LAW OFFICES OF LOUIS E. TAUBMAN, P.C.
225 Broadway, Suite 1200
New York, New York 10007
(212) 732-7184 Fax: (212)202-6380
E-mail: Louistlaw@aol.com
May 31, 2006
U.S. Securities and Exchange Commission
Division of Corporate Finance 450 Fifth
Street, N.W.
Washington, D.C. 20549-0303
Attn: Karl Hiller, Branch Chief
Lilly Dang, Staff Attorney
Re: Edgewater Foods International, Inc.
Form 10-KSB for Fiscal Year Ended August 31, 2005 File
December 14, 2005; Form 10-QSB for Fiscal Quarter Ended
February 28, 2006 Filed April 14, 2006 File No. 333-106955
Dear Mr. Hiller:
This letter is provided in response to your letter dated May 3, 2006,
regarding the above-referenced periodic reports for our client, Edgewater Foods
International, Inc. (the "Company"). Our responses are set forth below the items
noted by the staff in your letter.
1. For all comments issued below on your Form 10-KSB, 10-QSB and 8-K,
please make corresponding changes to the accounting and disclosures in
all documents, where appropriate.
Response: We have revised the documents accordingly.
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2. Please refer to the updated Form requirements for filings on Forms
10-KSB and 10-QSB, requiring an indication on the cover of our filings
of whether you meet the definition of a shell company, as defined in
Rule 12b-2 of the Exchange Act, and whether you are not required to
file reports pursuant to Section 13 or 15d of the Exchange Act.
Response: We have revised the documents accordingly.
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3. We note you disclose that the $29,000 decrease in gross loss for 2005
as compared to 2004 was mainly attributable to your decision to
capitalize inventory costs for biomass inventory of scallops which
previously were not capitalized, and to recognize recoverable inventory
costs. Please expand your disclosure to describe the reasons you
changed your accounting method and to indicate whether this was a
correction of an error. Additionally, address your accounting method
change in a note to your financial statements and explain how this has
been depicted in your financial statements to comply with the guidance
in APB 20.
Response: As the Company began placing an emphasis on the expansion of
future crops and crop yield in its 2005 fiscal year, Management decided
that it was preferable to carry Biomass (Scallops) and finished goods
at the lesser of cost (which included direct and reasonably attrituable
indirect production costs related to hatchery, cultivation, harvesting,
and processing activities) and estimated net realizable cost.
Previously, the Company had written-off the capital costs associated
with inventory and assigned a nil value to its Biomass. However,
Management believed that, given the projected increase in upcoming
annual crops, the capital costs associated with inventory should no
longer be written-off on a go forward basis. Based on Management's
review of Statement of Financial Accounting Standards (FASB) No. 154 (a
replacement of APB Opinion No. 20 and FASB Statement No.3), we do not
believe that this decision represents a change in accounting or a
change in an accounting principle.
As requested, we will revise our disclosure in Comparison of Results
for the Fiscal Year Ended August 31, 2005 to Fiscal Year Ended August
31, 2004, page 23 of Form 10KSB for the Fiscal Year Ended August 31,
2005 to describe the reasons for our change in inventory carrying costs
as follows:
"Gross profit (loss). Gross loss for the year ended August 31, 2005,
was approximately $51,000, a decrease of approximately $29,000 as
compared to gross loss of roughly $80,000, for the year ended August
31, 2004. The decrease in the amount of gross loss was mainly
attributable to management's decision to NO LONGER WRITE OFF THE
CAPITAL COSTS ASSOCIATED WITH our inventory and recognize recoverable
inventory costs at that date. AS THE COMPANY BEGAN PLACING AN EMPHASIS
ON THE EXPANSION OF FUTURE CROPS AND CROP YIELD IN ITS 2005 FISCAL
YEAR, MANAGEMENT DECIDED THAT IT WAS PREFERABLE TO CARRY BIOMASS
(SCALLOPS) AND FINISHED GOODS AT THE LESSER OF COST (WHICH INCLUDED
DIRECT AND REASONABLY ATTRITUABLE INDIRECT PRODUCTION COSTS RELATED TO
HATCHERY, CULTIVATION, HARVESTING, AND PROCESSING ACTIVITIES) AND
ESTIMATED NET REALIZABLE COST. Previously, the Company had assigned nil
carrying amount to the biomass inventor of scallops."
Additionally and as requested, we will add the following disclosure
under the Inventory section of Note 2: Significant Accounting Policies
on Page 37 of our Form 10KSB for the Fiscal Year Ended August 31, 2005.
"The Company maintains inventories of raw materials for its aquaculture
products, of biomass (inventory of live aquaculture product being
actively cultivated), and of finished goods (aquaculture product ready
for sale).
Raw materials are reported at the lesser of purchase cost and estimated
net realizable value.
Biomass and finished goods are reported at the lesser of cost and
estimated net realizable value. Cost 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.
PREVIOUSLY, THE COMPANY ASSIGNED A NIL VALUE TO ITS BIOMASS AND FARMING
COSTS ASSOCIATED WITH THE DEVELOPMENT OF SCALLOP CROPS WAS CARRIED
WITHIN COST OF GOODS SOLD. HOWEVER, MANAGEMENT BELIEVED THAT, GIVEN THE
PROJECTED INCREASE IN UPCOMING ANNUAL CROPS, THE CAPITAL COSTS
ASSOCIATED WITH INVENTORY SHOULD NO LONGER BE WRITTEN-OFF ON A GO
FORWARD BASIS. BASED ON MANAGEMENT'S REVIEW OF STATEMENT OF FINANCIAL
ACCOUNTING STANDARDS (FASB) NO. 154 (A REPLACEMENT OF APB OPINION NO.
20 AND FASB STATEMENT NO.3, WE DO NOT BELIEVE THAT THIS DECISION
REPRESENTS A CHANGE IN ACCOUNTING OR A CHANGE IN AN ACCOUNTING
PRINCIPLE.
At August 31, 2005, inventory consisted of the following:
Biomass (Scallops): $540,126
4. We note that your prior auditors BME + Partners issued a qualified
"except for" opinion on Island Scallops Ltd.'s financial statements as
of August 31, 2004 and for the year then ended, since they were not
able to observe the counting of your physical inventories at the
beginning and ending of the year ended August 31, 2004, nor satisfy
themselves concerning those inventory quantities by alternative means.
Please note that qualified audit opinions are not acceptable in SEC
filings. Refer to the guidance in SAB Topic 1:E.2 and FRC Section
607.01. Please remove this independent auditors report and label your
financial statements as of August 31, 2004 and for the year then ended
as unaudited until you have obtained an audit in which the auditor is
able to issue an unqualified opinion. Please make corresponding changes
to the Island Scallops' financial statements attached as an exhibit to
your Form 8-K filed on August 16, 2005.
Response: We are currently working with BME + Partners to revise their
audit and remove their qualified audit opinion. We are presently
developing further documentation regarding inventory that will allow
more acceptable assurance regarding scallop inventory. As such, we will
update our Form 10-KSB and Form 8-K as requested.
5. It appears that you may need to revise your consolidated statements of
operations to reflect your gain on sale of tenure as part of your loss
from operations to comply with the guidance in paragraph 45 of SFAS
144. On a related point, tell us the reasons you believe the loss on
settling the lawsuit is appropriately characterized as a non-operating
item.
Response: Per the guidance in paragraph 45 of SFAS 144 and as
requested, we will revise our statement of operations on our Form 10KSB
for the Fiscal Year Ended August 31, 2005 to reflect the gain of the
sale of our tenure as part of our loss for operations. On a related
note, we carried our loss on the settlement of the lawsuit as other
income (expense) because it was not part or our "normal" operations and
carried it on our statement of operations as a non-operating item under
"other income". Additionally, substantially all of the loss ($37,547 of
the $40,551 loss or 92.4%) was related to a cash payment and not a
disposal of assets; we did not believe that the guidance of paragraph
45 of SFAS 144, (related to the disposal of long-lived assets) is
directly relevant. However, we have reviewed the loss on the settlement
of the lawsuit and will revise our statement of operations on our Form
10KSB for the Fiscal Year Ended August 31, 2005 to reflect the loss on
settling the lawsuit as part of our loss for operations.
6. Please revise your consolidated statements of stockholders' equity to
show the effects of exchanging shares in your two reverse mergers on a
retroactive basis. Share activities of the accounting acquirer in a
reverse merger should be recast using the ratio of shares issued by the
legal acquirer in the reverse merger over shares of the accounting
acquirer that were outstanding immediately prior to the exchange.
Once you have revised the presentation, please also revise your
disclosure to explain the procedures employed and the specific entries
that are made in the equity section to account for each reverse merger,
specifying the shares exchanged in each instance, and the value of net
assets acquired along with the legal issuers.
Response: Based on our review of the SEC Manual Item 2.6.5.4 Reverse
Acquisitions, we believe our Consolidated Statement of Stockholders'
Equity in our Form 10KSB for the Fiscal Year Ended August 31, 2005
correctly shows the effect of our two reverse mergers on a retroactive
basis. The guidance states that "in a reverse acquisition the
historical shareholder's equity of the accounting acquirer prior to the
merger is retroactively restated (a recapitalization) for equivalent
number of shares received in the merger after giving effect to any
difference in par value of the registrant's and the accounting
acquirer's stock by an offset in paid in capital." Based on this
statement, we believe our Consolidated Statement of Stockholders'
Equity properly shows the effects of the reverse mergers by
retroactively stating the 10,300,000 shares given to Island Scallops
(accounting acquiror in the private reverse merger with Edgewater
Foods) and the subsequent recapitalization of Heritage (1,585,400
shares) in the reverse merger with Edgewater Foods. As requested we
will revise our disclosure in Note 1 - Basis of Presentation,
Organization and Nature of Operations, page 36 of Form 10KSB for the
Fiscal Year Ended August 31, 2005 to expand our disclosure to clarify
the shares exchanged for each reverse merger. As such, paragraph two
and three of Note 1 will be revised as follows:
"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.
became the wholly owned 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 Foods is the legal parent company. THE SHARE EXCHANGE WAS
TREATED AS A RECAPITALIZATION OF EDGEWATER FOODS. As such, Island
Scallops (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 FOR A 100% EQUITY INTEREST IN EDGEWATER FOODS.
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 Foods
was considered to be the accounting acquirer as its shareholders
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. Thus, 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."
7. We note you disclose that on August 15, 2005, you completed a reverse
acquisition of Heritage Management Corporation, and the share exchange
was treated as a recapitalization of Edgewater. Please expand your
disclosure to clarify whether Heritage was a shell company at the time
of your reverse acquisition.
Additionally, you disclosed that on June 29, 2005, Edgewater Foods
International, Inc. completed a share exchange with Island Scallops,
Ltd., with Island Scallops being the accounting acquirer and the
continuing entity for financial reporting purposes. Please expand your
disclosure to clarify whether Edgewater was also a shell company and
whether the share exchange was also accounted for as a
recapitalization.
Response: As requested, we will revise our disclosure in Note 1 - Basis
of Presentation, Organization and Nature of Operations, page 36 of Form
10KSB for the Fiscal Year Ended August 31, 2005 to expand our
disclosure to clarify that Heritage was a shell company at the time of
our reverse acquisition. As such, paragraph three of Note 1 will be
revised as follows:
"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 FOR A 100% EQUITY INTEREST IN EDGEWATER FOODS.
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 its shareholders retained
control of Heritage after the exchange. Although Heritage 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."
As requested, we will also revise our disclosure in Note 1 - Basis of
Presentation, Organization and Nature of Operations, page 36 of Form
10KSB for the Fiscal Year Ended August 31, 2005 to expand our
disclosure to clarify that the share exchange was also accounted for as
a recapitalization. As such, paragraph two of Note 1 will be revised as
follows:
"On June 29, 2005, Edgewater Foods International, Inc. ("Edgewater"), A
PRIVATE HOLDING 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
become the wholly own subsidiary of Edgewater Foods. As a result, the
shareholders of Island Scallops owned a majority (54.21%) of the voting
stock of Edgewater Foods. 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 Foods is the legal parent company. THE
SHARE EXCHANGE WAS TREATED AS A RECAPITALIZATION OF EDGEWATER FOODS. As
such, Island Scallops (and its historical financial statements) is the
continuing entity for financial reporting purposes."
8. We note you disclose that you received government assistance in the
form of loans, for which repayment is not required if you meet
specified future conditions. Please expand your disclosure to discuss
the nature of these conditions.
Response: As requested, we will revise our disclosure in the Government
Assistance section of Note 2 - Significant Accounting Policies, page 38
of Form 10KSB for the Fiscal Year Ended August 31, 2005 to expand our
disclosure to discuss the nature of certain future conditions under
which repayment of government assistance may not be required. As such,
our Government Assistance section will be revised as follows:
"Government assistance received by the Company, 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 has received government assistance in the foam of loans,
for which repayment MAY not BE required if the Company FAILS 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 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 revenue in that period."
Additional information detailing the specific revenue percentages and
repayment period for each government loan is disclosed in Note 9 - Long
Term Debt, page 46 of Form 10KSB for the Fiscal Year Ended August 31,
2005.
9. We note you disclose that approximately 60 percent and 50 percent of
your revenues for fiscal years 2005 and 2004 were derived from three
major customers. Please expand your disclosure to specify the revenues
attributable to individual customers contributing 10 percent or more to
your revenue each year to comply paragraph 39 of SFAS 131.
Response: During our fiscal years ending December 31, 2005 and 2004,
only those three major customers contributed 10 percent or more of our
revenue each year. As we requested, we will revise our disclosure in
the Concentration of Risk section of Note 2 - Significant Accounting
Policies, page 40 of Form 10KSB for the Fiscal Year Ended August 31,
2005 to specify the revenues attributable to individual customers
contributing 10 percent of more of our revenue each year to comply with
paragraph 39 of SFAS 131. As such, our Concentration of Risk section
will be revised as follows:
"The Company operates in the regulated aquaculture industry. Material
changes in this industry or the applicable regulations could have a
significant impact on the Company.
The quality and quantity of the aquaculture products cultivated,
harvested and processed by the Company could be impacted by biological
and environmental risks such as contamination, parasites, predators,
disease and pollution. These factors could severely restrict the
ability of the Company to successfully market its products.
DURING the year ended August 31, 2005, three customers, TRISTAR, SEA
WORLD AND LOBSTERMAN, INDIVIDUALLY ACCOUNTED FOR 23%, 17% AND 14% OR
OUR REVENUES RESPECTIVELY, AND WE THEREFORE ARE MATERIALLY DEPENDENT
UPON SUCH CUSTOMERS. DURING THE YEAR ENDED AUGUST 31, 2004, TRISTAR,
SUMMER BREEZE AND SEA WORLD, INDIVIDUALLY ACCOUNTED FOR 27%, 15% AND
10% OR OUR REVENUES RESPECTIVELY. The Company's ongoing operations are
dependent on continued business from these customers.
10. Please expand your disclosure to discuss the impact that adoption of
new accounting standards is expected to have on your financial
statements, to comply with SAB Topic 11:M. Additionally, it appears
that you could enhance the focus of your disclosure by removing from
your disclosure of recent accounting pronouncements discussions of the
standards issued and adopted in prior years or that were not otherwise
applicable.
Response: As requested, we will revise our disclosure in the Recent
Accounting Pronouncements section of Note 2 - Significant Accounting
Policies, page 41 of Form 10KSB for the Fiscal Year Ended August 31,
2005 to expand our disclosure to clarify the impact that the new
accounting standards are expected to have on our financial statements.
Additionally, we will enhance our disclosure by removing recent
discussions of recent accounting pronouncements adopted in prior years.
As such, the Recent Accounting Pronouncements section of Note 2 will be
read as follows:
In November of 2004, the FASB issued Statement of Financial Accounting
Standards No. 151 ("SFAS 151"). SFAS 151 amends the guidance in
Accounting Research Bulletin No. 43 (Inventory Pricing) to clarify the
accounting for abnormal amounts of idle facility expense, freight,
handling costs, and waste material. Among other provisions, SFAS 151
requires that items, such as idle facility expense, excessive spoilage,
double freight, and rehandling costs, be recognized as current period
charges. Additionally, SFAS 151 requires that the allocation of fixed
production overheads to the costs of conversions be based on normal
capacity of the production facilities. SFAS 151 is effective for fiscal
years beginning after June 15, 2005, and is required to be adopted by
the Company in the first quarter of fiscal 2006. IN THE OPINION OF
MANAGEMENT, THE ADOPTION OF THIS STATEMENT WILL NOT HAVE ANY IMPACT ON
THE COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS.
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
123R is required to be adopted by the Company not later than for the
2007 fiscal year. IN THE OPINION OF MANAGEMENT, THE ADOPTION OF THIS
STATEMENT WILL NOT HAVE A SIGNIFICANT IMPACT ON THE COMPANY'S
CONSOLIDATED FINANCIAL STATEMENTS.
In December of 2004, the FASB issued Statement of Financial Accounting
Standards No. 153 (Exchanges of Nonmonetary Assets - An Amendment of
APB Opinion No. 29, Accounting for Nonmonetary transactions) ("SFAS
153"). 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 153 specifies
that a nonmonetary exchange has commercial substance if the future cash
flows of the entity are expected to change significantly as a result of
the exchange. SFAS 153 is effective for fiscal periods beginning after
June 15, 2005, and 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' financial statements, unless it is
impracticable to do so. 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
prospectively 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
changes and corrections of errors made in fiscal years beginning after
the date the Statement was issued (May 2005). Statement 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. WE DO NOT CURRENTLY BELIEVE
THAT THE ADOPTION OF SFAS NO.154 WILL HAVE A MATERIAL IMPACT ON ITS
CONSOLIDATED FINANCIAL STATEMENTS.
