As filed with the Securities and Exchange Commission on July 14, 2006
Registration No. 333-
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
EDGEWATER FOODS INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
NEVADA 20-3113571
- ---------------------------- ------------------------ -------------------
(State or other jurisdiction (Commission File Number) (IRS Employer
of incorporation) Identification No.)
5552 WEST ISLAND HIGHWAY, QUALICUM BEACH
BRITISH COLUMBIA, CANADA V9K 2C8
(Address of principal executive offices (zip code))
(250) 757-9811
(Registrant's telephone number, including area code)
ROBERT SAUNDERS
PRESIDENT AND CHIEF EXECUTIVE OFFICER
5552 West Island Highway, Qualicum Beach
British Columbia, Canada V9K 2C8
(Name, address and telephone number of agent for service)
Approximate date of proposed sale to the public: AS SOON AS PRACTICABLE AFTER
THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
If this form is filed to register securities for an offering to be made on a
continuous or delayed basis, check the following box: [X]
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ __ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ __ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ __ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. [ __ ]
- ------------------------- ---------------------- ----------------------- ---------------------- ----------------------
TITLE OF EACH CLASS OF AMOUNT TO BE PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE REGISTERED OFFERING PRICE PER AGGREGATE OFFERING REGISTRATION FEE
REGISTERED UNIT (1) PRICE (1)
- ------------------------- ---------------------- ----------------------- ---------------------- ----------------------
Common Stock underlying 9,465,599 (2) (3) $1.40 $13,251,838.60 $1,417.95
the Preferred Stock
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Common Stock Underlying 21,440,020 $1.40 $30,016,028.00 $3,211.71
the Warrants
- ------------------------- ---------------------- ----------------------- ---------------------- ----------------------
- ------------------------- ---------------------- ----------------------- ---------------------- ----------------------
Common Stock Underlying 2,868,803 $1.40 $4,016,324.20 $429.75
the Placement
Consultant Warrants
- ------------------------- ---------------------- ----------------------- ---------------------- ----------------------
Common Stock 647,860 (3) $1.40 $907,004.00 $97.05
- ------------------------- ---------------------- ----------------------- ---------------------- ----------------------
Total 34,422,282 $5,156.46
- ------------------------- ---------------------- ----------------------- ---------------------- ----------------------
(1) Estimated solely for the purpose of computing the registration fee in
accordance with Rule 457(c) of the Securities Act of 1933 based upon
the average of the bid and asked price of the Registrant's common stock
as quoted on the Over-the-Counter Bulletin Board of $1.40 on July 11,
2006.
(2) This number represents 120% of the aggregate number of shares of common
stock necessary to effect the conversion of all of our Series A
Preferred Stock currently outstanding.
(3) An indeterminate number of additional shares of common stock shall be
issuable pursuant to Rule 416 to prevent dilution resulting from stock
splits, stock dividends or similar transactions and in such an event
the number of shares registered shall automatically be increased to
cover the additional shares in accordance with Rule 416 under the
Securities Act.
(4) Includes 22,860 shares issued as dividends to some of our Series A
Convertible Preferred shareholders; 400,000 shares issued to a lender
as consideration for extending the repayment date of a loan; and
225,000 shares issued to consultants.
Pursuant to Rule 416 of the Act, this registration statement also covers such
indeterminate additional shares of common stock as may become issuable as a
result of stock splits, stock dividends or other similar events.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(a), MAY
DETERMINE.
COPIES OF COMMUNICATIONS TO:
LOUIS E. TAUBMAN, ESQ.
LAW OFFICES OF LOUIS E. TAUBMAN, P.C.
17 State Street, 16th Floor
NEW YORK, NY 10004
(212) 732-7184
FAX: (212) 202-6380
ii
The information contained in this preliminary prospectus is not complete and may
be changed. These securities may not be sold until the Securities and Exchange
Commission declares the registration statement filed with it effective. This
preliminary prospectus is not an offer to sell these securities, and it is not
soliciting an offer to buy these securities in any state where the offer or sale
is not permitted. You should rely only on the information contained in this
preliminary prospectus. We have not authorized anyone to provide you with
information that is different.
PRELIMINARY PROSPECTUS
SUBJECT TO COMPLETION, DATED JULY 14, 2006
EDGEWATER FOODS INTERNATIONAL, INC.
