on August 17, 2007 pursuant to our 2005 Equity Plan. These
options vest on a 1/12 monthly basis over a twelve month period
beginning on the grant date and are exercisable at $1.21, which
represents 110% of the closing price of our common stock on August 17,
2007. Based on the Black-Scholes option pricing model, the total fair
value of these 200,000 options were determined to be $165,210. Since
these options vest monthly, we will incur a monthly cost of $13,768.
As of August 31, 2007, only one month of these stock options costs had
been realized.
52
(3) These include the five-year incentive stock options granted to such
individual on August 17, 2007 pursuant to our 2005 Equity Plan. These
options vest on a 1/12 monthly basis over a twelve month period
beginning on the grant date and are exercisable at $1.21, which
represents 110% of the closing price of our common stock on August 17,
2007. Based on the Black-Scholes option pricing model, the total fair
value of these 520,000 options were determined to be $429,546. Since
these options vest monthly, we will incur a monthly cost of $35,795.
As of August 31, 2007, only one month of these stock options costs had
been realized.
(4) Mr. Elenowitz indirectly owns a minority interest in TriPoint Capital
Advisors, LLC, a significant shareholder and party with which we
maintain a consulting agreement. In August 2006, the Board approved
the Compensation Committee's recommendation to pay TriPoint $15,000
per month, which includes fees for Mr. Elenowitz's services as a
Director; however, TriPoint agreed to reduce such fee to $7,000 per
month until our cash flow position improves, at which time the
Committee will reconvene and recommend a return to $15,000 per month.
In addition, TriPoint has agreed not to accept any additional fees,
other than expenses, until we are sufficiently funded to carry out our
business and operations.
(5) These include the five-year incentive stock options granted to such
individual on August 17, 2007 pursuant to our 2005 Equity Plan. These
options vest on a 1/12 monthly basis over a twelve month period
beginning on the grant date and are exercisable at $1.21, which
represents 110% of the closing price of our common stock on August 17,
2007. Based on the Black-Scholes option pricing model, the total fair
value of these 10,000 options were determined to be $8,260. Since
these options vest monthly, we will incur a monthly cost of $688. As
of August 31, 2007, only one month of these stock options costs had
been realized.
(6) These include the five-year incentive stock options granted to such
individual on August 17, 2007 pursuant to our 2005 Equity Plan. These
options vest on a 1/12 monthly basis over a twelve month period
beginning on the grant date and are exercisable at $1.21, which
represents 110% of the closing price of our common stock on August 17,
2007. Based on the Black-Scholes option pricing model, the total fair
value of these 75,000 options were determined to be $61,954. Since
these options vest monthly, we will incur a monthly cost of $5,163. As
of August 31, 2007, only one month of these stock options costs had
been realized.
(7) These include the five-year incentive stock options granted to such
individual on August 17, 2007 pursuant to our 2005 Equity Plan. These
options vest on a 1/12 monthly basis over a twelve month period
beginning on the grant date and are exercisable at $1.21, which
represents 110% of the closing price of our common stock on August 17,
2007. Based on the Black-Scholes option pricing model, the total fair
value of these 10,000 options were determined to be $8,260. Since
these options vest monthly, we will incur a monthly cost of $688. As
of August 31, 2007, only one month of these stock options costs had
been realized.
(8) These include the five-year incentive stock options granted to such
individual on August 17, 2007 pursuant to our 2005 Equity Plan. These
options vest on a 1/12 monthly basis over a twelve month period
beginning on the grant date and are exercisable at $1.21, which
represents 110% of the closing price of our common stock on August 17,
2007. Based on the Black-Scholes option pricing model, the total fair
value of these 50,000 options were determined to be $41,302. Since
these options vest monthly, we will incur a monthly cost of $3,442. As
of August 31, 2007, only one month of these stock options costs had
been realized.
53
Our directors who are employees do not receive any compensation from fiscal year 2006 and 2005 andus for
services rendered as directors. The Board has created three classes of fees for
outside directors: (1) outside directors who are "independent," as defined in
the $150,000 bonus that was toExchange Act will be paid $500 per meeting, whether telephonic or in person
for director fee - there shall not be any fees for written consents in lieu of
board meetings; (2) outside directors who are not "independent" will not receive
any fees at this time, but once our cash flow position improves, the
Compensation Committee will reconvene and make recommendations; (3) the Vice
Chairman will receive $3,000 per month, which includes $1,500 per month for his
role as Chairman of our Audit Committee. Additionally, although we do not
currently have an arrangement or agreement to Mr.