11. We note you disclose that a third party holds a first charge over your
inventory in the amount of $293,698 in support of its royalty
entitlement, but that it has not taken further action to enforce
payment of this arrears liability. Expand your disclosure to clarify
what you mean by the term "first charge," how much you have accrued for
this liability, and when you plan to pay it. If you do not plan to pay
this liability, disclose your reasons and describe the circumstances
sufficiently to understand how your accounting compares to that which
is required under paragraph 16 of SFAS 140.
Response: As requested, we will revise our disclosure in Note 7 - Short
Term Debt, page 45 of Form 10KSB for the Fiscal Year Ended August 31,
2005 to expand our disclosure to clarify the term "first charge" and
discuss how much has been accured to date and when we plan to pay for
the liability. As such, the second paragraph of our note will be
revised as follows:
"Included in short-term debt at August 31, 2005 is estimated royalties
of $55,848 (2004: $50,443) payable to a third party from whom the
former sole shareholder of Island Scallops originally acquired the
shares of Island Scallops. The 1992 share purchase agreement (for
Island Scallops) provided that the third party was to receive from the
Company 3% of the Company's revenues 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 inventory of the
Company (including broodstock) in the amount of $293,698 (2004:
$265,272) 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 $55,848 AS A CURRENT
LIABILITY AND WE PLAN TO PAY IT WITH AVAILABLE FUNDS IN THE NEAR
FUTURE."
12. Please expand your disclosure to discuss how you accounted for the
forgiveness of $3.2 million unsecured debt owed by your CEO; the manner
by which this item is reflected in each of your financial statements
should be clear.
Response: As requested, we will revise our disclosure in Note 8 -
Forgiveness of Note Due Shareholder, page 35 of Form 10KSB for the
Fiscal Year Ended August 31, 2005 to expand our disclosure to discuss
the manner by which this item is reflected in each of our financial
statements. As such, our note will be revised as follows:
"In August, 2005, our Board of Directors approved the forgiveness of
$3,152,978 of unsecured debt held by Robert Saunders, our Chairman,
President and CEO, and former sole shareholder of Island Scallops. This
debt, which represents an amount advanced to the Company by the
Company's previous shareholder, was acquired by Mr. Saunders at the
time of his acquisition of the Island Scallops in 1992. SINCE THIS WAS
A RELATED PARTY TRANSACTION, THIS FORGIVENESS OF DEBT IS REFLECTED IN
ADDITIONAL PAID IN CAPITAL ON OUR BALANCE SHEET AND STATEMENT OF
STOCKHOLDERS' EQUITY."
13. We note you disclose that you received $64,140 advance payments for
sale of geoduck seed from each of two counterparties in 2002. You
further disclose that you believe the counterparties violated the terms
of the agreement such that you are entitled to retain the balance of
the deposits. However, you also state that as of August 31, 2004, one
of the two counterparties had made claims that you owed it $74,704.
Please expand your disclosure to explain the nature of the violation,
why you believe you are entitled to retain the balance of the deposits,
and why the counterparty believes that you owe it more than what you
received.
Response: As requested, we will revise our disclosure in Note 10 -
Contingent Liabilities, page 47 of Form 10KSB for the Fiscal Year Ended
August 31, 2005 to expand our disclosure to explain the nature of the
parties' violation, why we believe that we are entitled to keep the
balance of the deposits and why one of the parties believes that they
are owned additional funds. As such, our note will be revised as
follows:
"In 1998, the Company's wholly owned subsidiary, Island Scallops,
entered into an agreement with two parties, under which Island Scallops
was to produce and sell geoduck seed to the two parties. Island
Scallops received advance payments from each of the two parties in 2002
of approximately $64,140 and recognized related revenue of $43,705 in
respect to seed delivered in 2002. The balance of the deposits received
(ADVANCE PAYMENTS), net of sales, totaling $110,648, is included in
accounts payable and accrued liabilities.
The position of Management is that the two parties violated the terms
of the agreement, such that the Company is entitled to retain the
balance of the deposits. PER THE TERMS OF THE ORIGINAL AGREEMENT,
ISLAND SCALLOP WAS ENTITLED TO MAKE UP ANY SHORTFALL IN THE PRODUCT
PRODUCED IN THE FOLLOWING YEAR. ALTHOUGH PRODUCT WAS AVAILABLE AND
OFFERED BY ISLAND SCALLOPS IN THE FOLLOWING YEAR, THE TWO PARTIES
REFUSED TO HONOR THE TERMS OF THE AGREEMENT AND WOULD NOT ACCEPT THE
PRODUCT (TO MAKE UP THE SHORTFALL) IN THE FOLLOWING YEAR.
As of August 31, 2004, one of the two parties made claims that it was
owed amounts totaling $74,704. THIS PARTICULAR PARTY BELIEVED THAT THE
AGREEMENT REQUIRED ISLAND SCALLOPS TO DELIVER THE PRODUCT IN YEAR ONE
AND DID NOT ALLOW ISLAND SCALLOP TO MAKE UP ANY SHORTFALL WITH PRODUCT
PRODUCED IN THE FOLLOWING YEAR. The balance included in accounts
payable and accrued liabilities related to this party is $29,156.
Any additional liability to the Company, 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."
14. We note your disclosure explaining that you recorded the 100,000 shares
issued to an individual who would provide services to your company at
par value. Tell us the reasons you believe the guidance in paragraph 8
of SFAS 123 does not apply to your transaction.
Response: These shares were issued while Edgewater Foods was still a
private company and we recorded the value of this expense based on the
value of our shares at the time of issuance (par value of $0.0001).
This value was based on recent cash purchases of shares in Edgewater
Foods at par value. We believed that this provided sufficient evidence
of the fair value of the equity instrument. We do not believe that the
guidance in paragraph 8 of SFAS 123 ("Share-Based Payment") applies to
this transaction since that direction states that this "statement does
not specify the measurement date for share-based payment transaction
with nonemployees for which the measure of the cost of goods acquired
or services is based on the fair value of the equity instruments
issued." Furthermore, EITF Issue No. 96-18 ("Accounting for Equity
Instruments that are Issued to Other than Employees for Acquiring, or
in Conjunction with Selling, Goods or Services") states that "paragraph
8 of Statement 123 states that those transactions should be measured at
the fair value of the consideration received or the fair value of the
equity instruments issued, whichever is more reliably measurable."
Accordingly, we believe there was sufficient evidence to clearly
establish the fair value of the equity issued and the expense should be
valued at this fair value.
15. Please revise the second paragraph of your disclosure to state your
conclusion about changes in your internal controls over financial
reporting, based on the wording and timing requirements of Regulation
S-B, Item 308(c).
Response: As requested, we will revise our disclosure in Item 8A.
Controls and Procedures, page 50 of Form 10KSB for the Fiscal Year
Ended August 31, 2005 to state our conclusions about the changes in our
internal controls over financial reporting, based on the wording and
timing requirements of Regulation S-B, Item 308 (c). As such, our
second paragraph of Item 8A will be revised as follows:
"THERE WAS NO CHANGE IN OUR INTERNAL CONTROL OVER FINANCIAL REPORTING
IDENTIFIED IN CONNECTION WITH THE EVALUATION REQUIRED BY RULE 13A-15(D)
AND 15D-15(D) OF THE EXCHANGE ACT THAT OCCURRED DURING THE PERIOD
COVERED BY THIS REPORT THAT HAS MATERIALLY AFFECTED, OR IS REASONABLY
LIKELY TO MATERIALLY AFFECT, OUR INTERNAL CONTROL OVER FINANCIAL
REPORTING."
16. We note you disclose on page 15 stating that at February 28, 2006, you
were in arrears with respect to loan payments to the National Research
Council of Canada Industrial Research Assistance Program. Please expand
your disclosure to discuss the implementation of late or nonpayments to
the government on your ability to renew your shellfish tenures.
Response: As requested, we will expand our disclosure in Note 5 -
Investments in Other Assets (Tenures), page 13 of Form 10QSB for the
Fiscal Quarter Ended February 28, 2006 to discuss any implication of
late or non-payments to various government agencies on our ability to
renew our shellfish tenures. As such, the first paragraph of Note 5
will be revised as follows:
"We carry our investment in other assets (tenures) at $3,486 at
February 28, 2006. This amount represents the carrying costs of certain
shellfish tenures acquired by our wholly-owned subsidiary Island
Scallops. 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.
One tenure has an expiration date of July 10, 2021. Other shellfish
tenures that we and our subsidiaries hold have expiration dates ranging
from 2021 to 2024."
17. Tell us why you recorded the $520,000 value of the 400,000 shares of
restricted common stock that you issued to World Wide Mortgage, as
consideration for agreeing to extend the due date of your $1.5 million
loan, as compensation expense. Please submit the analyses that you
performed under EITF 96-19 and 02-4 in assessing the applicability of
SFAS 15 and 140 to the modification that you describe.
Response: Based on review of the guidance provided under EITF 96-19 and
EITF 02-04 in assessing the applicability of SFAS 15 and 140, we do not
believe that this modification should be accounted for as a troubled
debt restructuring and/or modification or exchange of a existing debt
instrument.
According to paragraph 2 of Statement 15, "a restructuring of debt
constitutes a troubled debt restructuring for purposes of this
statement if the creditor for economic or legal reasons related to the
debtor's financial difficulties grants a concession to the debtor that
it would not otherwise consider." Furthermore, paragraph 62 of
Statement 15 states that a troubled debt restructuring "refers in
particular to modification of terms intended to continue an existing
debt by making the terms more favorable to the debtor to protect the
creditors investment." Based on this guidance, we do not believe the
modification to the agreement was a troubled debt restructuring since
the terms (the overall debt and interest rate) of the World Wide debt
was unchanged and we did not receive more favorable terms.
Additionally, as described in ETIF 02-04 discussion of factors that are
indicative of a debtor experiencing financial difficulties, we believe
that we did not qualify as a debtor experiencing financial difficulties
since we had not "declared or [were] in the process of declaring for
bankruptcy", our securities had not been delisted or were not "in the
process of being delisted" and we were still able to obtain funds "from
sources other than the existing creditors" (as evident by our
subsequent equity financing). Furthermore, our review of the guidance
given in EITF 96-19 (Debtor's Accounting for a Modifications or
Exchange of Debt Instruments) indicates that this agreement did not
constitute a transfer or exchange of debt instrument since the basic
terms and conditions of the debt instrument were not substantially
different than our original agreement with World Wide.
18. Ordinarily we would expect U.S. domestic form filers to present
financial statements in U.S. GAAP and U.S. Dollars; and that a pro
forma income statement would be necessary to show the effects of your
reverse merger. We also believe that you should include disclosure
explaining the reasons you reversed all of Heritage's balance sheet
amounts as your pro forma adjustments.
Response: As requested we will expand our pro forma statements to
include a pro forma income statement and include additional disclosure
explaining the reasons for the reversals of Heritage's balance sheet
amounts on our pro forma adjustments. Additionally, all financial
information will be presented in U.S GAAP and U.S. Dollars.
Please be advised that in connection with the foregoing responses, we
acknowledge on behalf of our client, Edgewater Foods International, Inc., that:
o Edgewater is responsible for the adequacy and accuracy of the
disclosures in the filings;
o Staff comments or changes to disclosures in response to staff comments
do not foreclose the Commission from taking any action with respect to
the filings; and
o Edgewater may not assert staff comments as a defense in any proceeding
initiated by the Commission or any person under the federal securities
laws of the United States.
Thank you for your attention to this matter. Please feel free to contact the
undersigned if you have any questions regarding the registration statement or
this letter.
Very truly yours,
/s/ Louis E. Taubman
--------------------
Louis E. Taubman
cc. Robert Saunders, CEO Edgewater Foods International, Inc.
CURRENT REPORT FOR ISSUERS SUBJECT TO THE
1934 ACT REPORTING REQUIREMENTS
FORM 8-K/A
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act
August 15, 2005
Date of Report
(Date of Earliest Event Reported)
Edgewater Foods International, Inc.
(Exact name of registrant as specified in its charter)
Nevada
(State or other jurisdiction (Commission File Number) (IRS Employer of
incorporation) Identification No.)
5552 WEST ISLAND HWY
QUALICUM BEACH, BRITISH COLUMBIA, CANADA. V9K 2C8
(Address of principal executive offices (zip code))
(250)757-9811
(Registrant's telephone number, including area code)
5031 GORDON SMITH
ROWLETT, TEXAS 75088
(Previous Address)
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions (see General Instruction A.2 below):
[ ] Written communications pursuant to Rule 425 under the Securities Act (17 CFR
230.425)
[ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a - 12)
[ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange
Act (17 CFR 240.14d-2(b))
[ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange
Act (17 CFR 240.13d-4(c))
The registrant has previously filed its Current Report on Form 8-K, dated August
15, 2005, without certain financial information required by Item 9.01 (b) on
such Form 8-K. The registrant hereby amends the Current Report on Form 8-K to
file such financial information. Item 9.01 of the Report dated August 15, 2005,
is hereby amend to read as follows:
SECTION 9 - FINANCIAL STATEMENTS AND EXHIBITS
Item 9.01: Financial Statements and Exhibits
- ---------------------------------------------
(a) Financial statements of business acquired
The Audited Financial Statements for Island Scallops, Ltd as of August 31,
2004 and 2003, and for the years ended August 31, 2004 and 2003 are
included following this Item 9.01(a).*
The Unaudited Financial Statements for Island Scallops, Ltd. as of May 31,
2005 and for the nine months ended May 31, 2005 and 2004 are included
following this Item 9.01 (a).*
* Previously filed on Form 8-K dated August 15, 2005.
(b) Pro Forma financial information
The Unaudited Pro Forma Financial information of Island Scallops, Ltd
(Edgewater Foods International) and Heritage Management Corporation for the
period ended May 31, 2005 and June 30, 2005, respectively, related to the
acquisition of Island Scallops, Ltd (Edgewater Foods International) are
included following this item 9.01 (b).
PRO FORMA COMBINING FINANCIAL STATEMENTS
The following pro forma balance sheet and income statement has been derived from
the balance sheet and income statement of Heritage Management, Inc. at June 30,
2005 and adjusts such information to give the effect to the acquisition of
Edgewater Foods International (Island Scallops, Ltd.) as if the acquisition had
occurred at May 31, 2005. The pro forma balance sheet and income statement is
presented for informational purposes only and does not purport to be indicative
of the financial condition that would have resulted if the acquisition had been
consummated at May 31, 2005.
PRO FORMA CONSOLIDATED BALANCE SHEET
(Unaudited)
Heritage
Island Management,
Scallops Ltd Inc. Adjustments Proforma
May 31, June 30,
2005 2005
(unaudited) (unaudited)
------------------------------------------------------------
ASSETS
Current assets:
Cash $ 28,715 $ 1,612 $ (1,612) A $ 28,715
Accounts receivable, 9,385 -- -- 9,385
Loans receivable -- 10,000 (10,000) A --
Inventory 237,371 -- -- 237,371
Prepaid expenses 9,123 -- -- 9,123
Advances and other current assets -- 93,121 (93,121) A --
-------------------------------------- ----------
Total current assets 284,595 104,733 (104,733) 284,595
Property, plant and equipment 909,023 18,909 (18,909) A 909,023
Loans receivable 19,051 14,000 (14,000) A 19,051
Investments in tenures 3,197 -- -- 3,197
-------------------------------------- ----------
Total assets $1,215,865 $ 137,642 $ (137,642) $1,215,865
====================================== ==========
LIABILITIES
Current Liabilities:
Checks issued in excess of funds on deposit $ -- $ -- $ -- $ --
Bank indebtedness -- -- -- --
Accounts payable and accrued liabilities 416,901 8,939 (8,939) A 416,901
Short term debt 679,480 -- -- 679,480
Due to shareholder 3,107,412 -- -- 3,107,412
Current portion of long term debt 948,811 6,018 (6,018) A 948,811
-------------------------------------- -----------
Total Current Liabilities 5,152,604 14,957 (14,957) $ 5,152,604
Long term debt 321,164 12,559 (12,559) A 321,164
-------------------------------------- -----------
Total Liabilities 5,473,768 27,516 (27,516) $ 5,473,768
SHARE CAPITAL AND DEFICIT
Stockholders' Equity
Common stock 1 3,885 (2,300) B 11,885
10,299 C
Additional paid in capital -- 174,965 (174,965) A (11,884)
(1,585) B
Accumulated Deficit $(4,200,130) (68,724) 68,724 $(4,200,130)
Accumulated other comprehensive income $ (57,774) $ (57,774)
-------------------------------------- -----------
Total Stockholders' Equity $(4,257,903) 110,126 (110,126) (4,257,903)
Total Liabilities and Stockholders' Equity $ 1,215,865 137,642 (137,642) $ 1,215,865
====================================== ===========
PRO FORMA CONSOLIDATED INCOME STATEMENT (UNAUDITED)
Heritage Management,
Island Scallops Ltd Inc. Adjustments Proforma
Six Months Ended Six Months Ended
May 31, June 30,
2005 2005
(unaudited) (unaudited)
------------ ------------ ------------ ------------
Revenue $ 307,914 $ 6,957 (6,957) 307,914
Cost of goods sold 288,282 -- 288,282
------------ ------------ ------------ ------------
Gross profit (loss) 19,632 6,957 (6,957) 19,632
Expenses:
General and administrative
expenses 173,771 60,512 (60,512) 173,771
Salaries and benefits 54,661 -- 54,661
Stock compensation expense -- -- -- --
------------ ------------ ------------ ------------
Total 228,432 60,512 (60,512) 228,432
------------ ------------ ------------ ------------
Loss from operations (208,800) (53,555) 53,555 (208,800)
------------ ------------ ------------ ------------
Other income (expense):
Interest (expense), net -- -- --
Other income -- -- --
------------ ------------ ------------
Other income
(expense), net -- -- --
------------ ------------ ------------
Net income (loss) $ (208,800) $ (53,555) $ 53,555 (208,800)
------------ ------------ ------------ ------------
Foreign currency translation (201,786) -- (201,786)
Total Comprehensive (loss) $ (410,586) $ (53,555) 53,555 (410,586)
------------ ------------ ------------ ------------
Net income (loss) per Share
Basic and diluted $ (0.02) $ (0.01) $ (0.02)
------------ ------------ ------------ ------------
Weighted average shares outstanding
Basic and diluted 10,300,000 3,885,400 (2,300,000) 11,885,400
------------ ------------ ------------ ------------
UNAUDITED NOTES TO PRO FORMA COMBINING FINANCIAL STATEMENTS
On August 15, 2005, Heritage Management, Inc. ("Heritage"), a public sheet
company as that term is defined in Rule 12b-2 of the Exchange Act, established
under the laws of Nevada on June 12, 2000, completed a Share Exchange (the
"Share Exchange") 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 Foods
International became our wholly owned subsidiary. The shareholders of Edgewater
now own the majority (92.30%) of our voting stock. To accomplish the Share
Exchange, we issued an aggregate of 19,000,000 shares of our Common Stock in
exchange for all of the issued and outstanding capital stock of Edgewater from
the shareholders of Edgewater. The shares issued to the Edgewater Shareholders
were issued to 17 accredited investors pursuant to a claim of exemption under
Section 4(2) of the Securities Act of 1933, as amended for issuances not
involving a public offering. Additionally, as a condition of the Share Exchange,
E. Lee Murdoch, our controlling shareholder prior to the Share Exchange, agreed
to cancel 2,300,000 shares of our Common Stock upon close of the Share Exchange.
Pursuant to the Share Exchange Agreement, E. Lee Murdoch resigned as a Director
of Heritage. The Share Exchange did not require the approval of our
shareholders.
The transaction was regarded as a reverse merger whereby Edgewater Foods
International was considered to be the accounting acquirer as it retained
control of Heritage after the exchange.
All amounts of Heritage were reversed to net assets assumed by Edgewater Foods
International, Inc. in the reverse merger were $0.
On June 29, 2005, Edgewater Foods International, Inc., a private holding company
established under the laws of Nevada in order to acquire assets in the
aquaculture industry, issued 10,300,000 shares of common stock tin exchange for
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. 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. As
such, Island Scallops (and its historical financial statements) is the
continuing entity for financial reporting purposes.
The preceding unaudited pro forma combined the balance sheet represents the
combined financial position of Edgewater Foods International as of May 31, 2005
as if the reverse merger acquisition occurred on May 31, 2005. The unaudited
combined income statements give effect to the reverse acquisition of Edgewater
Foods International by Heritage assuming that the reverse acquisition took place
on June 1, 2005.
The unaudited pro forma combining financial information is presented for
illustrative purposes only and is not necessarily indicative of the operating
results that would have been achieved if the reverse acquisition of Edgewater
Foods has been consummated as of the beginning of the period indicated, nor is
necessarily indicative of the resulted of future operations.
Assumptions and Adjustments:
A) Per the terms of the Share Exchange and Bill of Sale of Heritage
Funding Corporation and E. Lee Murdoch, Heritage delivered will zero
assets and zero liabilities at time of closing.
B) Mr. E. Lee Murdoch agreed to cancel 2,300,000 shares which he owns,
resulting in 1,585,400 shares issued and outstanding immediately before
issuing 19,000,000 shares to the shareholders of Edgewater Foods
International.
Total shares issued and outstanding at
June 20, 2005 per Form 10-QSB 3,855,400
Cancellation of 2,300,000 shares owned
by Mr. E. Lee Murdoch 2,300,000
---------
Total shares outstanding 1,585,400
C) On August 15, 2005, Heritage issues 19,000,000 shares of common stock
to the shareholders of Edgewater Foods International for 100% interest
in Edgewater Foods International.
Total shares issued for Edgewater Foods 19,000,000
Adjustment for recapitalization of Edgewater
in conjunction with Island Scallops
(accounting acquirer) acquisition 8,700,000
---------
Retroactive shares issued 10,300,000
(c) Exhibits
3.1 Amended and Restated Bylaws*
10.1 Share Exchange Agreement between Heritage Management Corporation and
Edgewater Foods International, dated August 15, 2005.*
10.2 Bill of Sale between Heritage Management, Inc. and E. Lee Murdock,
dated August 14, 2005.*
* Previously filed on Form 8-K dated August 15, 2005.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Current Report on Form 8-K to be signed on its
behalf by the undersigned hereunto duly authorized.
By:
-------------------------------
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, 2005
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: None
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. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Securities Exchange Act of 1934) Yes [ ] No [X]
The issuer's revenues for its most recent fiscal year were: $315,869.
The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant as of December 9, 2005 was $8,932,580 (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 the Company's common stock outstanding on August 31,
2005 was 20,585,400.
ii
TABLE OF CONTENTS
PART I
Item 1 Description of Business..................................... Page 4
Item 2 Description of Property..................................... Page 15
Item 3 Legal Proceedings........................................... Page 16
Item 4 Submission of Matter to a Vote of Security Holders.......... Page 16
PART II
Item 5 Market for Common Equity, Related Stockholder Matters
and Small Business Issuer Purchases of Equity Securities.... Page 17
Item 6 Management's Discussion and Analysis or Plan of Operation... Page 18
Item 7 Financial Statements........................................ Page 30
Item 8 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure......................... Page 50
Item 8A Controls and Procedures..................................... Page 50
PART III
Item 9 Directors and Executive Officers of the Registrant.......... Page 50
Item 10 Executive Compensation...................................... Page 55
Item 11 Security Ownership of Certain Beneficial Owners, and
Management and Related Stockholder Matters.................. Page 61
Item 12 Certain Relationships and Related Transactions.............. Page 63
Item 13 Exhibit List and Reports on Form 8-K........................ Page 64
Item 14 Principal Accountants Fees and Services..................... Page 66
Signatures.................................................. Page 66
3
PART I.
CAUTIONARY STATEMENT REGARDING
FORWARD-LOOKING INFORMATION
Under the Private Securities Litigation Reform Act of 1995, companies
are provided with a "safe harbor" for making forward-looking statements about
the potential risks and rewards of their strategies. Forward-looking statements
often include the words "believe," "expect," "anticipate," "intend," "plan,"
"estimate" or similar expressions.
Our ability to achieve our goals depends on many known and unknown
risks and uncertainties, including changes in general economic and business
conditions. These factors could cause our actual performance and results to
differ materially from those described or implied in forward-looking statements.
In addition, these forward-looking statements speak only as of the date
of this filing. We believe it is in the best interest of our investors to use
forward-looking statements in discussing future events. However, we are not
required to, and you should not rely on us to, revise or update these statements
or any factors that may affect actual results, whether as a result of new
information, future events or otherwise.
ITEM 1. DESCRIPTION OF BUSINESS
OVERVIEW
On August 15, 2005, we completed a reverse acquisition of Heritage Management
Corporation, a Nevada corporation incorporated on June 12, 2000. Following the
reverse acquisition, we changed the name of Heritage Management Corporation to
"Edgewater Foods International, Inc."
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. 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 no significant competition for the farming of these marine species in
our geographic area. 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 originally established to commercialize research
on scallop aquaculture that was financed in part by the Canadian government.
Island Scallops' hatchery operations have in the past produced 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
4
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. Additionally, Island Scallops intends to
devote substantial resources to the development of its sablefish operations.
Island Scallops also 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.
KEY CORPORATE OBJECTIVES
Our key business development objectives over the next 36 months are to: expand
scallops and sablefish production using both existing and new infrastructure at
our facilities in Qualicum Beach, Canada, in a manner that we believe will allow
us to reach annual sales of approximately US$41.6 million and earnings of
approximately US$18.2 million by the end of 2008. We plan to implement this
significant expansion through the following 7 initiatives:
o Increase scallops sales from approximately US$334,000 per year to
approximately US$5 million for the year ending 2006 using existing
seed stock and inventory.
o Produce at least 12 million scallops for the 2006 harvest (which will
begin in the fall of 2006) and implement planned scallop raising
techniques that will greatly enhance sales & profitability growth in
2006 and beyond.
o Capitalize on the high demand for sablefish in foreign markets by
entering into the market for mature sablefish by 2006. Transition the
marine fish operation from a small, solely juvenile production
facility to full-scale onshore farming of sablefish (blackcod) by
2007.
o Expand current distribution by establishing new strategic
relationships with 10-15 American fisheries importers in Seattle,
Portland, San Francisco, San Jose, and Los Angeles in 2006.
o During 2006 and 2007, rapidly increase farm production with a
projected minimum scallop harvest of more than 30 million scallops in
2007 and 60 million scallops in 2008.
o Produce 200 million scallop seeds in 2008, with a projected 2009
harvest of at least 100 million scallops.
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
5
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 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
an important factor for scallops since whole scallops only have a shelf life of
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 and retrieve unused
products on a weekly basis. Unsold product is then returned to Island Scallops
for further processing and shucking for re-sale as shucked meat. This not only
minimizes waste, but also allows Island Scallops to maximize profits and adjust
more rapidly to changing demand trends.
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. 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.
Island Scallops has been a leader in marine hatchery technology for the past 14
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
6
considerable investment. In the case of sablefish, which is a cold-water fish
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.
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 production to 15 million scallops annually by
the fall of 2006. Given the high worldwide demand for scallops, Island Scallops
is poised to rapidly expand production and significantly increase revenues and
earnings.
The Pacific scallop is sold live in four sizes, extra small, small, medium and
large. Pricing ranges from a low of US$1.20 per pound to $2.80 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 product was discontinued and the focus switched to the sale of
live scallops.
The basis for our anticipated scallop farming production increase is our shift
from net culture to the Japanese method of "ear hanging". This method employs a
small plastic pin, which attaches a pair of scallops to a vertical down line
that is suspended from a horizontal mainline. Each down line holds 250 scallops
and each mainline holds 400 down lines for a total of 100,000 scallops per
mainline. Each farm currently has between 20 and 50 main lines enabling
production of between 2 and 5 million scallops per farm. Presently, our Baynes
Sound tenures (farms) can accommodate more than eight million "ear-hung"
scallops. We are currently adding additional lines that will increase their
capacity to more than 24 million scallops. In addition, our large bottom lease,
which is currently not producing any scallops, has the capacity to accommodate
at least 30 million scallops. See the Scallop Tenure Concessions section below.
The advantages of this method are improved growth rate, an increase in culture
capacity per mainline (from 35,000 in nets to 100,000 ear hung) and most
significantly, the rapid ease of harvesting. Present harvesting rates are 5000
lbs per four man-days using nets as opposed to 8,000 lbs in one-man day. This
improvement in material handling allows for ease of processing and increased
ability to access a larger live market.
Island Scallops is currently ear hanging 3.5 million scallops of which
approximately 1.2 million scallops have been successfully ear hung as of June 1,
2005. These scallops will be ready for harvest in the fall of 2005. The hatchery
production of juvenile scallops includes 10 million 3 mm scallop seed delivered
to the ocean farms and nearly 50 million ready for delivery. An additional 15
7
million scallop seeds will be held at the onshore nursery for delivery to the
farms in September.
As the only 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 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.
Any body parts not sold for human consumption can be used as bait or in poultry
feed and fertilizer. Marketed scallops generally take the following product
forms:
o Whole-live (shelf life of seven days);
o Whole dried; o Eviscerated whole;
o Shucked fresh (shelf life of about 15-20 days);
o Shucked frozen (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. 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 on
the west coast (Seattle, Portland, San Francisco and Los Angeles) to consume
2,500 lbs. per week based on the successful Vancouver model.
Island Scallops currently distributes through specialty wholesalers with
particular expertise in selling to restaurants. 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 the 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
8
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.
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.
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 have the added advantage of being parasite free. Wild sablefish carry
a parasite that does not allow the fish to be eaten raw. (All wild product is
frozen.) Island Scallops has already demonstrated the feasibility of onshore
sablefish farming and plans to quickly expand production to at least 1,000,000
sablefish in 2006, with production planned to increase by at least 500,000
annually.
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). The hatchery infrastructure is in
place to produce 100,000 juvenile sablefish.
Given the current undersupply of sablefish, we plan to begin sablefish
production and rapidly expand into both ocean and onshore farming of sablefish.
To date, Island Scallops has marketed a limited number of live sablefish into
the Vancouver market. Initial response has been excellent for a small 1-kilogram
live sablefish (~$11/kg). We also believe the Island Scallops' sablefish will
compete very favorably with the live rockfish market.
To capitalize on Island Scallops' breakthrough sablefish hatchery technology and
our existing juvenile production capabilities, we plan to expand our existing
sablefish production capabilities. We plan to construct a new sablefish hatchery
consisting of the following:
9
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.
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 production and sales increase, Island Scallops will continue to expand its
production capability by constructing an onshore tank farm consisting of large
and small ponds and tanks complete with associated recirculation systems. This
onshore facility will be used to augment our 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 Sablefin 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. Although Island Scallops'
expanded sablefish facilities are expected to reach a production of 3 million
sablefish within the next 4 years, this will fill less than 30% of the overall
shortfall. The economic potential for sablefish is therefore considerable. Given
these market conditions and opportunities, Island Scallops decided in 1996 to
pursue the development of hatchery technology and is now poised to exploit the
farming of this species by developing offshore and onshore sablefish farms. Our
goal is to produce a 2006 class of 1 million sablefish with a harvest beginning
in October 2006 that produces revenue of more than US$10 million (approximately
$2.7 million in 2006).
OTHER PRODUCTS
In the past Island Scallops has 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 exclusively on scallops and
sablefish sales.
GENERAL FISHERIES MARKET OVERVIEW
The worldwide market for farmed marine species continues to grow. According to a
personal communication from 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.
10
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.
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), industry analysts expect per
capita consumption to continue to increase.
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.
PROPERTY AND EQUIPMENT
Island Scallops main office and hatcheries are located on the east side of
Vancouver Island in the town of Qualicum Bay. The shellfish hatchery and
processing facilities are housed in a 930 square meter building. A 600 square
meter sablefish hatchery 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 these scallop farms are
located in Baynes Sound, 25 minutes north of the main facility. These farm sites
11
total 87 acres and are capable of producing at least eight million scallops
annually. Approximately 30% of the farm area is currently being farmed. An
additional bottom tenure of 926 acres is located 10 minutes north of the main
facility 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 six 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. AREAS TYPE
- --------------------- ------------------- ------------------- ------------------
DENMAN 1406063 14.28 DEEPWATER
- --------------------- ------------------- ------------------- ------------------
HINDOO CREEK 1406664 49.2 DEEPWATER
- --------------------- ------------------- ------------------- ------------------
DEEP BAY 1406711 18.5 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.
Our Baynes Sound tenures can currently accommodate more than eight million
"ear-hung" scallops. We are currently adding additional main and down lines that
will increase their capacity to more than 24 million scallops in the near
future. In addition and as previously noted, our large bottom lease (which was
seeded in 1999 and 2000 with 10- 20 million 3mm scallops that have yet to be
harvested and whose potential yield is to date undetermined) has the capacity to
accommodate at least 30 million ear hang scallops and possibly more than 50
million scallops without any increase in its present footprint. As such, our
current tenures have the capacity to easily accommodate 50 and 70 million
"ear-hung" scallops. Once approved, the proposed expansion of the footprints of
our existing tenures should easily accommodate increasing scallop harvest of
2009 and beyond.
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.
12
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 14 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.
REGULATORY ENVIRONMENT
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. The United States is the exception to the rule. The vast majority of
United States brokers/distributors soak or dip their scallops in sodium
tripolyphosphate (STPP), thereby, enhancing the weight of the product by
reducing the rate of fluid loss. Scallops treated this way are referred to as
processed scallops. Over soaked scallops can shrink as much as 30 percent when
cooked, have little taste, and develop a rubbery texture. However, there is a
growing segment of the consumer market that demands unprocessed, natural
scallops. These people address consumer concerns about chemical food additives
and want to avoid the risk of purchasing an over soaked product. Island Scallops
only sells natural scallops and will not permit its brokers/distributors to
process scallops, which guarantees its' customers a high quality product.
A further 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, most noticeably during the early fall. 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.
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. Due to the world oversupply of farmed salmon, this industry
has become very competitive, with pricing near the break-even level. The rest of
the British Columbia marine farming sector is in the shellfish industry, mainly
in oysters and Manila clams and more recently mussels. Although this sector is
13
rapidly expanding, 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 that we are aware of that are capable of
producing this unique breed. Although a large commercial scallop 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
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 grow less than 300,000
scallops per farm. 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.
Sablefish
Island Scallops is currently the only hatchery to produce quantities of juvenile
sablefish. These fish were sold to five commercial salmon farming facilities and
the fish have been marketed successfully. At the present time, due to disease
and pricing difficulties in the salmon farming industry, little demand for a new
species has materialized. Although two marine fish hatcheries have been
constructed in British Columbia, neither has successfully produced large
quantities of sablefish. The first facility, located in Cedar, has yet to
14
produce sablefish juveniles for sale. The second facility on Saltspring Island
is mired in controversy, has produced only limited numbers of juveniles and does
not plan on farming sablefish but rather (we believe) intends to remain solely a
juvenile producer.