Saunders upon the closing of at least US$3,500,000 inprovide stock based compensation
to our outside funding. Althoughdirectors, we have yetmay, from time to reach a final agreement on payment terms, we paid Mr. Saunders
$50,000 towards the bonus in September of 2006.time, grant outside directors
incentive stock options pursuant to our 2005 Equity Incentive Plan.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Securities authorized for issuance under equity compensation plans. Please see
Part II, Item 5: "Market for Common Equity and Related Stockholder Matters"
above.
Security Ownership of Certain Beneficial Owners and Management
As used in this section, the term beneficial ownership with respect to a
security is defined by Rule 13d-3 under the Securities Exchange Act of 1934, as
amended, as consisting of sole or shared voting power (including the power to
vote or direct the vote) and/or sole or shared investment power (including the
power to dispose of or direct the disposition of) with respect to the security
through any contract, arrangement, understanding, relationship or otherwise,
subject to community property laws where applicable.
As of November 27, 200623, 2007, we had a total of 21,049,92623,737,700 shares of common stock,
and
7,821,3337,773,998 shares of Series A Preferred Stock, 207 shares of Series B Preferred
Stock and 747,870 shares of our Series C Preferred Stock issued and outstanding,
which are theour only issued and outstanding equity securities. However, our
preferred stock does not have any voting equity securitiesrights except with respect to specified
transactions that may affect the rights, preferences, privileges or voting power
of such class and except as otherwise required by Nevada law. As of the Company.date of
this Report, each share of our Series A Preferred Stock and each share of Series
C Preferred Stock is convertible into one share of common stock; each share of
our Series B Preferred Stock is convertible into a number of fully paid and
nonassessable shares of our common stock equal to the quotient of the
liquidation preference amount per share ($10,000) divided by the conversion
price, which initially is $1.15 per share, subject to certain adjustments, or
approximately 8,696 shares of common for each share of converted Series B
Preferred Stock.
The following table sets forth, as of November 27,23, 2006: (a) the names and
addresses of each beneficial owner of more than five percent (5%) of our common
stock and Preferred Stock (taken together as one class) known to us, the number
of shares of common stock and Preferred Stock beneficially owned by each such
person, and the percent of our common stock and Preferred Stock so owned; and
(b) the names and addresses of each director and executive officer, the number
of shares our common stock and Preferred Stock beneficially owned, and the
4054
percentage of our common stock and Preferred Stock so owned, by each such
person, and by all of our directors and executive officers as a group. Each
person has sole voting and investment power with respect to the shares of our
common stock and Preferred Stock, except as otherwise indicated. Beneficial
ownership consists of a direct interest in the shares of common stock and
Preferred Stock, except as otherwise indicated. Name and AddressIndividual beneficial ownership
also includes shares of common stock that a person has the right to acquire
within 60 days from November 23, 2007.
Amount and Nature of Percentage
Name and Address Beneficial Ownership ofOf Voting of
Securities (1)
Robert Saunders 9,900,000 34.29%10,025,000 (2) 29.44%
Chairman, President and CEO
5552 West Island Highway
Qualicum Beach, British Columbia
Canada V9K 2C8
Douglas C. MacLellan 1,040,000 3.60%1,123,333 (3) 3.30%
Vice Chairman
8324 Delgany Avenue
Playa del Ray, CA 90293
Mark Elenowitz 1,238,000 (2) 4.29%1,454,667 (4) (5) 4.27%
Director
400 Professional Drive
Suite 310
Gaithersburg, MD 20879
Dr. Robert Rooks 300,000 1.04%320,833 (6) 0.94%
Director
912 Pine Avenue
Huntington Beach, CA 90293
Ian Fraser 800,000 2.77%831,250 (7) (8) 2.44%
Director
3056 West 2nd Avenue
Vancouver, British Columbia
Canada V6T 1E9
55
Amount and Nature of Percentage
Name and Address Beneficial Ownership Of Voting of
Securities (1)
Michael Boswell 938,000 (3) 3.25%1,100,500 (9) (10) 3.23%
Director and
Acting Chief Accounting Officer
400 Professional Drive
Suite 310
Gaithersburg, MD 20879
41
Name and Address Amount and Nature of Percentage
Beneficial Ownership of Voting of
Securities (1)
Victor Bolton 0 0.0%4,167 (11) 0.01%
345-916 W. Broadway
Vancouver, BC V5Z 1K7
Darryl Horton 0 0.0%4,167 (12) 0.01%
33568 Eagle Mountain Drive
Abbortsford, BC V3G 2X7
Vision Opportunity Master Fund, Ltd. 1,699,577 (13) 4.99%
20 West 55th St., 5th Floor
New York, NY 10019
All directors and officers as a group (8 14,863,917 43.64%
persons) 14,216,000 49.24%
- ----------------
(1) All Percentages have been rounded up to the nearest one hundredth of
one percent.percent and such percentage is based upon the amount of
outstanding our common stock and preferred stock, on an as converted
basis. The percentage assumes in the case of each shareholder listed
in the above list that all warrants or options held by such
shareholder that are exercisable currently or within 60 days were
fully exercised by such shareholder, without the exercise of any
warrants or options held by any other shareholders.