Island Scallops is the only company that supplies sablefish hatchery-produced
juveniles for the ocean-farming sector. We believe Island Scallops can initially
expect to control the farming of sablefish for the next two-to-four years. 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 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.
The main industry participants in the sablefish-farming sector are two Norwegian
salmon farming operations (Omega Salmon Group and Pacific National Group) and
two small independent salmon farmers (Totem Sea Products and Target Marine).
Each of these farms have successfully raised and marketed Island Scallops
produced sablefish. The majority of these fish were marketed through Calkins and
Burke, as live fish into the Vancouver market. At the present time due to
financial difficulties in the Atlantic salmon farming industry, no sablefish
juveniles were sold in 2004.
EMPLOYEES
At August 31, 2005, we had 35 full time employees based throughout the Canada
United States.
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
For the fiscal year ended August 31, 2005, 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 are housed in a 930 square meter building. A 600 square
meter sablefish hatchery is also located at this site. Corporate scallop farms
15
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
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
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, 2004, one of the two parties had claimed that Island Scallops
owed it amounts totaling $74,704. 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
We did not submit any matters to a vote of the security holders at a shareholder
meeting during the fourth quarter of the fiscal year ended August 31, 2005.
However, on August 15, 2005, holders of 17,150,000 shares representing 83.3% of
our outstanding shares acted by written consent to change our name from Heritage
Management, Inc. to Edgewater Foods International, Inc.
On August 15, 2005, our Board of Directors, in accordance with their rights
under our Articles of Incorporation and Bylaws and in accordance with Nevada
Law, adopted a change to our Bylaws that allows any action permitted to be taken
by our shareholders at a meeting of shareholders to also be taken by a written
consent of a majority of the shareholders who would be entitled to vote at such
meeting. Previously, our Bylaws had required a unanimous written consent of our
shareholders for any action taken without a meeting. They also adopted a change
to allow one-third of the directors then in office or the Chairman of the Board
of Directors or the President to call special meetings of the Board of
Directors. Furthermore, notice of the place, date and time of each such special
meeting can be given to each director by whom it is not waived by mailing
written notice not less than three days before the meeting or by telegraphing,
telefaxing or emailing the same not less than 18 hours before the meeting.
Unless otherwise indicated in the notice thereof, any and all business may be
transacted at a special meeting. Neither the business to be transacted at, nor
the purpose of, any regular or special meeting of the Board of Directors need be
specified in the notice or waiver of notice of such meeting.
Pursuant to the Share Exchange with Heritage Management Corporation (on August
15, 2005) and in accordance with the terms of our bylaws, the Board of Directors
unanimously approved a change in fiscal year from December 31 to August 31
effective immediately.
16
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 March 31, 2004. The prices set forth below
represent inter-dealer quotations, without retail markup, markdown or commission
and may not be reflective of actual transactions.
FISCAL 2003 HIGH LOW
---- ---
Quarter ended March 31, 2004 n/a n/a
Quarter ended June 30, 2004 n/a n/a
Quarter ended September 30, 2004 $0.25 $0.25
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
At August 31, 2005, the closing bid price of the common stock was $1.35 and we
had approximately 117 record holders of our common 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 December 9, 2005, the closing bid price of our common stock was $1.40 and
there were approximately 117 record holders of our common 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 its outstanding
common stock in the foreseeable future.
17
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.
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.
OVERVIEW
In the fourth quarter of 2005, we continued the ear hanging of our 2004 year
class of scallops and had approximately 1.5 million scallops successfully
ear-hung as of mid-August. In the beginning of the first quarter for 2005-2006
fiscal year we added an additional 700,000 ear-hung scallops for a total 2004
year class of scallops of approximately 2.2 million1. We will begin harvesting
these scallops no later that February 2006.
Currently we plan to develop our business along two lines, the continued
expansion of scallops and the expansion of our sablefish production using both
existing and new infrastructure at our facilities in Qualicum Beach, Canada. We
already have approximately 7 million 2005 hatchery/nursery scallops in the water
and we intend to significantly expand the production of additional scallop seed
and juvenile scallops as part of our 2006 hatchery/nursery scallop crop in order
to reach an anticipated level of up to 30 million ear-hung scallops. In order to
continue our scallop expansion and begin developing new infrastructure required
to launch significant commercial sablefish production, we will require
additional working capital. We anticipate beginning sablefish farming by the
fourth quarter of 2005-2006 fiscal year; provided we are able to raise adequate
capital to begin those operations. If we are unable to secure necessary working
capital to fund our ongoing expansion and execute our total business strategy,
we may be forced to curtail or delay certain aspects of our business plan, such
as sablefish production.
LIQUIDITY AND CASH RESOURCES
At August 31, 2005, we had a cash balance of $560. We expect to achieve
operating positive cash flow no earlier than the second quarter of 2006.
However, there is no assurance that we will achieve positive cash flow.
- -------------------------
1 We categorize scallops based upon when we began the growth cycle. Therefore,
although scallops may be ear-hung in 2005, if they were spawned in 2004, they
would be classified as the "2004 year" class of scallops.
18
Additionally, to date, our recent expansion has been largely funded by a short
term note with a maximum limit of approximately $1,260,000 of which we had drawn
nearly $992,000 as of August 31, 2005. We anticipate that we will require
approximately $2,500,000 of additional working capital to fund our planned
expansion and execute our business strategy in the upcoming fiscal year. As a
result, we will be required to raise substantial amounts of cash during 2006.
There can be no assurance that we will be successful in our efforts and any
failure to raise such monies would have a material negative effect on our
business and operations.
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, checks issued in excess of funds on deposit,
bank indebtedness, and highly liquid short term market investments with terms to
maturity of three months or less.
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 maintains inventories of raw materials for its aquaculture products,
of biomass (inventory of live aquaculture product being actively cultivated),
and of finished goods (aquaculture product ready for sale).
Raw materials are reported at the lesser of purchase cost and estimated net
realizable value.
Biomass and finished goods are reported at the lesser of cost and estimated net
realizable value. Cost 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.
19
Long term investments
Long term investments are recorded at cost. The Company reviews its investments
periodically to assess whether there is an "other than temporary" decline in the
carrying value of the investment. The Company considers 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.
Intangible assets
Intangible assets are recorded at cost. Cost is amortized over the estimated
useful life of the asset unless that life is determined to be indefinite.
Intangible assets not subject to amortization are tested for impairment on at
least an annual basis. If the fair value of the intangible asset is determined
to be less than the carrying amount, an impairment loss is recognized in the
amount of that difference.
Intangible assets subject to amortization are reviewed for impairment in
accordance with the provisions applying to long-live assets.
Property, plant, and equipment
Property, plant, and equipment are recorded at cost less accumulated
amortization and are amortized in the following manner based on estimated useful
lives:
Buildings 4% - 5% declining balance
Seawater piping 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 balance
Impairment of long-lived assets
The Company monitors 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. The
Company's 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 wilt not he recoverable.
20
Government assistance
Government assistance received by the Company, 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 has received government assistance in the foam of loans, for which
repayment is not required if the Company meets specified future conditions, Such
assistance received by the Company is initially recorded as a liability, until
such time as all conditions for forgiveness are met, rind is then recognized as
revenue in that period.
Farm license costs
The Company must pay annual license costs in respect to government-granted
tenures that it holds, which give the Company 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 Company 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
The Company calculates its 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
The Company recognizes revenue when it is realized or realizable, and earned.
The Company considers 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 Company is derived principally from the sale of scallops produced
by the Company or purchased from third parties, and from the sale of seed and
farm supplies to other aquaculture farms.
Revenue from the sale of scallops and other products is recognized upon delivery
of the product and invoicing of the customer, assuming collection is considered
reasonably assured.
21
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
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.
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.
Non-GAAP Financial Measures
To supplement our financial information presented in accordance with generally
accepted accounting principles (GAAP), below we use a non-GAAP financial measure
such term is defined in Regulation G under the rules of the Securities Exchange
Commission, to clarify and enhance understanding future prospects.
While we believe that the non-GAAP financial measure is useful in evaluating us,
the information should be considered as supplemental in nature and not as a
substitute for or superior to the related financial information prepared in
accordance with GAAP. Further, the non-GAAP financial measure may differ from
similarly titled measures presented by other companies.
INVESTMENTS IN TENURES AS COMPARED TO ESTIMATED MARKET VALUE OF TENURES
We currently carry our investment in Island Scallops' tenures at $3,356. This
amount represents the initial carrying costs of certain tenures acquired by
Island Scallop's 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 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
22
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
12 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 ($3,356) 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.
COMPARISON OF RESULTS FOR THE FISCAL YEAR ENDED AUGUST 31, 2005, TO THE FISCAL
YEAR ENDED AUGUST 31, 2004.
Revenues. Revenues for the fiscal year ended August 31, 2005, were approximately
$316,000. We had revenues of approximately $450,000 for the fiscal year ended
August 31, 2004. This is a decrease of approximately $134,000 or 30%. In 2005,
the majority of our revenue resulted from the sale of scallops. The decrease in
our revenue from 2004 to 2005 was due to increased emphasis on the develop 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 in 2006 and beyond.
Gross profit (loss). Gross loss for the year ended August 31, 2005, was
approximately $51,000, a decrease of approximately $29,000 as compared to gross
loss of roughly $80,000, for the year ended August 31, 2004. The decrease in the
amount of gross loss was mainly attributable to management's decision to no
longer write off capital costs associated with our inventory costs and recognize
recoverable inventory costs at that date. As the Company began placing an
emphasis on the expansion of future crops and crop yield in its 2005 fiscal
year, Management decided that it was preferable to carry Biomass (Scallops) and
finished goods at the lesser of cost (which included direct and reasonably
attrituable indirect production costs related to hatchery, cultivation,
harvesting, and processing activities) and estimated net realizable cost.
Previously, the Company had assigned nil carrying amount to the biomass inventor
of scallops.
General and administrative. General and administrative expenses for the fiscal
year ended August 31, 2005, were approximately $221,000. Our general and
administrative expenses were approximately $95,000 for the fiscal year ended
August 31, 2004. This is an increase of approximately $126,000 or 133%. Our
general and administrative expenses for the year ended August 31, 2005 were
attributable to costs associated with establishing, building, and supporting our
23
infrastructure and included various consulting costs, legal and accounting fees,
overhead, realized stock compensation and salaries. We anticipate that these
costs will rise as we continue to expand our operations.
Stock compensation expense. 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 Foods International, Inc.
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. As 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
and $0 for the issuance of these shares during the year ended August 31, 2004.
Other income (expense), net. Interest income for the year ending August 31, 2005
was approximately $2,600. Interest expense for the year ending August 31, 2005
was approximately $81,000. Interest expense for the year ending August 31, 2004
was approximately $32,000. As a result, other expense for the year ending August
31, 2005 was approximately $78,000 as compared to approximately $32,000 for the
year ending August 31, 2004. This is a increase in expenses of of approximately
$46,000 primarily attributed to expenses related to the expansion of the
Company's scallop crops.
Net profit (loss). As a result of the above, the net loss for the year ended
August 31, 2005, was approximately $350,000 as compared to a net loss of
approximately $135,000 for the year ended August 31, 2004.
RISK FACTORS
You should carefully consider the risks described below before making an
investment in our Company. 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 SPX
Disease (or Pertensis). SPX or Pertensis affects a variety of scallops and is
most prevalent when water temperatures rise above 20 degrees Celsius. SPX
disease has inhibited scallop growth throughout the industry. In the 1990s,
mortality numbers were large and nearly wiped out fisheries on the west coast.
During this time Island Scallops lost most of its stock, but 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 SPX-free. Although there is a chance that other diseases may
occur, the Island Scallops hybrid scallop has proven resistant to SPX disease
for the last six years.
24
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 monitored by the Canadian Department of Fisheries and Oceans (DFO)
to avoid this problem. This type of contaminant is not threatening to the crop,
it only causes a temporary displacement to the marketing of the product until
evacuation of the bacteria is concluded. 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 scallop market in general and could adversely affect on our
business.
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.
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
25
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 land within the "grow-out" nets and metamorphose there. Crabs,
starfish, boring snails, certain species of fish, including the wolfish and cod
can prey on scallops.
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.
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 exposing their
soft parts.
Improper ear hanging could lead to increased mortality rates.
By drilling a hole in the left anterior auricle and inserting a plastic
fastener, or a-ge-pin, that is affixed to a rope, two scallops can hang next to
each other on the down line. Since the scallops are not confined or lying on
their sides, the shells are more convex, resulting in a higher meat yield. Since
this technique relies on proper placement of holes within the scallop shells
(specifically in the left anterior auricle, or byssal notch), mortalities can
occur if these holes pierce both sides of the shell.
BUSINESS RISKS
We will require additional capital to fund our current business plan.
26
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.
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. 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 69.23% of our capital
stock may decrease your influence on shareholder decisions.
Our executive officers and directors, in the aggregate, beneficially own
approximately 69.23% of our 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.
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.
27
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.
Our business may be adversely affected by an oversupply sablefish.
The sablefish market is considered to be a high-end niche market, which is
small. It is also a high quality product that is very sensitive to volume. A
small increase in volume always brings upon an exaggerated reduction in market
prices. If British Columbian sablefish farms achieve their expected production,
they will more than double the current supply of sablefish to the world market.
This increase in sablefish production could result in excess of supply over
demand and could force fisheries to reduce, or maintain prices.
Our business may be adversely affected by certain environmental liabilities.
Currently Island Scallops is not required to have a Waste Management Permit. In
the future, this could be reviewed and Island Scallops could be required to
apply for such a permit. In such a case, Island Scallops may be "grandfathered"
in its requirements. Island Scallops is also anticipating that its' tenures may
be required to partake in a Canadian Environmental Review, although the tenures
have recently been renewed for an additional 20 years, making it unlikely to
have an impact. However, should new environmental regulations be implemented or
if existing regulations are interpreted differently, we could be adversely
affected and as a result, our compliance costs could increase.
We may experience barriers to conducting business due to potential government
regulations.
There are no 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, as this species is considered an "exotic". It is
unlikely that 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.
Our business may be adversely affected price by 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.
28
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 US 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 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.
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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. as of August 31, 2005, and the related statements of
operations, stockholders' equity, and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion of these financial statements based on
our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standard require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statement referred to above present fairly, in all
material respects, the financial position of Edgewater Foods International, Inc.
as of August 31, 2005, and the results of its operations and its cash flows for
the year then ended, 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 15 to the financial
statements, Edgewater has incurred losses from operations for the year ended
August 31, 2005 totaling approximately $272,000, has negative net worth
approximating $1,300,000 and current liabilities exceed current assets by a
significant amount. 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) obtains additional
financing necessary to support its working capital requirements. These
conditions raise substantial doubt about Edgewater's ability to continue as a
going concern. Management's plans regard to this matter are described in Note
15. The accompanying financial statements do not include any adjustments that
might results from the outcome of these uncertainties.
/s/ Lopez, Blevins, Bork & Associates, LLP
- ------------------------------------------
Lopez, Blevins, Bork & Associates, LLP
Houston, Texas
November 16, 2005
30
INDEPENDENT AUDITORS REPORT
To the Director of Island Scallops Ltd.
We have audited the consolidated balance sheet of Island Scallops Ltd. as at
August 31, 2004 and the consolidated statement of operations, stockholders'
equity and cash flows for the year then ended. These consolidated financial
statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
Except as discussed in the following paragraph, we have conducted our audits in
accordance with the standards of the Public Company Oversight Board (United
States). Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the consolidated financial statements are free of
material misstatement. An audit includes examining on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating, the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
Because we were appointed auditors of the Company subsequent to August 31, 2004,
we were not able to observe counting of physical inventories at the beginning
and ending of the year ended August 31, 2004 nor satisfy ourselves concerning
those inventory quantities by alternative means. Since opening and closing
inventories enter into the determination of the results of operations and cash
flows, we were unable to determine whether adjustments to cost of goods sold,
net loss for the period, opening and ending deficit and cash flows from
operating activities might be necessary.
In our opinion, except for the effect of adjustments, if any, as might have been
determined to be necessary had we been able to examine opening and closing
inventory quantities, as described in the preceding paragraph, the consolidated
financial statements referred to in the paragraph above, present fairly, in all
material respects, the financial position of the Company as at August 31, 2004
and the results of its operations and cash flows for the year then ended in
accordance with United States generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 18 to the
financial statements, the Company has suffered recurring losses from operation
and has a net capital deficiency. These factors raise substantial doubt about
the ability of the Company to continue as a going concern. Management's plans in
regard to these matters are also described in Note 18. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
/s/ BME + Partners
- -------------------
BME + Partners
Chartered Accountants
Vancouver, British Columbia
June 17, 2005
31
EDGEWATER FOODS INTERNATIONAL
CONSOLIDATED BALANCE SHEET
AUGUST 31, 2005 and 2004
2005 2004
----------- -----------
ASSETS
Current assets:
Cash $ 560 12,910
Accounts receivable -- 25,416
Loans receivable -- 2,042
Inventory 540,126 --
Other current assets 28,520 7,476
----------- -----------
Total current assets 569,206 47,844
Property, plant and equipment 1,096,986 620,636
Loans receivable 20,387 17,051
Investments in tenures 3,356 3,032
----------- -----------
Total assets $ 1,689,935 $ 688,563
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Checks issued in excess of funds on deposit $ 38,538 $ --
Bank indebtedness 65,364 --
Accounts payable and accrued liabilities 489,724 276,411
Short term debt 1,125,141 88,465
Shareholder debt -- 2,946,789
Current portion of long term debt 959,486 896,336
----------- -----------
Total Current Liabilities 2,678,253 4,208,001
Long term debt 369,632 327,879
----------- -----------
Total Liabilities 3,047,885 4,535,880
----------- -----------
Stockholders' Equity
Common stock, no par $0.001, 50,000,000 authorized, 20,585,400
issued and outstanding at August 31, 2005 2,059 1,030
Additional paid in capital 3,151,790 (1,029)
Accumulated deficit (4,341,406) (3,991,330)
Accumulated other comprehensive income (170,393) 144,012
----------- -----------
Total Stockholders' Equity (1,357,950) (3,847,317)
----------- -----------
Contingent Liabilities
Total Liabilities and Stockholders' Equity $ 1,689,935 688,563
=========== ===========
See accompanying summary of accounting policies and notes to financial statements
32
EDGEWATER FOODS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDING AUGUST 31, 2005 and 2004
2005 2004
------------ ------------
Revenue $ 315,869 $ 449,928
Cost of goods sold 366,724 530,319
------------ ------------
Gross profit (loss) (50,855) (80,391)
------------ ------------
Income (expenses) from Operations:
General and administrative expenses (137,337) (31,366)
Salaries and benefits (83,653) (63,349)
Gain on sale of tenure -- 112,641
Loss on settlement of lawsuit -- (40,551)
------------ ------------
Total (220,990) (22,625)
------------ ------------
Loss from operations (271,845) (103,016)
------------ ------------
Other income (expense):
Interest(expense), net (80,868) (31,869)
Other income 2,637 --
------------ ------------
Other income (expense), net (78,231) (31,869)
------------ ------------
Net income (loss) $ (350,076) $ (134,885)
============ ============
Net income (loss) per Share
Basic and diluted $ (0.03) (0.01)
Weighted average shares outstanding
Basic and diluted 11,899,320 10,300,000
See accompanying summary of accounting policies and notes to financial
statements
33
EDGEWATER FOODS INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED AUGUST 31, 2005
Accumulated
Other Comprehensive
Additional Income -
Common Stock Paid in Foreign Exchange Accumulated
-------------------------
Number Value Capital Adjustment Deficit Total
- ------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at August 31, 2003 10,300,000 $ 1,030 $ (1,029) $ 324,869 $(3,856,445) $(3,531,575)
Comprehensive loss
Net income (loss) (134,885) (134,885)
Foreign exchange adjustment (180,857) (180,857)
-----------
Total comprehensive loss (315,742)
----------- ----------- ----------- ----------- ----------- -----------
Balance at August 31, 2004 10,300,000 1,030 (1,029) 144,012 (3,991,330) (3,847,317)
Comprehensive loss
Net income (loss) (350,076) (350,076)
Foreign exchange adjustment (314,405) (314,405)
-----------
Total comprehensive loss (664,481)
Common stock issued for
services 100,000 10 -- 10
Common stock issued in
connection with
recapitalization 8,600,000 860 -- -- 860
Forgiveness of shareholder
debt 3,152,978
Common stock issued
in connection with
recapitalization 1,585,400 159 (159)
----------- ----------- ----------- ----------- ----------- -----------
Balance at August 31, 2005 20,585,400 $ 2,059 $ 3,151,790 $ (170,393) $(4,341,406) $(1,357,950)
=========== =========== =========== =========== =========== ===========
See accompanying summary of accounting policies and notes to financial statements
34
EDGEWATER FOODS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASHFLOWS
YEARS ENDED AUGUST 31, 2005 and 2004
2005 2004
----------- -----------
Cash flows from operating activities:
Net income (loss) $ (350,076) $ (134,885)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation, depletion and amortization 80,435 39,660
Common stock issued for services 10 --
Bad debt expense 347 --
Gain on sale of tenure -- (112,641)
Loss on settlement of lawsuit -- 40,551
Changes in current assets and liabilities:
Accounts receivable 25,069 (557)
Other current assets (21,044) 489
Loan receivable (1,294) --
Inventory (540,126) --
Accounts payable 221,644 39,247
Bank overdrafts 38,538 --
Deferred revenues -- --
----------- -----------
Net cash used in operating activities (546,497) (128,136)
----------- -----------
Cash flows from investing activities:
Payment in settlement of interest in joint venture -- (37,547)
Proceeds on sale of property, plant and equipment -- 22,234
Purchase of property, plant and equipment (493,018) (4,884)
Proceeds on sale of tenure -- 112,641
Decrease in loans receivable -- 13,644
----------- -----------
Net Cash provided by (used in) investing activities (493,018) 106,088
----------- -----------
Cash flows from financing activities:
Line of credit, net 6,591 --
Proceeds from short term debt 1,125,247 --
Payments on short term debt (38,128) --
Proceeds of long term debt -- 165,207
Payment of long term debt (25,408) (98,238)
Common stock issued for cash 860 --
----------- -----------
Net Cash provided by financing activities 1,069,162 66,969
----------- -----------
Foreign currency translation effect (41,997) (1,153)
Net increase in cash (12,350) 43,768
Cash, beginning of period 12,910 (30,858)
----------- -----------
Cash, end of period $ 560 $ 12,910
----------- -----------
Supplemental disclosure of cash flow information
Net cash paid during the year
Interest $ 60,000 $ 33,182
Income taxes $ - $ -
Non-cash transactions
Forgiveness of shareholder debt $ 3,152,978 $ -
See accompanying summary of accounting policies and notes to financial statements
35
Edgewater 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. 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 no significant competition for the farming of these marine species in
our geographic area. 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.
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 for a
100% equity interest in Edgewater Foods. 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.
36
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.
Cash and equivalents
Cash and equivalents include cash, checks issued in excess of funds on deposit,
bank indebtedness, and highly liquid short term market investments with terms to
maturity of three months or less.
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 maintains inventories of raw materials for its aquaculture products,
of biomass (inventory of live aquaculture product being actively cultivated),
and of finished goods (aquaculture product ready for sale).
Raw materials are reported at the lesser of purchase cost and estimated net
realizable value.
Biomass and finished goods are reported at the lesser of cost and estimated net
realizable value. Cost 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.
Previously, the Company assigned a nil value to its Biomass and farming costs
associated with the development of scallop crops was carried within cost of
goods sold. However, Management believed that, given the projected increase in
upcoming annual crops, the capitol costs associated with inventory should no
longer be written-off on a go forward basis. Based on Management's review of
Statement of Financial Accounting Standards (FASB) No. 154 (a replacement of APB
Opinion No. 20 and FASB Statement No.3), we do not believe that this decision
represents a change in accounting or a change in accounting principle.
37
At August 31, 2005, inventory consisted of the following:
Biomass (Scallops): $540,126
Long term investments
Long term investments are recorded at cost. The Company reviews its investments
periodically to assess whether there is an "other than temporary" decline in the
carrying value of the investment. The Company considers 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.
Intangible assets
Intangible assets are recorded at cost. Cost is amortized over the estimated
useful life of the asset unless that life is determined to be indefinite.
Intangible assets not subject to amortization are tested for impairment on at
least an annual basis. If the fair value of the intangible asset is determined
to be less than the carrying amount, an impairment loss is recognized in the
amount of that difference.
Intangible assets subject to amortization are reviewed for impairment in
accordance with the provisions applying to long-lived assets.
Property, plant, and equipment
Property, plant, and equipment are recorded at cost less accumulated
amortization and are amortized in the following manner based on estimated useful
lives:
Buildings 4% - 5% declining balance
Seawater piping 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 balance
Impairment of long-lived assets
The Company monitors 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. The
Company's policy is to write down assets to the estimated net recoverable
38
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 received by the Company, 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 has received government assistance in the foam of loans, for which
repayment may not be required if the Company fails 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 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 revenue in that period.
Farm license costs
The Company must pay annual license costs in respect to government-granted
tenures that it holds, which give the Company 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 Company 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
The Company calculates its 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 recognizes revenue when it is realized or realizable, and earned.
The Company considers 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.
39
Revenue of the Company is derived principally from the sale of scallops produced
by the Company or purchased from third parties, and from the sale of seed and
farm supplies to other aquaculture farms.
Revenue from the sale of scallops and other products is recognized upon delivery
of the product and invoicing of the customer, assuming collection is considered
reasonably assured.
Financial instruments
The carrying amount of the Company's financial instruments, which include cash,
accounts receivable, loans receivable, checks issued in excess of funds on
deposit, 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 is not exposed to significant interest,
currency or credit risk arising from these financial instruments unless
otherwise noted.
Foreign exchange
The functional currency of the Company's 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 operates in the regulated aquaculture industry. Material changes in
this industry or the applicable regulations could have a significant impact on
the Company.
The quality and quantity of the aquaculture products cultivated, harvested and
processed by the Company could be impacted by biological and environmental risks
such as contamination, parasites, predators, disease and pollution. These
factors could severely restrict the ability of the Company to successfully
market its products.
During the year ended August 31, 2005, three customers, TriStar, Sea World and
Lobsterman, individually accounted for 23%, 17% and 14% or our revenues
respectively, and we therefore are materially dependent upon such customers.
During the year ended August 31, 2004, TriStar, Summer Breeze and Sea World,
40
individually accounted for 27%, 15% and 10% or our revenues respectively. The
Company's ongoing operations are dependent on continued business from these
customers.
Stock-based compensation
The Company accounts for stock-based employee compensation arrangements using
the intrinsic 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,
2005 2004
--------- -----------
Net income (loss), as reported $(350,076) $ (134,885)
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 income (loss) $(720,641) $ (134,885)
--------- -----------
Basis and diluted net loss per share
As reported (0.03) (0.01)
Pro-forma (0.06) (0.01)
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
41
assumptions: dividend yield $0, expected volatility of 100%, average risk-free
interest rate of 4.15%, and expected lives of 10 and 5 years.
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 November of 2004, the FASB issued Statement of Financial Accounting Standards
No. 151 ("SFAS 151"). SFAS 151 amends the guidance in Accounting Research
Bulletin No. 43 (Inventory Pricing) to clarify the accounting for abnormal
amounts of idle facility expense, freight, handling costs, and waste material.
Among other provisions, SFAS 151 requires that items, such as idle facility
expense, excessive spoilage, double freight, and rehandling costs, be recognized
as current period charges. Additionally, SFAS 151 requires that the allocation
of fixed production overheads to the costs of conversions be based on normal
capacity of the production facilities. SFAS 151 is effective for fiscal years
beginning after June 15, 2005, and is required to be adopted by the Company in
the first quarter of fiscal 2006. In the opinion of Management, the adoption of
this statement will not have any impact on the Company's consolidated financial
statements.
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 123R is
required to be adopted by the Company not later than for the 2007 fiscal year.
In the opinion of Management, the adoption of this statement will not have a
significant impact on the Company's consolidated financial statements.
In December of 2004, the FASB issued Statement of Financial Accounting Standards
No. 153 (Exchanges of Nonmonetary Assets - An Amendment of APB Opinion No. 29,
Accounting for Nonmonetary transactions) ("SFAS 153"). 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 153
specifies that a nonmonetary exchange has commercial substance if the future
cash flows of the entity are expected to change significantly as a result of the
42
exchange. SFAS 153 is effective for fiscal periods beginning after June 15,
2005, and 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' financial
statements, unless it is impracticable to do so. 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 prospectively 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 changes and corrections of errors made
in fiscal years beginning after the date the Statement was issued (May 2005).
Statement 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. We do not currently believe that the adoption of SFAS
145 No. 154 will have a material impact on our consolidated financial
statements.
NOTE 3. PROPERTY, PLANT AND EQUIPMENT
Property, Plant and Equipment at August 31, 2005 consisted of the following:
Accumulated Net Book
Cost Amortization Value
-----------------------------------------
Land $ 211,463 $ -- $ 211,463
Buildings 415,807 204,402 211,405
Seawater piping and tanks 417,558 239,200 178,358
Boats and Barge 214,335 88,618 125,717
Field equipment 952,751 592,691 360,060
Office equipment 12,717 11,238 1,479
Vehicles 33,681 29,982 3,699
Computer equipment 7,834 3,029 4,805
------------------------------------------
$2,266,146 $1,169,160 $1,096,986
43
Property, plant and equipment at August 31, 2004 consisted of the following:
Accumulated Net Book
Cost Amortization Value
-------------------------------------
Land $ 190,996 $ - $ 190,996
Buildings 368,875 175,301 193,574
Seawater piping and tanks 357,605 206,390 151,215
Boats 87,392 69,374 18,018
Field equipment 551,901 492,604 59,297
Office equipment 11,052 9,870 1,182
Vehicles 30,421 25,648 4,773
Computer equipment 3,272 1,691 1,581
------------------------------------------
$1,601,514 $ 980,878 $ 620,636
Accumulated amortization was $1,169,160 and $980,878 for the years ended August
31, 2005 and 2004, respectively. Depreciation expenses are $10,195 and $39,660
for the years ended August 31, 2005 and 2004, respectively.
NOTE 4. LOANS RECEIVABLE
An unsecured note receivable from Seascal Enterprises, Ltd. ("Seascal") requires
monthly interest payments, calculated at the Business Development Bank of
Canada's operational rate plus 1%, per annum, and has no fixed term of
repayment. The Company has an informal arrangement to provide scallop seed to
Seascal, for which the Company receives a percentage of ultimate sales.
NOTE 5. INVESTMENTS IN TENURES
The Company carries its Investment in Tenures at $3,356 at August 31, 2005 and
$3,032 at August 31, 2004. This amount represent the carrying costs of certain
shellfish tenures acquired by the 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 Company and its 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.
44
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 shareholder totaling $95,210 at
August 31, 2005 and $44,681 at August 31, 2004. The Company used these credit
cards as a means of short term financing and incurs interest charges on such
unpaid balances.
Included in accounts payable and accrued liabilities at August 31, 2005 is an
amount of $110,648 (2004 is $99,939) related to deposits paid by two third
parties in respect to an agreement to purchase geoduck seed from the Company
(for additional information see Note 10 - Contingent Liabilities).
Included in accounts payable and accrued liabilities at August 31, 2005 is an
amount of $6,330 related to interest accrued in respect to the loan from the
National Research Council of Canada Industrial Research Assistance Program (see
Note 9 - Long Term Debt for additional information).
Other accounts payable at August 31, 2005 carry a balance of $267,314 and
accrued liabilities included a customer deposit of $10,223.
As a result, at August 31, 2005, the Company had an accounts payable and accrued
liabilities balance of $489,724.
NOTE 7. SHORT TERM DEBT
Included in short-term notes payable is a loan with an authorized limit of
$1,258,706 secured by the assets of the Company, including a mortgage charge in
the amount of $1,258,706 on land 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. The note bears interest at a rate of 1% per
month, payable monthly, and is due April 1, 2006. As of August 31, 2005,
$991,533 of the authorized limited had been lent to the Company's wholly owned
subsidiary, Island Scallops.
Included in short-term debt at August 31, 2005 is estimated royalties of $55,848
(2004: $50,443) payable to a third party from who the former sole shareholder of
Island Scallops Ltd. originally acquired the shares of Island Scallops Ltd. The
1992 share purchase agreement (for Island Scallops) provided that the third
party was to receive from the Company 3% of revenues of the Company 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 inventory of
the Company (including broodstock) in the amount of $293,698 (2004: $265,272) 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 $55,848 as a current liability and we plan to pay it with available
funds in the near future.
45
Included in short-term notes payable at August 31, 2005 is an unsecured
non-interest bearing demand loan from an individual with a face value of $42,096
(2004: $38,022) 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 the short-term notes payable at August 31, 2005 is a second
unsecured non-interest bearing demand loan with a face value of $35,664 and no
specific terms of repayment.
As a result, at August 31, 2005, the Company had $1,125,141 (2004: $88,465) of
short-term notes.
NOTE 8. FORGIVENESS OF NOTE DUE SHAREHOLDER
In August, 2005, our Board of Directors approved the forgiveness of $3,152,978
of unsecured debt by Robert Saunders, our Chairman, President and CEO, and
former sole shareholder of Island Scallops. This debt, which represents an
amount advance to the Company by the previous shareholder of the Company, was
acquired by Mr. Saunders at the time of his acquisition of the Island Scallops
in 1992. Since this was a related party transaction, this forgiveness of debt is
reflected in Additional Paid in Capital on our Balance Sheet and Statement of
Stockholders' Equity.
NOTE 9. 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 scallop sales of the Company, payable
semi-annually, with no specified due date. At August 31, 2005 as Island Scallops
is in arrears in respect to the payment of these amounts, the full principal
balance of $568,343 (2004: $516,367) is reflected as a current liability.
Management of the Company is seeking to renegotiate terms of repayment of this
debt.
These consolidated financial statements include the Company's wholly owned
subsidiary's (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
$370,128, 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, 2005, based on revenues of $32,908 (revenue
of $24,253 for the year ending August 31, 2004) bear interest at a rate of 1%
per month. At August 31, 2005, Island Scallops is in arrears in respect to the
payment of these amounts, the full principal balance of $369,745 (2004:
$333,959) is reflected as a current liability.
These consolidated financial statements include Island Scallop's mortgage loan
repayable at $1,808 per month including interest calculated at the greater of
10% and (Canadian) prime plus 6%. 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, 2005, the principal due is $182,418 (2004: $165,849).
46
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 $157,266, 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.