(2) In addition to his stock ownership, Mr. Saunders was granted 300,000
five-year nonqualified stock options on August 17, 2007 that vest on a
1/12 monthly basis over a twelve month period beginning on the grant
date. The exercise price of the options is $1.21, which represents
110% of the closing price of our common stock on August 17, 2007. As
of November 23, 2007, only 3/12 of these options have vested, but an
additional 2/12 will vest within 60 days from such date.
(3) In addition to his stock ownership, Mr. MacLellan was granted 200,000
five-year nonqualified stock options on August 17, 2007 that vest on a
1/12 monthly basis over a twelve month period beginning on the grant
date. The exercise price of the options is $1.21, which represents
110% of the closing price of our common stock on August 17, 2007. As
of November 23, 2007, only 3/12 of these options have vested, but an
additional 2/12 will vest within 60 days from such date.
56
(4) Mr. Elenowitz is a one hundred (100%)100% percent shareholder of MHE, Inc., which owns
18,000 shares of our voting stock. Additionally, MHE, Inc. is a forty percent (40%)40%
member of TriPoint Capital Advisors, LLC, which owns 3,000,000 shares
of our voting stock. Mr. Elenowitz owns 20,000 shares of our voting
stock directly. Therefore, Mr. Elenowitz beneficially owns
1,238,000shares of our voting stock.
(3)(5) In addition to his stock ownership, Mr. Elenowitz was granted 520,000
five-year nonqualified stock options on August 17, 2007 that vest on a
1/12 monthly basis over a twelve month period beginning on the grant
date. The exercise price of the options is $1.21, which represents
110% of the closing price of our common stock on August 17, 2007. As
of November 23, 2007, only 3/12 of these options have vested, but an
additional 2/12 will vest within 60 days from such date.
(6) In addition to his stock ownership, Dr. Rooks was granted 50,000
five-year nonqualified stock options on August 17, 2007 that vest on a
1/12 monthly basis over a twelve month period beginning on the grant
date. The exercise price of the options is $1.21, which represents
110% of the closing price of our common stock on August 17, 2007. As
of November 23, 2007, only 3/12 of these options have vested, but an
additional 2/12 will vest within 60 days from such date.
(7) Mr. Fraser is a 100% shareholder of One Way Grill Limited, which owns
800,000 shares of our voting stock. Therefore, Mr. Fraser beneficially
owns 800,000 shares of our voting stock.
(8) In addition to his stock ownership, Mr. Fraser was granted 75,000
five-year nonqualified stock options on August 17, 2007 that vest on a
1/12 monthly basis over a twelve month period beginning on the grant
date. The exercise price of the options is $1.21, which represents
110% of the closing price of our common stock on August 17, 2007. As
of November 23, 2007, only 3/12 of these options have vested, but an
additional 2/12 will vest within 60 days from such date.
(9) Mr. Boswell and his wife jointly own Invision, LLC, which owns 38,000
shares of our voting stock. Additionally, Invision, LLC.LLC is a thirty
percent (30%)30%
member of TriPoint Capital Advisors, LLC, which owns 3,000,000 shares
of our voting stock. Therefore, Mr. Boswell beneficially owns 938,000
shares of our voting stock.