These consolidated financial statements include two bank loans for Island
Scallops. The first bank loan is repayable at $1,049 per month, plus interest
calculated at the floating base rate of the Business Development Bank of Canada
plus 1.5% annum, is due February 23, 2009, and is secured by a General Security
Agreement over the assets of the Company's wholly owned subsidiary (Island
Scallops), a mortgage charge on Island Scallop's real property and a personal
guarantee of $41,957 by our Chairman, President and CEO, and former sole
shareholder of Island Scallops. At August 31, 2005, the principal due is $44,055
(2004: $51,160). The second bank loan is repayable at $437 per month plus
interest calculated at (Canadian) prime plus 3% per annum, is unsecured and is
due October 23, 2007. At August 31, 2005, the principal due is $11,182 (2004:
$14,837).
As a result, at August 31, 2005, the Company had $1,329,118 (2004: $1,224,215)
of long-term debt less a current portion of $959,486 (2004: $896,336) for a
balance of $369,632 (2004: $327,879). Principal payments due within each of the
next five fiscal years and subsequently, in respect to long term debt are
approximately as follows:
2006 $959,486
2007 $22,237
2008 $18,041
2009 $11,748
2010 $5,874
2011 and subsequent $311,732
-------------
$1,329,118
=============
NOTE 10. CONTINGENT LIABILITIES
The Company's wholly owned subsidiary, Island Scallops, entered into an
Agreement 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 $110,648, is included in accounts payable and accrued
liabilities.
The position of management of the Company is that the two parties violated the
terms of the agreement, such that the Company is entitled to retain the balance
of the deposits. Per the terms of the original agreement, Island Scallop was
47
entitled to make up any shortfall in the product produced in the following year.
Although product was available and offered by Island Scallops in the following
year, the two parties refused to honor the terms of the agreement and would not
accept the product (to make up the shortfall) in the following year.
As of August 31, 2004, one of the two parties had made claims that the Company
owed to it amounts totaling $74,704. This particular party believed that the
agreement required Island Scallops to deliver the product in year one and did
not allow Island Scallop to make up any shortfall with product produced in the
following year. The balance included in accounts payable and accrued liabilities
related to this party is $29,156.
Any additional liability to the Company, 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 Company nor its wholly owned subsidiary maintain insurance in
respect to replacement of its inventory. Consequently, the Company is exposed to
financial losses or failure as a result of this risk.
NOTE 11. INCOME TAXES
The Company did not provide any current or deferred United States federal, state
or foreign income tax provision or benefit for the period presented because it
has experienced operation losses since inception. The Company has provided a
full valuation allowance on the deferred tax asset, consisting primarily
unclaimed research and development expenditures, because of uncertainty
regarding the Company's 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, 2005 are as follows:
August 31, August 31,
2005 2004
--------- ---------
Deferred tax asset attributable to: -- $ 599,019
Net operating loss carryover $ 445,558 44,020
Less, Change in valuation allowance (445,558) (643,039)
--------- ---------
Total net deferred tax asset $ -- $ --
========= =========
Edgewater follows 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 $445,558 at August 31, 2005 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 2005 was approximately $197,481.
48
At August 31, 2005 Edgewater had net operating loss carryforwards amounting to
approximately $42,314 and $0 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 2005 is
as follows:
2005
-----------
Tax at U.S. statutory rate 34.0%
State tax rate, net of federal benefits 0.0
Foreign tax rate in excess of U.S. statutory rate 17.6%
Change in valuation allowance (201,607)
-----------
Effective tax rate 0.0%
===========
NOTE 12. STOCK-COMPENSATION EXPENSE
On June 27 2005, the Company issued 100,000 shares of stock to an individual who
would provide services to Edgewater Foods International, Inc. Subsequently in
August 2005, Edgewater was acquired by the Company pursuant to a share exchange.
As such, these shares were valued based on the par value, $0.0001, of our stock
at time of issuance. As a result, the Company recorded a stock compensation
expense for the year ended August 31, 2005 of $10.
NOTE 13. COMMITMENTS AND CONTINGENCIES
Corporate Offices
For the fiscal year ended August 31, 2005, 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
On June 29, 2005 the Company entered into an employment agreement with Mr.
Robert Saunders as Chairman and President of Edgewater Foods effective 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. For serving as Chairman, Mr. Saunders will receive an
additional US $10,000 per month for the first twelve months of service following
receipt of US $5,000,000 in outside funding by the Company. Thereafter, Mr.
Saunders will receive US $20,000 per month provided that the Company has
achieved gross revenue of at least US $20,000,000 in its most recent fiscal year
and continuing as long as the Company continues to achieve gross revenues of at
least US $20,000,000. Additionally, the Company 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.
49
NOTE 14. SETTLEMENT OF LAWSUIT
During the 1997 year, the Company entered into a joint venture agreement with
Blackfin Research, Ltd. ("BRL") for the purpose of researching and developing a
black cod hatchery. In the 2001 year, BRL made a legal claim against the Company
totaling $353,965, seeking to recover amounts it claimed it had contributed to
the joint venture.
During the 2004 year, the Company made a settlement with BRL under which the
Company was required to pay to BRL case of $37,547, and to transfer to BRL a
shellfish tenure with a carrying amount of $3,004. BRL agreed that the Company
would retain sold rights to all intellectual property developed by the joint
venture.
The settlement resulted in a loss to the Company of $40,551.
NOTE 15. SALE OF TENURE
During the 2004 year, Island Scallop sold a shellfish tenure which had a
carrying amount of $nil, for cash proceeds of $112,641.
NOTE 16. COMPARATIVE FIGURES
Certain of the comparative figures as of August 31, 2004 and for the year then
ended have been reclassified to conform to the presentation adopted for the 2005
year.
NOTE 17. RECENT DEVELOPMENTS
On September 20, 2005, Montgomery Simus resigned as one of our directors. Mr.
Simus, who currently serves on another public company's board of directors and
serves as President and CEO of a private company, felt that he did not have
sufficient time to dedicate to his role as a director. In conjunction with his
resignation, Mr. Simus agreed to cancel back to the Company the 150,000 shares
of common stock that was originally issued to him in June 2005.
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 25,000 shares of our restricted common stock per
quarter during the term of its agreement, 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 that will be recognized by Company in the first quarter
of 2006 will be $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 will be
recognized by Company in the first quarter of 2006 will be $37,500.
50
NOTE 18. GOING CONCERN
As of August 31, 2005, the Company's working capital has been primarily financed
with various forms of debt. The Company has suffered operating losses since its
inception in its efforts to establish and execute its business strategy. The
Company anticipates that it will continue to require additional working capital
to fund its ongoing operations and execute its business strategy. In the event
that the Company does not continue to raise such required capital it would raise
substantial doubt about the Company's 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
the Company be unable to continue as a going concern. The Company's ability to
continue as a going concern is dependent upon its ability to generate sufficient
cash flows to meet its obligations on a timely basis and ultimately to attain
profitability. The Company's management intends to obtain working capital
through operations and to seek additional funding through debt and equity
offerings to help fund the Company's operations as it expands. There is no
assurance that the Company will be successful in its 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 19. FOREIGN OPERATIONS
The Company's share of the net assets held outside of the United States totaled
approximately $1,690,000 at August 31, 2005.
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
We, under the supervision and with the participation of our management,
including our Chief Executive Officer and Acting Chief Accounting Officer, have
evaluated the effectiveness of the design and operation of our "disclosure
controls and procedures," as such term is defined in Rules 13a-15e promulgated
under the Exchange Act as of this report. Based upon the evaluation, the Chief
Executive Officer and Acting Chief Accounting Officer have concluded that our
disclosure controls and procedures were effective as of the end of the period
covered by this report to provide reasonable assurance that information required
to be disclosed by us in reports that we file or submit under the Exchange Act
is recorded, processed, summarized and report within the time periods specified
in SEC rules and forms.
51
CHANGES IN INTERNAL CONTROLS
There was no change in our internal control over financial reporting identified
in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of
the Exchange Act that occurred during the period covered by this report that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
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 December 9, 2005. 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 Spring of 2006, 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, there are no family relationships among 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.
NAME AGE POSITION
- ---- --- --------
Robert Saunders 53 Chairman, CEO and President
Douglas C. MacLellan 49 Vice Chairman
Mark H. Elenowitz 35 Director
Robert L. Rooks 51 Director
Ian Fraser 45 Director
Michael Boswell 36 Director, Acting Chief Accounting Officer
Bruce Evans 52 Farm Manager
Kristina M. Miller 43 Chief Scientific Advisor
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
52
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. He is responsible for the overall corporate development of the firm
and assisting Tripoint's clients with high-level financial services and general
business development. From December 2002 to September 2005, Mr. Elenowitz was a
board member of AXM Pharma (AMEX: AXJ). From September 2001 to March 2002, Mr.
Elenowitz was a Director and President of Image World Media, Inc. (Pink sheet:
IMWI), 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 30
publicly traded companies providing financial consulting and strategic planning
services. Previously, Mr. Elenowitz held Series 7 and 63 licenses as a broker,
and held a Series 24 license (Branch Manager) at regional brokerage firm and
also served as Vice President of Sales at NYSE member firm. Mr. Elenowitz is the
recipient of several entrepreneurial awards. He is a graduate of the University
of Maryland School of Business and Management, with a Bachelor of Science in
Finance.
53
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.
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.
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.
54
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 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.
AUDIT COMMITTEE AND FINANCIAL EXPERT
The Company has 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:
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
55
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 the Company's Audit Committee Financial Expert, as that
term is defined in Item 401 of Regulation S-B and the Board has determined that
Mr. MacLellan is independent, as that term is used in Item 7(d)(3)(iv) of
Schedule 14A under the Exchange Act. Mr. MacLellan's qualifications as an audit
committee financial expert are described 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
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 are currently a voluntary filer pursuant to Section 15(d) of the Act and,
therefore, our officers, directors and 10% or greater holders of our securities
are not currently required to file reports pursuant to Section 16(a).
CODE OF ETHICS
On August 3, 2005, we adopted a code of ethics that applies to our Chief
Executive Officer, Principal Financial and Accounting Officer and Controller. A
copy of the code of ethics is filed as Exhibit 14.1 to this Annual Report on
Form 10-KSB.
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, oral request at: (250)
757-9811.
56
ITEM 10. EXECUTIVE COMPENSATION
Summary Compensation Table
Long Term Compensation
Annual Compensation Awards Payouts
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other Securities
Name Annual Restricted Under- All
and Compen- Stock lying LTIP Other
Principal sation Award(s) Options/ Payouts Compen-
Position Year Salary($) Bonus($) ($) ($) SARs (#) ($) sation
($)
Robert 2005 60,000 150,000 0 0 0 0 0
Saunders,
Chairman,
President and
CEO(1)
Michael 2004 0 0 0 0 0 0 0
Boswell,
President and
Acting Chief
Account
Officer (2)
(1) In June 2005, the Company entered into an employment agreement with
Mr. Robert Saunders as Chairman and President of Edgewater Foods
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,
the Company 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.
(2) Mr. Saunders replaced Mr. Boswell as President in June 2005
OPTION/SAR IN LAST FISCAL YEAR
The Board of Directors and holders of a majority of our outstanding securities
acting by consent have adopted the Edgewater Foods International 2005 Equity
Incentive Plan. The Equity Plan is intended to further the growth and financial
success of Edgewater by providing additional incentives to directors, executives
57
and selected employees of and consultants to Edgewater so that such participants
may acquire or increase their proprietary interest in Edgewater. 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 September 1, 2005, our Board of Directors granted 282,000options to
employees, directors and consultants under the Equity Plan. As of September 1,
2005, there are 6 Directors, 2 executive officers, 10 consultants and
approximately 35 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 holder or beneficiary of an
Award, or other Person. The Board may also waive any conditions or rights under,
58
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 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.
60
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 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 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)
60
Section 162(m) of the Internal Revenue Code disallows a public company's
deductions for employee compensation exceeding $1,000,000 per year for the chief
executive officer and the four other most highly compensated executive officers.
Section 162(m) contains an exception for performance-based compensation that
meets specific requirements. The Equity Plan is intended to permit all options
to qualify as performance-based compensation at the Board of Directors or
Committee's discretion. If an Award is to qualify as such, it shall clearly
state so in the award agreement.
Withholding
We have the right to deduct any taxes required to be withheld with respect to
grants under the Equity Plan. We may require that the participant pay to us the
amount of any required withholding. The Compensation Committee may permit the
participant to elect to have withheld from the shares issuable to him or her
with respect to an option or restricted stock the number of shares with a value
equal to the required tax withholding amount.
Aggregated Option/Sar Exercised And Fiscal Year-End Option/Sar Value Table
- --------------------------- ---------------------------- -------------------------- ----------------- ----------------
NAME NUMBER OF SECURITIES PERCENT OF TOTAL EXERCISE OR EXPIRATION DATE
UNDERLYING OPTIONS/SARS OPTIONS/SARS GRANTED TO BASE PRICE
GRANTED (#) EMPLOYEES IN FISCAL YEAR ($/SH)
- --------------------------- ---------------------------- -------------------------- ----------------- ----------------
(a) (b) (c) (d) (e)
- --------------------------- ---------------------------- -------------------------- ----------------- ----------------
Kristina Miller, Chief 150,000 53.19% 1.50 8/18/2015
Scientific Officer
- --------------------------- ---------------------------- -------------------------- ----------------- ----------------
Bruce Evans, 50,000 17.73% 1.50 8/18/2015
Farm Manager
- --------------------------- ---------------------------- -------------------------- ----------------- ----------------
Barb Bunting, Government 20,000 7.09% 1.50 8/18/2015
Liaison
- --------------------------- ---------------------------- -------------------------- ----------------- ----------------
Pattie Greenham, Larval 15,000 5.32% 1.50 8/18/2010
Man
- --------------------------- ---------------------------- -------------------------- ----------------- ----------------
Rick Stevens, Maintenance 15,000 5.32% 1.50 8/18/2010
and Design
- --------------------------- ---------------------------- -------------------------- ----------------- ----------------
Lisa Vernon, Financial 14,000 4.96% 1.50 8/18/2010
Manager
- --------------------------- ---------------------------- -------------------------- ----------------- ----------------
Lorraine Hopps, 10,000 3.55% 1.50 8/18/2010
Processing Man
- --------------------------- ---------------------------- -------------------------- ----------------- ----------------
Leslie Chapman, 8,000 2.84% 1.50 8/18/2010
Algal Man
- --------------------------- ---------------------------- -------------------------- ----------------- ----------------
61
Neither our executive officers nor the individuals listed in the tables above,
exercised options or SARs during the last fiscal year.
BOARD OF DIRECTORS
Our directors who are employees do not receive any compensation from us for
services rendered as directors. We have not yet determined what consideration
our outside directors will receive for their service on our Board, however, we
currently anticipate that they will be compensated for their service and will
receive additional compensation for serving on our board committees and/or for
serving as Chairman of such committees. 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.
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. 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.
62
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.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
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 December 9, 2005 we had a total of 20,550,400 shares of common stock and
no shares of Preferred Stock issued and outstanding, which are the only issued
and outstanding voting equity securities of the Company.
The following table sets forth, as of December 9, 2005: (a) the names and
addresses of each beneficial owner of more than five percent (5%) of our Common
Stock beneficially owned by each such person, and the percent of our Common
Stock so owned; and (b) the names and addresses of each director and executive
officer, the number of shares our Common Stock beneficially owned, and the
percentage of our Common 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, except as
otherwise indicated. Beneficial ownership consists of a direct interest in the
shares of Common Stock except as otherwise indicated.
Amount and Nature of Beneficial Ownership Percentage
Name and Address Of Voting of
Securities (1)
Robert Saunders 9,900,000 48.15%
Chairman, President and CEO
5552 West Island Highway
Qualicum Beach, British Columbia
Canada V9K 2C8
Douglas C. MacLellan 1,040,000 5.06%
Vice Chairman
8324 Delgany Avenue
Playa del Ray, CA 90293
Mark Elenowitz 1,238,000 (2) 6.02%
Director
400 Professional Drive
Suite 310
Gaithersburg, MD 20879
63
Dr. Robert Rooks 300,000 1.46%
Director
912 Pine Avenue
Huntington Beach, CA 90293
800,000 3.89%
Ian Fraser
Director
3056 West 2nd Avenue
Vancouver, British Columbia
Canada V6T 1E9
Michael Boswell 938,000 (3) 4.56%
Director and
Acting Chief Accounting Officer
400 Professional Drive
Suite 310
Gaithersburg, MD 20879
All directors and officers as a group (6 14,216,000 69.14%
persons)
- ----------------
(1) All Percentages have been rounded up to the nearest one hundredth of
one percent.
(2) Mr. Elenowitz is a one hundred (100%) percent shareholder of MHE,
Inc., which owns 18,000 shares of our voting stock. Additionally, MHE,
Inc. is a forty percent (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) Mr. Boswell and his wife jointly own Invision, LLC, which owns 38,000
shares of our voting stock. Additionally, Invision, LLC. is a thirty
percent (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
CHANGES IN CONTROL
On August 15, 2005, we completed a Share Exchange 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. The shareholders of
Edgewater now own the majority of our voting stock. To accomplish the Share
64
Exchange, we issued an aggregate of 19,000,000 shares of our common stock in
exchange for all of the issued and outstanding capital stock of Edgewater from
the shareholders of Edgewater. The shares issued to the Edgewater Shareholders
were issued to 17 accredited investors pursuant to a claim of exemption under
Section 4(2) of the Securities Act of 1933, as amended for issuances not
involving a public offering. Additionally, as a condition of the Share Exchange,
E. Lee Murdoch, our controlling shareholder prior to the Share Exchange, agreed
to cancel 2,300,000 shares of our Common Stock upon close of the Share Exchange.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Dr. Kristina Miller, our Chief Scientific Advisor is Robert Saunders, our
Chairman, CEO and President's wife
Michael Boswell, our acting Chief Accounting Officer and a director, and Mark
Elenowitz, a director, are partners in Tripoint Holdings, LLC, a holding
company. Louis Taubman, our outside corporate and securities counsel is also a
partner in Tripoint Holdings. Additionally, our corporate offices in
Gaithersburg, Maryland are currently provided by Tripoint Holdings at no cost to
us.