(10) In addition to his stock ownership, Mr. Boswell was granted 390,000
five-year nonqualified stock options on August 17, 2007 that vest on a
1/12 monthly basis over a twelve month period beginning on the grant
date. The exercise price of the options is $1.21, which represents
110% of the closing price of our common stock on August 17, 2007. As
of November 23, 2007, only 3/12 of these options have vested, but an
additional 2/12 will vest within 60 days from such date.
(11) Mr. Bolton was granted 10,000 five-year nonqualified stock options on
August 17, 2007 that vest on a 1/12 monthly basis over a twelve month
period beginning on the grant date. The exercise price of the options
is $1.21, which represents 110% of the closing price of our common
stock on August 17, 2007. As of November 23, 2007, only 3/12 of these
options have vested, but an additional 2/12 will vest within 60 days
from such date.
57
(12) Mr. Horton was granted 10,000 five-year nonqualified stock options on
August 17, 2007 that vest on a 1/12 monthly basis over a twelve month
period beginning on the grant date. The exercise price of the options
is $1.21, which represents 110% of the closing price of our common
stock on August 17, 2007. As of November 23, 2007 only 3/12 of these
options have vested, but an additional 2/12 will vest within 60 days
from such date.
(13) Vision owns 2,204,296 shares of common stock, 5,238,333 shares of
common stock issuable upon conversion of their Series A Convertible
Preferred Stock, 1,495,740 shares of common stock issuable upon
conversion of their Series B Convertible Preferred Stock, 747,870
shares of common stock issuable upon conversion of their Series C
Convertible Preferred Stock and 230,630 shares of common stock
received as dividends. However, based upon the terms of the preferred
stock, Vision may not convert its preferred stock if on any date, it
would be deemed the beneficial owner of more than 4.99% of the then
outstanding shares of our common stock. In addition to the shares
listed in the table, Vision holds warrants to purchase up to
19,787,758 shares of our common stock, but based upon the terms of
these warrants, Vision cannot exercise them if on any date, it would
be deemed the beneficial owner of more than 4.99% of the then
outstanding shares of our common stock. However, Vision can elect to
waive the cap upon 61 days notice to us or less if, and only if less
than 61 days remain on the term of the warrant and in such case the
waiver will not be effective until the warrant's expiration date.
CHANGES IN CONTROL
To the best of our knowledge, there are no arrangements that could cause a
change in our control.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Dr. Kristina Miller, our Chief Scientific Advisor is Robert Saunders, our
Chairman, CEO and President's wife.
We are party to a consulting agreement with TriPoint Capital Advisors, LLC, a
company in which Mark Elenowitz, a director and one of our significant
shareholders, indirectly owns a 40% interest. Michael Boswell, our acting Chief
Accounting Officer and one of our directors, indirectly owns a 30% interest in
TriPoint. Louis Taubman, our outside corporate and securities counsel also
indirectly owns an interest (30%) in TriPoint. Our Board recently approved the
Compensation Committee's recommendation of a flat rate $15,000 per month fee,
which shall be reduced to $7,500 per month until our cash flow position
improves, for the legal services Louis Taubman provides us. The Board also
approved the recommendation of a $15,000 per month fee, which shall be reduced
42
to $7,000 per month until our cash flow position improves, for the Acting CFO
type services and financial advisory services Michael Boswell and TriPoint,
respectively, provide us. Additionally, our corporate offices in Gaithersburg,
Maryland are currently provided by Tripoint Holdings, LLC, the parent company of
Tripoint at no cost to us.
Island Scallops, our wholly owned subsidiary, recently transferred 100%
ownership of RKS Laboratories, Inc. to Robert Saunders, our Chairman, CEO and
58
President. RKS is a Vancouver research and development that is working towards
developing superior strains of scallops (developed by Island Scallops and known
as the Pacific Scallop) with beneficial traits such as higher meat yield and
rapid growth. Island Scallops agreed to transfer its ownership of RKS in
consideration for the grant to Island Scallops by RKS and Robert Saunders of a
right of first refusal to commercialize any intellectual property developed by
RKS. Island Scallops has the right to acquire or use any intellectual property
from RKS at RKS' cost, in perpetuity or until such time as RKS shall cease to
exist. InBetween June 2006 and August 2006,2007, Island Scallops agreed to loan RKS a
total of approximately $23,000$82,000 under twoeight non-interest bearing notes that are
secured by all assets of RKSRKS' assets and are due at on or before June 15, 2007 or August 31, 2007,
respectively.2008.