ITEM 13. EXHIBITS LIST AND REPORTS ON FORM 8-K
SECTION 9 - FINANCIAL STATEMENTS AND EXHIBITS
(a) Exhibits.
Exhibit Number Description
2.1 Share Exchange Agreement between Heritage Management Corporation and
the shareholders of Edgewater Foods International., dated as of August
15, 2005 (Incorporated by reference to Exhibit 10.1 to the Company's
Current Report on Form 8-K filed on August 16, 2005).
2.2 Bill of Sale between Heritage Management and E. Lee Murdock, date
August 14, 2005 (Incorporated by reference to Exhibit 10.2 to the
Company's Current Report on Form 8-K filed on August 16, 2005).
3.1+ Articles of Incorporation of the Company, as amended.
3.2 Amended and restated Bylaws of the Company (Incorporated by reference
to Exhibit 3.1 to the Company's Current Report on Form 8-K filed on
August 16, 2005).
4.1+ Form of certificate representing shares of the Company's common stock.
10.1 Employment Agreement between Robert Saunders and the Company, dated
June 29, 2005.
14.1+ Code of Ethics.
21.1+ List of Subsidiaries.
65
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.
(b) Reports on Form 8-K
-------------------
1. Share exchange between Heritage Management Corporation and Edgewater
Foods International, Inc., reported on Form 8-K on August 16, 2005,
reporting an Event that occurred on August 15, 2005.
2. Name and symbol change reported on Form 8-K on August 30, 2005,
reporting an event that occurred on August 29, 2005.
66
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
(1) AUDIT FEES
The aggregate fees billed for professional services rendered by Lopez,
Blevins and Bork 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 2005 and
2004 were $9,000 and $1,800, 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.
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.
_________________________ Dated:
Robert Saunders
Chief Financial Officer, President & Chairman
_________________________ Dated:
Michael Boswell
Director & Acting Chief Financial Officer
_________________________ Dated:
Douglas C. MacLellan
Vice Chairman
_________________________ Dated:
Mark H. Elenowitz
Director
67
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):
68
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
; 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: December 9, 2005
By: /s/ Robert Saunders
- -----------------------
Robert Saunders
Chief Executive Officer
70
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):
71
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
; 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: December 9, 2005
By: /s/ Michael Boswell
-----------------------------------
Michael Boswell
Acting Chief Accounting Officer
72
Exhibit 32.1
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, 2005 (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: December 9, 2005
/s/ Robert Saunders
- -----------------------
Robert Saunders
Chief Executive Officer
/s/ Michael Boswell
- -------------------
Michael Boswell
Principal Financial and 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.
73
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 28, 2006
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______________ TO _______________
COMMISSION FILE NUMBER
EDGEWATER FOODS INTERNATIONAL, INC.
------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Nevada 20-3113571
---------------------------------- --------------------------------
(STATE OR OTHER JURISDICTION IRS EMPLOYER IDENTIFICATION NO.)
OF INCORPORATION OR ORGANIZATION)
US REPRESENTATIVE OFFICE
5552 West Island Highway, Qualicum Beach, British Columbia, Canada
V9K 2C8
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(250) 757-9811
(ISSUER'S TELEPHONE NUMBER)
(FORMER ADDRESS)
CHECK WHETHER THE ISSUER (1) FILED ALL REPORTS REQUIRED TO BE FILED BY
SECTION 13 OR 15(D) OF THE EXCHANGE ACT OF 1934 DURING THE PAST 12 MONTHS (OR
FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS),
AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES X NO
--- ---
INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS
DEFINED IN RULE 12B-2 OF THE EXCHANGE ACT). YES [ ] NO [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Securities Exchange Act of 1934) Yes [ ] No [X]
AS OF APRIL 14, 2006, THERE WERE 20,960,400 SHARES OF COMMON STOCK
OUTSTANDING AND NO SHARES OF PREFERRED STOCK. ALL STOCK PAR VALUE IS $.001.
PART I - FINANCIAL INFORMATION.................................................3
Item 1. Financial Statements Note:
Balance Sheet at February 28, 2006 (unaudited).................................3
Unaudited Statements of Operations for the three and six month periods
ended February 28, 2006, and 2005.............................................4
Unaudited Statements of Cash Flows for the six month periods ended
February 28, 2006 and 2005....................................................5
Notes to Financial Statements..................................................6
Item 2 -Management's Discussion and Analysis of Results of Operations
and Financial Condition.......................................................7
Item 3 - Controls and Procedures..............................................16
PART II - OTHER INFORMATION...................................................17
Item 1. LEGAL PROCEEDINGS....................................................17
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS............................17
Item 3. DEFAULTS UPON SENIOR SECURITIES......................................17
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................17
Item 5. OTHER INFORMATION....................................................18
Item 6. EXHIBITS.............................................................18
2
PART I - FINANCIAL INFORMATION
EDGEWATER FOODS INTERNATIONAL
CONSOLIDATED BALANCE SHEET
UNAUDITED
FEBRUARY 28, 2006
ASSETS
Current assets:
Cash $ 123
Accounts receivable, net 27,320
Inventory 820,268
Other current assets 17,213
-----------
Total current assets 864,924
Property, plant and equipment, net 1,097,383
Loans receivable 14,982
Investments in other assets 3,486
-----------
Total assets $ 1,980,775
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Checks issued in excess of funds on deposit $ 25,927
Bank indebtedness 69,987
Short term debt 1,601,298
Current portion of long term debt 974,136
Accounts payable and accrued liabilities 610,532
-----------
Total Current Liabilities 3,281,880
Long term debt 394,942
-----------
Total Liabilities 3,676,822
-----------
Stockholders' Deficit
Common stock, no par $0.001, 25,000,000 authorized,
20,960,400 issued and outstanding at
February 28, 2006 2,096
Additional Paid in Capital 3,854,290
Accumulated Deficit (5,330,880)
Accumulated other comprehensive income - (221,553)
foreign exchange adjustment
-----------
Total Stockholders' Deficit (1,696,047)
-----------
Total Liabilities and Stockholders' Deficit $ 1,980,775
===========
See accompanying summary of accounting policies and notes to financial
statements
EDGEWATER FOODS INTERNATIONAL
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND SIX MONTH PERIOD ENDING FEBRUARY 28
THREE MONTHS ENDED SIX MONTHS ENDED
FEBRUARY 28, FEBRUARY 28,
2006 2005 2006 2005
---------------------------- ----------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
Revenue $ 143,372 $ 129,426 $ 303,551 $ 264,540
Cost of goods sold 133,466 161,925 305,547 251,570
------------ ------------ ------------ ------------
Gross profit (loss) 9,906 (32,499) (1,996) 12,970
------------ ------------ ------------ ------------
Expenses:
General and administrative expenses 62,804 34,309 105,867 67,513
Salaries and benefits 35,571 22,895 79,666 35,062
Stock compensation expense 520,000 -- 702,500 --
------------ ------------ ------------ ------------
Total 618,375 57,204 888,033 102,575
------------ ------------ ------------ ------------
Loss from operations (608,469) (89,703) (890,029) (89,605)
------------ ------------ ------------ ------------
Other income (expense):
Interest (expense), net (52,573) (14,970) (106,096) (23,419)
Other income 2,532 -- 6,650 --
------------ ------------ ------------ ------------
Other income (expense), net (50,041) (14,970) (99,446) (23,419)
------------ ------------ ------------ ------------
Net income (loss) $ (658,510) $ (104,673) $ (989,475) $ (113,024)
============ ============ ============ ============
Foreign currency translation (28,205) (103,182) (221,553) (103,628)
Total Comprehensive (loss) $ (686,715) $ (207,855) $ (1,211,028) $ (216,652)
============ ============ ============ ============
Net income (loss) per Share
Basic and diluted $ (0.03) $ (0.01) $ (0.05) $ (0.01)
Weighted average shares outstanding
Basic and diluted 20,689,289 10,300,000 20,626,422 10,300,000
See accompanying summary of accounting policies and notes to financial
statements
4
EDGEWATER FOODS INTERNATIONAL
CONSOLIDATED STATEMENTS OF CASHFLOWS
SIX MONTHS ENDED FEBRUARY 28
SIX MONTHS ENDED
FEBRUARY 28,
2006 2005
----------- -----------
(unaudited) (unaudited)
Cash flows from operating activities:
Net income (loss) $ (989,475) $ (113,024)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation, depletion and amortization 135,923 816,401
Common stock issued for services 702,500 --
Changes in current assets and liabilities:
Accounts receivable (27,320) 3,163
Prepaid expenses 11,307 --
Other current assets -- (888)
Loan receivable 5,405 1,462
Inventory (280,142) --
Accounts payable 120,808 155,060
Bank overdrafts (12,610) 16,787
----------- -----------
Net cash provided by (used in) operating activities (333,604) 878,961
----------- -----------
Cash flows from investing activities:
Purchase of property, plant and equipment (18,113) (1,133,479)
----------- -----------
Net Cash provided by (used in) investing activities (18,113) (1,133,479)
----------- -----------
Cash flows from Financing activities:
Line of credit, net 4,623 --
Proceeds from short term debt 405,036 250,907
Proceeds of long term debt 2,178 --
Payment of long term debt (13,292) (10,392)
----------- -----------
Net Cash provided by financing activities 398,545 240,515
----------- -----------
Foreign currency translation effect (47,265) 320
----------- -----------
Net increase (decrease) in cash (437) (13,683)
Cash, beginning of period 560 13,683
----------- -----------
Cash, end of period $ 123 $ 0
----------- -----------
See accompanying summary of accounting policies and notes to financial
statements
5
Edgewater Foods International, Inc.
Notes to Consolidated Financial Statements
(unaudited)
NOTE 1. BASIS OF PRESENTATION, ORGANIZATION AND NATURE OF OPERATIONS
Edgewater Foods International Inc. ("Edgewater"), 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. 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 no significant competition for the farming of these marine species in
our geographic area. Island Scallops is committed to rapidly expanding
production and profits while continuing to finance our aggressive growth and
maintaining a healthy respect for the marine environment.
On June 29, 2005, 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 become
the wholly own subsidiary of Edgewater. As a result, the shareholders of Island
Scallops owned a majority (54.21%) of the voting stock of Edgewater. 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 (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 for a
100% equity interest in Edgewater Foods. 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 Edgewater 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.
6
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The unaudited consolidated financial statements of the Company are prepared in
conformity with accounting principles generally accepted in the United States of
America for reporting interim financial information and the rules and
regulations of the Securities and Exchange Commission. In the opinion of
management, all adjustments necessary for a fair presentation of the financial
position and results of operations for the periods presented have been included.
All such adjustments are of a normal recurring nature. These unaudited
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements included in the Company's Annual Report on
Form 10-KSB for the year ended August 31, 2005. Results of operations for the
three and six months ended February 28, 2006 are not necessarily indicative of
the operating results for the full accounting year or any future period.
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, checks issued in excess of funds on deposit,
bank indebtedness, and highly liquid short term market investments with terms to
maturity of three months or less.
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
Edgewater maintains inventories of raw materials for its aquaculture products,
of biomass (inventory of live aquaculture product being actively cultivated),
and of finished goods (aquaculture product ready for sale).
7
Raw materials are reported at the lesser of purchase cost and estimated net
realizable value.
Biomass and finished goods are reported at the lesser of cost and estimated net
realizable value. Cost 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 February 28, 2006, inventory consisted of the following:
Biomass (Scallops): $820,268
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.
Intangible assets
Intangible assets are recorded at cost. Cost is amortized over the estimated
useful life of the asset unless that life is determined to be indefinite.
Intangible assets not subject to amortization are tested for impairment on at
least an annual basis. If the fair value of the intangible asset is determined
to be less than the carrying amount, an impairment loss is recognized in the
amount of that difference.
Intangible assets subject to amortization are reviewed for impairment in
accordance with the provisions applying to long-lived assets.
Property, plant, and equipment
Property, plant, and equipment are recorded at cost less accumulated
amortization and are amortized in the following manner based on estimated useful
lives:
Buildings 4% - 5% declining balance
Seawater piping 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 balance
8
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
Any 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.
We have received government assistance in the form of loans, for which repayment
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
defined period of time. Such assistance is initially recorded as a liability,
until such time as all conditions for forgiveness are met, and is then
recognized as revenue in that period.
Farm license costs
We must pay annual license costs in respect to government-granted tenures that
we hold, which gives 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 we incur that 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) ("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
9
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 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.
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.
Revenue from the sale of scallops and other products is recognized upon delivery
of the product and invoicing of the customer, assuming collection is considered
reasonably assured.
Financial instruments
The carrying amount of our financial instruments, which include cash, accounts
receivable, loans receivable, checks issued in excess of funds on deposit, 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 is not exposed to significant interest, currency or
credit risk arising from these financial instruments unless otherwise noted.
Foreign exchange
The functional currency of our 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.
10
Concentration of risk
We operate in the regulated aquaculture industry. Material changes in this
industry or the applicable regulations could have a significant impact on us.
The quality and quantity of the aquaculture products we cultivate, harvest and
process could be impacted by biological and environmental risks such as
contamination, parasites, predators, disease and pollution. These factors could
severely restrict our ability to successfully market our products.
Stock-based compensation
We account for stock-based employee compensation arrangements using the
intrinsic value method in accordance with the provisions of Accounting
Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to
Employees," and in compliance 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 our common
stock and the amount an employee must pay to acquire the stock.
We periodically issue common stock for acquisitions and services rendered.
Common stock issued is valued at the estimated fair market value, as determined
by management and our 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.
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 November of 2004, the FASB issued Statement of Financial Accounting Standards
No. 151 ("SFAS 151"). SFAS 151 amends the guidance in Accounting Research
Bulletin No. 43 (Inventory Pricing) to clarify the accounting for abnormal
amounts of idle facility expense, freight, handling costs, and waste material.
Among other provisions, SFAS 151 requires that items, such as idle facility
expense, excessive spoilage, double freight, and rehandling costs, be recognized
as current period charges. Additionally, SFAS 151 requires that the allocation
of fixed production overheads to the costs of conversions be based on normal
capacity of the production facilities. SFAS 151 is effective for fiscal years
beginning after June 15, 2005, and as required, we adopted it in the first
quarter of fiscal 2006. In the opinion of Management, the adoption of this
statement will not have any impact on the Company's consolidated financial
statements.
11
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. We are required
to adopt SFAS 123R not later than for the 2007 fiscal year. In the opinion of
Management, the adoption of this statement will not have a significant impact on
the Company's consolidated financial statements.
In December of 2004, the FASB issued Statement of Financial Accounting Standards
No. 153 (Exchanges of Nonmonetary Assets - An Amendment of APB Opinion No. 29,
Accounting for Nonmonetary transactions) ("SFAS 153"). 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 153
specifies that a nonmonetary exchange has commercial substance if the future
cash flows of the entity are expected to change significantly as a result of the
exchange. SFAS 153 is effective for fiscal periods beginning after June 15,
2005, and as required, we adopted it in this 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' financial
statements, unless it is impracticable to do so. 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 prospectively 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 changes and corrections of errors made
in fiscal years beginning after the date the Statement was issued (May 2005).
Statement 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, we will implement the
provisions of this accounting pronouncement in the fiscal reporting period
ending August 31, 2007. We do not currently believe that the adoption of SFAS
145 No. 154 will have a material impact on our consolidated financial
statements.
12
NOTE 3. PROPERTY, PLANT AND EQUIPMENT
Property, Plant and Equipment at February 28, 2006 consisted of the following:
Accumulated Net Book
Cost Amortization Value
------------------------------------
Land $ 219,589 $ -- $ 219,589
Buildings 431,786 217,422 214,364
Seawater piping and tanks 436,587 253,907 182,680
Boats and Barge 224,226 101,694 122,532
Field equipment 1,001,102 651,827 349,275
Office equipment 13,206 11,820 1,386
Vehicles 34,975 31,688 3,287
Computer equipment 8,136 3,866 4,270
------------------------------------
$2,369,607 $1,272,224 $1,097,383
Depreciation expenses for the six months ended February 28, 2006 and 2005 were
$53,778 and $18,649.
NOTE 4. LOANS RECEIVABLE
An unsecured note receivable from Seascal Enterprises, Ltd. requires monthly
interest payments, calculated at the Business Development Bank of Canada's
operational rate plus 1%, per annum, and has no fixed term of repayment. We have
an informal arrangement to provide scallop seed to Seascal, for which we receive
a percentage of ultimate sales.
NOTE 5. INVESTMENTS IN OTHER ASSETS (TENURES)
We carry our investment in other assets (tenures) at $3,486 at February 28,
2006. This amount represents the carrying costs of certain shellfish tenures
acquired by our wholly-owned subsidiary Island Scallops 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. One tenure has an
expiration date of July 10, 2021. Other shellfish tenures that we and our
subsidiaries hold have expiration dates ranging from 2021 to 2024.
13
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 shareholder totaling $101,843 at
February 28, 2006. We used these credit cards as a means of short term financing
and incurs interest charges on such unpaid balances.
Included in accounts payable and accrued liabilities at February 28, 2006 is an
amount of $114,890 related to deposits paid by two third parties in respect to
an agreement to purchase geoduck seed from us (for additional information see
Note 9 - Contingent Liabilities).
Included in accounts payable and accrued liabilities at February 28, 2006 is an
amount of $3,220 related to 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).