ITEM 13. EXHIBITS LIST
Exhibit
Number Description
- -------------- -----------
3.1+3.1 Articles of Incorporation of the Company, as amended. (Incorporated by
reference to Exhibit 3.1 to the Company's Quarterly Report on Form
10-QSB for the quarter ending February 28, 2007, which was filed on
April 13, 2007.)
3.2 Amended and restated Bylaws of the Company (Incorporated by reference
to Exhibit 3.1 to the Company's CurrentQuarterly Report on Form 8-K10-QSB for
the quarter ending February 28, 2007, which was filed on August 16, 2005).April 13,
2007.)
4.1+ Form of certificate representing shares of the Company's common stock.
4.2 Form of Certificate of Designation of Rights and Preferences of Series
A Convertible Preferred Stock. (Incorporated by reference to Exhibit
10.3 to the Company's Current Report on Form 8-K filed on April 14,
2006).
4.3+ Form of certificate representing shares of the Company's preferred stock.Series A
Preferred Stock.
4.4+ Form of certificate representing shares of the Company's Series B
Preferred Stock.
4.5+ Form of certificate representing shares of the Company's Series C
Preferred Stock.
4.12 Form of Series C Convertible Preferred Stock Purchase Agreement, dated
November 5, 2007, by and between the Company and each of the
Purchasers thereto (Incorporated by reference to Exhibit 10.1 to the
Company's Current Report on Form 8-K filed on November 7, 2007).
4.13 Form of Registration Rights Agreement by and between the Company and
each of the Purchasers thereto (Incorporated by reference to Exhibit
10.2 to the Company's Current Report on Form 8-K filed on November 7,
2007).
4.14 Form of Certificate of Designation of Rights and Preferences of Series
C Convertible Preferred Stock (Incorporated by reference to Exhibit
10.3 to the Company's Current Report on Form 8-K filed on November 7,
2007).
59
4.15 Form of Lock-Up Agreement by and between the Company and each of the
shareholders listed therein (Incorporated by reference to Exhibit 10.4
to the Company's Current Report on Form 8-K filed on November 7,
2007).
4.16 Form of Warrants (Incorporated by reference to Exhibits 10.5 through
10.11 to the Company's Current Report on Form 8-K filed on November 7,
2007).
10.1 Form of Series A Convertible Preferred Stock Purchase Agreement, dated
April 12, 2006, by and between the Company and each of the Purchasers
thereto (Incorporated by reference to Exhibit 10.1 to the Company's
Current Report on Form 8-K filed on April 14, 2006).
10.2 Form of Registration Rights Agreement, dated April 12, 2006, by and
between the Company and each of the Purchasers thereto. (Incorporated
by reference to Exhibit 10.2 to the Company's Current Report on Form
8-K filed on April 14, 2006).
10.4 Form of Individual Lock-Up Agreement dated April 12, 2006 by and
between the Company and each of the shareholders listed therein.
(Incorporated by reference to Exhibit 10.4 to the Company's Current
Report on Form 8-K filed on April 14, 2006).
10.5 Form of Lock-Up Agreement dated April 12, 2006 by and between the
Company and World Wide Mortgage Corporation. (Incorporated by
reference to Exhibit 10.5 to the Company's Current Report on Form 8-K
filed on April 14, 2006).
43
10.6 Form of Series A Warrant dated April 12, 2006. (Incorporated by
reference to Exhibit 10.6 to the Company's Current Report on Form 8-K
filed on April 14, 2006).
10.7 Form of Series B Warrant dated April 12, 2006. (Incorporated by
reference to Exhibit 10.7 to the Company's Current Report on Form 8-K
filed on April 14, 2006).
10.8 Form of Series C Warrant dated April 12, 2006. (Incorporated by
reference to Exhibit 10.8 to the Company's Current Report on Form 8-K
filed on April 14, 2006).
10.9 Form of Series D Warrant dated April 12, 2006. (Incorporated by
reference to Exhibit 10.9 to the Company's Current Report on Form 8-K
filed on April 14, 2006).
10.10 Form of Series E Warrant dated April 12, 2006. (Incorporated by
reference to Exhibit 10.10 to the Company's Current Report on Form 8-K
filed on April 14, 2006).
10.11 Form of Series F Warrant dated April 12, 2006. (Incorporated by
reference to Exhibit 10.11 to the Company's Current Report on Form 8-K
filed on April 14, 2006).
10.12 Form of Series G Warrant dated April 12, 2006. (Incorporated by
reference to Exhibit 10.12 to the Company's Current Report on Form 8-K
filed on April 14, 2006).
10.13 Form of Series H Warrant dated April 12, 2006. (Incorporated by
reference to Exhibit 10.13 to the Company's Current Report on Form 8-K
filed on April 14, 2006).
10.14 Form of Series J Warrant dated April 12, 2006. (Incorporated by
reference to Exhibit 10.14 to the Company's Current Report on Form 8-K
filed on April 14, 2006).
10.15 Form of Series A Convertible Preferred Stock Purchase Agreement, dated
May 30, 2006, by and between the Company and each of the Purchasers
thereto (Incorporated by reference to Exhibit 10.1 to the Company's
Current Report on Form 8-K filed on May 30, 2006).
60
10.16 Form of Registration Rights Agreement, dated May 30, 2006, by and
between the Company and each of the Purchasers thereto. (Incorporated
by reference to Exhibit 10.2 to the Company's Current Report on Form
8-K filed on May 30, 2006).
10.17 Form of Series A Warrant dated May 30, 2006. (Incorporated by
reference to Exhibit 10.3 to the Company's Current Report on Form 8-K
filed on May 30, 2006).
10.18 Form of Series B Warrant dated May 30, 2006. (Incorporated by
reference to Exhibit 10.4 to the Company's Current Report on Form 8-K
filed on May 30, 2006).
10.19 Form of Series C Warrant dated May 30, 2006. (Incorporated by
reference to Exhibit 10.5 to the Company's Current Report on Form 8-K
filed on May 30, 2006).16, 2005).
10.20 Form of Series D Warrant dated may 30, 2006. (Incorporated by
reference to Exhibit 10.6 to the Company's Current Report on Form 8-K
filed on May 30, 2006).
44
10.21 Amendment to Registration Rights Agreement dated May 30,
2006(Incorporated by reference to Exhibit 10.7 to the Company's
Current Report on Form 8-K filed on August 16, 2005).
10.22 Form of Joinder Agreement to the Series A Convertible Preferred Stock
Purchase Agreement, dated May 30, 2006, by and between the Company and
each of the Purchasers thereto (Incorporated by reference to Exhibit
10.1 to the Company's Current Report on Form 8-K filed on June 30,
2006).
10.23 Form of Joinder Agreement to the Registration Rights Agreement, dated
May 30, 2006, by and between the Company and each of the Purchasers
thereto. (Incorporated by reference to Exhibit 10.2 to the Company's
Current Report on Form 8-K filed on June 30, 2006).
21.1+ List of Subsidiaries.
31.1+ Certification of Chief Executive Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2+ Certification of Acting Chief Accounting Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
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.
+ Filed herewith.
4561
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
(1) AUDIT FEES
The aggregate fees billed for professional services rendered by LBB &
Associates, Ltd., LPP (formerly Lopez, Blevins, Bork & Associates, LLP) for the
audit of the registrant's annual financial statements and review of financial
statements included in the registrant's Form 10-KSB or services that are
normally provided by the accountant in connection with statutory and regulatory
filings or engagements for fiscal years 20062007 and 20052006 were approximately
$46,000$102,000 and $9,000,$46,000 respectively.
(2) AUDIT-RELATED FEES
NONE
(3) TAX FEES
NONE
(4) ALL OTHER FEES
NONE
(5) AUDIT COMMITTEE POLICIES AND PROCEDURES
The policy of our Audit Committee is to pre-approve all audit and
permissible non-audit services to be performed by the Company's independent
auditors during the fiscal year.
No services related to Audit-Related Fees, Tax Fees or All Other Fees
described above, were approved by the Audit Committee.