Other accounts payable and accrued liabilities at February 28, 2006 carry a
balance of $390,579.
As a result, at February 28, 2006, we had an accounts payable and accrued
liabilities balance of $610,532.
NOTE 7. SHORT TERM DEBT
Included in short-term notes payable is a loan with an authorized limit of
$1,394,214 secured by our assets, including a mortgage charge in the amount of
$1,394,214 on land 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. The note bears interest at a rate of 1% per month, payable
monthly, and is due April 15, 2006. During the six months ended February 28,
2006, we borrowed an additional $536,732 for working capital requirements.
Therefore, as of February 28, 2006, the entire authorized limit of $1,394,214
had been lent to Island Scallops. In addition, Island Scallops was currently in
arrears on interest payment for $40,458. As a result, the debt is carried as
$1,434,672 of short term debt on the balance sheet.
Included in short-term debt at February 28, 2006 is estimated royalties of
$57,994 payable to a third party from whom the former sole shareholder of Island
Scallops originally acquired the shares of Island Scallops. The 1992 share
purchase agreement (for Island Scallops) provided that the third party was to
14
receive from the Company 3% of revenues of the Company 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 (including
broodstock) in the amount of $304,984 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 $57,994 as a current
liability and we plan to pay it with available funds in the near future.
Included in short-term notes payable at February 28, 2006 is an unsecured
non-interest bearing demand loan from an individual with a face value of $43,714
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 the short-term notes payable at February 28, 2006 is a second
unsecured non-interest bearing demand loan with a face value of $41,391 and no
specific terms of repayment.
Included in short-term notes payable at February 28, 2006 is a third and fourth
unsecured non-interest bearing loan from a shareholder with face values of
14,814 and $8,714 and no specific terms of repayment.
As a result, at February 28, 2006, we had $1,601,298 of short-term notes.
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, payable semi-annually,
with no specified due date. At February 28, 2006 as Island Scallops is in
arrears in respect to the payment of these amounts, the full principal balance
of $590,183 is reflected as a current liability. Our management is seeking to
renegotiate terms of repayment of this debt.
These consolidated financial statements include 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 $384,351, if repayment is
before December 1, 2007. If at December 1, 2012, Island Scallops has not earned
sufficient revenues required to repay the original loan amount, the remaining
portion of the loan is to be forgiven. Amounts currently due at February 28,
2006 bear interest at a rate of 1% per month. At February 28, 2006, Island
Scallops is in arrears in respect to the payment of these amounts, the full
principal balance of $383,953 is reflected as a current liability.
These consolidated financial statements include Island Scallop's mortgage loan
repayable at $1,842 per month including interest calculated at the greater of
10% and (Canadian) prime plus 6%. The loan, which is due on April 1, 2007, is
15
secured by a second charge on the real property of Island Scallops. At February
28, 2006, the principal due is $187,571
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 Island Scallops' gross scallop sales for each preceding year,
which is due January 1, 2007. If at the due date we have not generated
sufficient revenues to be required to repay the original amount of $159,269, 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.
These consolidated financial statements include two bank loans for Island
Scallops. The first bank loan is repayable at $1,089 per month, plus interest
calculated at the floating base rate of the Business Development Bank of Canada
plus 1.5% annum, is due February 23, 2009, and is secured by a General Security
Agreement over Island Scallops' assets , a mortgage charge on Island Scallop's
real property and a personal guarantee of $43,569 by our Chairman, President and
CEO, and former sole shareholder of Island Scallops. At February 28, 2006, the
principal due is $39,212. The second bank loan is repayable at $454 per month
plus interest calculated at (Canadian) prime plus 3% per annum, is unsecured and
is due October 23, 2007. At February 28, 2006, the principal due is $8,889.
As a result, at February 28, 2006, we had $1,374,636 of long-term debt less a
current portion of $974,136 for a balance of $394,942.
NOTE 9. CONTINGENT LIABILITIES
Island Scallops entered into an Agreement 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 $114,980, is
included in accounts payable and accrued liabilities.
The position of management is that the two parties violated the terms of the
agreement, such that we are entitled to retain the balance of the deposits. Per
the terms of the original agreement, Island Scallop was entitled to make up any
shortfall in the product produced in the following year. Although product was
available and offered by Island Scallops in the following year, the two parties
refused to honor the terms of the agreement and would not accept the product (to
make up the shortfall) in the following year.
As of February 28, 2006, one of the two parties had made claims that we owed to
it amounts totaling $85,888. This particular party believed that the agreement
required Island Scallops to deliver the product in year one and did not allow
Island Scallop 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 $33,801.
16
Any additional liability to us, or any reduction of the currently recognized
liability, in respect to these deposits will be recorded at the time a
conclusion to this matter can be determined.
Neither we nor our wholly owned subsidiary maintain insurance in respect to
replacement of its inventory. Consequently, we are exposed to financial losses
or failure as a result of this risk.
NOTE 10. STOCK-COMPENSATION EXPENSE
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 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 compensation.
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
and/or non-qualified stock options for employees, directors and consultants to
Edgewater. As of February 28, 2006, our Board of Directors had authorized the
issuance of 282,000 options to employees.
Stock option activity during the six month period ending February 28, 2006 was
as follows:
Weighted Average
Number of Exercise Price
Shares
----------------------------------
Outstanding, August 31, 2005 282,000 $
1.50
Granted -- --
Exercised -- --
Forfeited -- --
Expired -- --
----------------------------------
Outstanding, February 28, 2006 282,000 $
1.50
==================================
Exercisable, February 28, 2006 282,000 $
1.50
==================================
At February 28, 2006, 62,000 of the outstanding options expire in August 2010
with the remaining balance of 220,000 having an expiration date of August 2015.
17
NOTE 11. GOING CONCERN
As of February 28, 2006, our working capital has 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. We anticipate that we
will continue to require additional working capital to fund our ongoing
operations and execute our business strategy. If we do not continue to raise
such required capital it would raise 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
management 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 12. SUBSEQUENT EVENTS
On April 12, 2006, we completed a private equity financing of $1,062,000 with 2
accredited investors. Net proceeds from the financing are approximately
$952,000. We issued 1,888,000 shares of our Series A Preferred Stock, par value
$0.001 per share and stated value of $0.75 per share, at a purchase price of
$0.5625 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,
(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 fifty percent (50%) of the number of
Preferred Shares purchased, except for the Series J Warrants, which shall
entitle the investor to purchase a number of shares of common stock equal to one
hundred percent (100%) of the number of shares of Series A Preferred Stock
purchased; we issued a total of 9,440,000 Warrants. Each of the Warrants has a
term of five (5) years, except for the Series J Warrants, which have a term of
one (1) year.
In connection with this financing, we paid cash compensation to a placement
consultant in the amount of $84,960.00 and issued him 188,800 warrants. Each of
the placement consultant's warrants allow him to purchase one share of our
Series 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 warrants to purchase
the securities described above is exercisable at a price of $0.5625 per warrant,
for a period of three years.
18
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
In the second quarter of 2006, we started harvesting our 2004 year class of
scallops1 and began inspecting our 2005 year class of scallops as we prepare to
begin moving these scallops to larger growth nets and/or ear-hanging our 2005
scallops in the third quarter of 2006. Originally, we planned to ear-hang our
entire 2005 scallop crop, but after inspection of growth rates of the 2004
ear-hang crops and an analysis of labor costs of ear-hanging versus the cost of
additional nets we decided to use nets for the final grow-out stage of the 2005
crop. Entering the third quarter of 2006, we began preparing for the spawning of
our 2006 year class of scallops. In order to complete the transition of the 2005
year class of scallops to larger growth nets and some ear-hung lines, spawn
sufficient numbers of scallop seed to ensure the continued expansion of our
scallop inventory, allow continued growth of our current inventory and begin
developing new infrastructure required to launch significant commercial
sablefish production, we will require additional working capital in the third
quarter of 2006. We are currently investigating several funding options and hope
to have the first stage of new financing completed in the spring of 2006.
Although we originally anticipated producing a 2006 year scallop class of 30
million animals, delays in funding to date have caused management to revise
projections to between 15 and 25 million scallops (depending on the date of
future fundings). If we are unable to secure necessary working capital to fund
our ongoing expansion and execute our total business strategy, we may be forced
to curtail or delay certain aspects of our business plan, such as sablefish
production and/or reduce our projected future scallop crop yields.
COMPARISON OF RESULTS FOR THE THREE MONTHS AND SIX MONTHS ENDED FEBRUARY 28,
2006 TO THE THREE AND SIX MONTHS ENDED FEBRUARY 28, 2005.
Revenues. Revenues for the three months ended February 28, 2006, were
approximately $143,000. We had revenues of approximately $129,000 for the three
months ended February 28, 2005. This is an increase of approximately $14,000 or
11%. Revenues for the six months ended February 28, 2006 were approximately
$303,000 as compare to $265,000 for the six months ended February 28, 2005. This
was an increase of approximately $38,000 or 14%. For the three and six month
periods ended February 28, 2006 and 2005, the majority of our revenue resulted
from the sale of scallops. The slight increase in our revenue from 2005 to 2006
was due to the increased emphasis that we began putting on the development and
production of larger scallops crops in 2005 and continuing into 2006 as opposed
to our prior emphasis on selling our scallops earlier in the growth cycle to
- ------------------------------
1 We categorize scallops based upon when we began the growth cycle. Therefore,
although scallops may be ear-hung in 2005, if they were spawned in 2004, they
would be classified as the "2004 year" class of scallops.
19
generate working capital. Management believes that this emphasis on the
development and production of larger scallop crops has positioned the company
for revenue growth and that our continued emphasis on expansion of future crops
should yield a significant increase in revenues in later half of 2006 and
beyond.
Gross profit (loss). Gross profit for the three months ended February 28, 2006,
was approximately $10,000, an increase of approximately $42,000 as compared to
gross loss of roughly $32,000, for the three months ended February 28, 2005. For
the six months ended February 28, 2006, gross loss was approximately $2,000 as
compared to a gross profit of $13,000 for the six months ended February 28,
2005. The increase in the amount of gross loss for the six months ended February
28, 2006 was mainly attributable to management's decision to focus on the
expansion and development of larger scallop crops and larger scallop yields for
the crop year 2005 and 2006. As a result, we expended a larger portion of our
resources on the maintaining, developing and tending our scallop crops in 2005
and 2006 and are only beginning to see the benefits of our efforts in developing
larger and profits.
General and administrative. General and administrative expenses for the three
months ended February 28, 2006, were approximately $618,000. Our general and
administrative expenses were approximately $57,000 for the three months ended
February 28, 2005. This is an increase of approximately $561,000. General and
administrative expenses for the six months ended February 28, 2006, were
approximately $888,000. Our general and administrative expenses were
approximately $103,000 for the six months ended February 28, 2005. This is an
increase of approximately $785,000. Our general and administrative expenses for
the three and six months ended February 28, 2006 were attributable to costs
associated with establishing, building, and supporting our infrastructure and
included various consulting costs, legal and accounting fees, overhead, realized
stock compensation and salaries. We anticipate that these costs will rise as we
continue to expand our operations.
Stock compensation expense. During the three months ended February 28, 2006, our
Board of Directors authorized the issuance of shares of our restricted common
stock to one group in consideration for the extension of the due date on a share
term loan to Island Scallops. 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 $520,000.
We also had an expense of approximately $183,00 during the three months ended
November 30, 2005. The expense was for two consulting groups who would provide
services to us. As such, we incurred a stock compensation expense of
approximately $703,000 for the six months ended February 28, 2006.
Other income (expense), net. Interest expense for the three months ended
February 28, 2006 was approximately $53,000. For the three months ended February
28, 2006, we had interest expense of roughly $15,000. Other income for the three
months ended February 28, 2006 was approximately $3,000 as opposed to no other
20
income for the three months ended February 28, 2005. As a result, other expense
for the three months ended February 28, 2006 was approximately $50,000 as
compared to other expense of approximately $15,000 for the three months ended
February 28, 2006. This is an increase of approximately $35,000 primarily
attributed to expenses related to the expansion of our scallop crops. Interest
expense for the six months ended February 28, 2006 was approximately $106,000.
For the three months ended February 28, 2006, we had interest expense of roughly
$23,000. Other income for the three months ended February 28, 2006 was
approximately $7,000 as opposed to no other income for the three months ended
February 28, 2005. As a result, other expense for the three months ended
February 28, 2006 was approximately $99,000 as compared to other expense of
approximately $23,000 for the three months ended February 28, 2006. This is an
increase of approximately $66,000 primarily attributed to expenses related to
the expansion of our scallop crops.
Net profit (loss). As a result of the above, the net loss for the three and six
months ended February 28, 2006, was approximately $658,000 and $989,000 as
compared to a net loss of approximately $105,000 and $114,000 for the three and
six months ended February 28, 2006.
Liquidity and Cash Resources. At February 28, 2006 we had a cash balance of
$123. To date, our recent expansion has been largely funded by a short term note
with a maximum limit of approximately $1,280,000. During the six months ended
February 28, 2006, we accessed approximately an additional $540,000 on this
short term note; thereby, bringing our total drawn to nearly $1,400,000 as of
February 28, 2006. As of February 28, 2006, we had reached the authorized
limited on this note and may need to look to other sources to fund any short
term operational shortfalls. Additionally, we relied on short term loans from
certain shareholders to assist with our working capital needs and to meet short
term cash requirements. We anticipate that we will require approximately
$2,500,000 of additional working capital to fund our planned expansion and
execute our business strategy in the upcoming fiscal year. As a result, we will
be required to raise substantial amounts of cash during the rest of 2006. There
can be no assurance that we will be successful in our efforts and any failure to
raise such monies would have a material negative effect on our business and
operations. Without adequate funding, we will be unable to complete the transfer
of our 2005 crop into larger growth nets and ear-hung lines or spawn the
necessary scallop larvae to satisfy the target levels necessary to produce a
larger 2006 year-class scallops.
ITEM 3. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures
------------------------------------------------
We maintain controls and procedures designed to ensure that information
required to be disclosed in the reports that we file or submit under
21
the Securities Exchange Act of 1934 is recorded, processed, summarized
and reported within the time periods specified in the rules and forms
of the Securities and Exchange Commission. Based upon their evaluation
of those controls and procedures performed as of the end of the period
covered by this report, our chief executive officer and principal
financial officer concluded that our disclosure controls and procedures
were effective.
(b) Changes in internal controls
----------------------------
There was no change in our internal control over financial reporting
identified in connection with the evaluation required by Rule 13a-15(d)
and 15d-15(d) of the Exchange Act that occurred during the period
covered by this report that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.
22
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In 1998 Island Scallops entered into an agreement with two purchasers, pursuant
to which Island Scallops was to produce and sell geoduck seed to the two
purchasers. Island Scallops received advance payments from each of the two
purchasers 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, 2004, one of the two purchasers had claimed that Island
Scallops owed it amounts totaling $85,888. 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 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a) Unregistered Sales of Equity Securities
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.
In connection with the financing we closed on April 11, 2006, we issued the
placement consultant 188,800 warrants that allow him to purchase one share of
our Series A preferred stock, and one half of each of the Series A-I Warrants
and one Series J warrant we issued in the financing. Each of the placement
consultant's warrants to purchase the securities described above is exercisable
at a price of $0.5625 per warrant, for a period of three years.
(b) Not Applicable.
23
(c) Not Applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
(a) Not Applicable.
(b) Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
(a) Not applicable.
(b) Not applicable.
ITEM 6. EXHIBITS
(a) The following exhibits are filed as part of this report.
Exhibit No. Document
31.1 Certification of Chief Executive Officer and Acting Chief
Financial Officer required by Rule 13a-14/15d-14(a) under the
Exchange Act
32.1 Certification of Chief Executive Officer and Acting Chief
Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: April ___, 2006 EDGEWATER FOODS INTERNATIONAL, INC.
By:
------------------------------
Robert Saunders,
Chief Executive Officer
By:
------------------------------
Michael Boswell,
Acting Chief Financial Officer
24
Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Robert Saunders certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Edgewater Foods
International, Inc.
2. Based on my knowledge, this quarterly 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 quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer(s) 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)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant 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
registrant, 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. Designed such internal control over financial reporting, or caused
such internal control to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles.
c. Evaluated the effectiveness of the registrant'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
d. Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant'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 registrant's ability to
record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date:
Robert Saunders
Chief Executive Officer
CERTIFICATION OF ACTING CHIEF FINANCIAL OFFICER
I, Michael Boswell certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Edgewater Foods
International, Inc.
2. Based on my knowledge, this quarterly 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 quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer(s) 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)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant 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
registrant, 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. Designed such internal control over financial reporting, or caused
such internal control to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles.
c. Evaluated the effectiveness of the registrant'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
d. Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant'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 registrant's ability to
record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date:
- ------------------------------
Michael Boswell
Acting Chief Financial Officer
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Edgewater Foods International, Inc.
(the "Company") on Form 10-QSB for the period ending February 28, 2006, as filed
with the Securities and Exchange Commission on the date hereof (the "Report'),
I, Robert Saunders, Chief Executive Officer of the Company, certify, pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that:
(1)The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2)The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company
at the dates and for the periods indicated.
Date:
- -----------------------
Robert Saunders,
Chief Executive Officer
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Edgewater Foods International, Inc.
(the "Company") on Form 10-QSB for the period ending February 28, 2006, as filed
with the Securities and Exchange Commission on the date hereof (the "Report'),
I, Michael Boswell, Acting Chief Financial Officer of the Company, certify,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
(1)The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2)The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company
at the dates and for the periods indicated.
Date:
- ------------------------------
Michael Boswell,
Acting Chief Financial Officer