62
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
/s/ Robert Saunders Dated: November 28, 200629, 2007
- ---------------------------
Robert Saunders
President and Chief Executive Officer
/s/ Michael Boswell Dated: November 28, 200629, 2007
- ---------------------------
Michael Boswell
Director & Acting Chief Accounting Officer
46
/s/ Douglas C. MacLellan Dated: November 28, 200629, 2007
- ---------------------------
Douglas C. MacLellan
Vice-chairman of the Board
/s/ Mark H. Elenowitz Dated: November 28, 200629, 2007
- ---------------------------
Mark H. Elenowitz
Director
/s/ Dr. Robert Rooks Dated: November 28, 200629, 2007
- --------------------------
Dr. Robert Rooks
Director
/s/ Ian Fraser Dated: November 28, 200629, 2007
- --------------------------
Ian Fraser
Director
/s/ Victor Bolton Dated: November 29, 2007
- --------------------------
Victor Bolton
Director
/s/ DarylDarryl Horton Dated: November 28, 200629, 2007
- --------------------------
Darryl Horton
Director
4763
Exhibit 31.1
Certification of Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act and Rule 13a-14(a)
or 15d-14(a) under the Securities Exchange Act of 1934
I, Robert Saunders, certify that:
1. I have reviewed this Annual Report on Form 10-KSB of Edgewater Foods
International, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the small business issuer as of, and for, the periods presented in this
report;
4. The small business issuer's other certifying officer and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e) for the small
business issuer and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the small
business issuer, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the period
in which this report is being prepared;
b) Evaluated the effectiveness of the small business issuer's disclosure
controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as
of the end of the period covered by this report based on such
evaluation; and
c) Disclosed in this report any change in the small business issuer's
internal control over financial reporting that occurred during the
small business issuer's most recent fiscal quarter (the small business
issuer's fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect,
the small business issuer's internal control over financial reporting;
and
5. The small business issuer's other certifying officer and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the small business issuer's auditors and the audit committee
of the small business issuer's board of directors (or persons performing
the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the small business issuer's
ability to record, process, summarize and report financial information
;information;
and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the small business issuer's
internal control over financial reporting.
Date: November 28, 200629, 2007
By: /s/ Robert Saunders
- -------------------------------------------------
Robert Saunders
Chief Executive Officer
Exhibit 31.2
------------
Certification of Acting Chief Accounting Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act and Rule 13a-14(a)
or 15d-14(a) under the Securities Exchange Act of 1934
I, Michael Boswell, certify that:
1. I have reviewed this Annual Report on Form 10-KSB of Edgewater Foods
International, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the small business issuer as of, and for, the periods presented in this
report;
4. The small business issuer's other certifying officer and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e) for the small
business issuer and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the small
business issuer, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the period
in which this report is being prepared;
b) Evaluated the effectiveness of the small business issuer's disclosure
controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as
of the end of the period covered by this report based on such
evaluation; and
c) Disclosed in this report any change in the small business issuer's
internal control over financial reporting that occurred during the
small business issuer's most recent fiscal quarter (the small business
issuer's fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect,
the small business issuer's internal control over financial reporting;
and
5. The small business issuer's other certifying officer and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the small business issuer's auditors and the audit committee
of the small business issuer's board of directors (or persons performing
the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the small business issuer's
ability to record, process, summarize and report financial information
;information;
and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the small business issuer's
internal control over financial reporting.
Date: November 28, 200629, 2007
By: /s/ Michael Boswell
-------------------------------------------
Michael Boswell
Acting Chief Accounting Officer
Exhibit 32.1
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Written Statement of the Chief Executive Officer and Acting Chief Accounting
Officer Pursuant to 18 U.S.C. Section 1350
In connection with the filing of the Annual Report on Form 10-KSB for the fiscal
year ended August 31, 20062007 (the "Report") by Edgewater Foods International, Inc.
("Registrant"), the undersigned hereby certifies that, to the best of his
knowledge:
1. The Report fully complies with the requirements of section 13(a) or 15(d)
of the Securities Exchange Act of 1934, as amended, and
2. The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
Registrant.
Date: November 28, 200629, 2007
/s/ Robert Saunders
- ---------------------------------------
Robert Saunders
Chief Executive Officer
/s/ Michael Boswell
- ---------------------------------------
Michael Boswell
Acting Chief Accounting Officer
A signed original of this written statement required by 18 U.S.C. Section 1350
has been provided to Edgewater Foods International, Inc and will be retained by
Edgewater Foods International, Inc and furnished to the Securities and Exchange
Commission or its staff upon request.