34,422,282 SHARES OF COMMON STOCK
The 34,422,282 shares of common stock, $.001 par value, being offered
by the selling shareholders listed on page 11. The shares of our common stock
covered by this prospectus include:
o 400,000 shares of common stock to The Bridge Financing Group
(doing business as "World Wide Mortgage Corporation") on January
31, 2006 as consideration of their agreement to extend the due
date for repayment of our $1,500,00 bridge loan with them;
o 225,000 shares of common stock issued to the following parties
pursuant to consulting agreements with us, in consideration for
services provided to us: 100,000 shares issued to Aurelius
Consulting Group, Inc. in October 2005; 100,000 shares issued to
Gallatin Consulting, Inc. on June 27, 2005; 12,500 shares issued
to Christian Galatti on October 21, 2005 and November 11, 2005;
and 12,500 shares issued to Gary Shemano on October 21, 1005 and
November 11, 2005;
o 21,440,020 shares of common stock issuable upon exercise of
21,440,020 warrants to purchase shares of our common stock to
investors in our 2006 private financings;
o 9,465,599 shares of common stock issuable upon conversion of the
Series A Convertible Preferred Stock granted to investors in our
2006 private financings; this number represents 120% of the
aggregate number of shares of common stock necessary to convert
the currently outstanding 7,887,999 shares of our Series A
Preferred Stock, which is required by the transaction documents
of our April 12, 2006, May 30, 2006, June 30, 2006 and July 11,
2006 private financings;
o 2,868,803 shares of common stock issuable upon exercise of three
(3) placement consultant warrants to purchase shares of our
common stock granted to the placement consultant in our April 12,
2006, May 30, 2006, June 30, 2006 and July 11, 2006 private
financings;
o 22,860 shares of common stock issuable pursuant to dividends that
were issued in July 2006 and pursuant to dividends that may be
paid in the future to our Series A Preferred Shareholders.
This offering is not being underwritten.
The prices at which the selling shareholders may sell their shares will
be determined by the prevailing market price for the shares or in privately
negotiated transactions. Information regarding the selling shareholders and the
times and manner in which they may offer and sell the shares under this
prospectus is provided under the "Selling Shareholders" and "Plan of
Distribution" sections in this prospectus. Edgewater will not receive any of the
proceeds from the sale of the shares under this prospectus.
iii
Our common stock is listed on the Over the Counter Bulletin Board, also
called the OTCBB, under the trading symbol "EDWT." On July 11, 2006, the
closing bid for our common stock as reported on the OTCBB was $1.40 per share.
As of July 11, 2006, Edgewater had the following amount of shares issued and
outstanding:
o 20,983,260 shares of Common Stock; and,
o 7,887,999 shares of Series A Preferred Stock
THIS INVESTMENT INVOLVES RISK.
SEE "RISK FACTORS"BEGINNING ON PAGE 3.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved the securities or determined that this
prospectus is complete or accurate. Any representation to the contrary is a
criminal offense.
------------------------------------------
The date of this Prospectus is
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iv
TABLE OF CONTENTS
Page
Corporate Information...................................................... vi
Prospectus Summary......................................................... 1
Risk Factors............................................................... 4
Cautionary Statement Regarding Forward Looking Statements.................. 9
Use Of Proceeds............................................................ 10
Selling Shareholders....................................................... 10
Plan of Distribution....................................................... 13
Business................................................................... 15
Description of Property.................................................... 22
Management................................................................. 26
Executive Compensation..................................................... 30
Security Ownership of Certain Beneficial Owners and Management............. 36
Certain Relationships And Related Transactions............................. 38
Description Of Securities.................................................. 39
Market for Common Equity and Related Shareholder Matters................... 44
Management's Discussion and Analysis or Plan of Operations................. 45
Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure....................................................... 53
Legal Proceedings.......................................................... 54
Experts.................................................................... 54
Legal Matters.............................................................. 54
Financial Statements....................................................... F-1
v
CORPORATE INFORMATION
Our corporate offices are located at 5552 West Island Highway, Qualicum Beach
British Columbia, Canada, V9K 2C8. Our telephone number is (250) 757-9811.
vi
PROSPECTUS SUMMARY
The following is a summary that highlights what we believe to be the most
important information regarding Edgewater and the securities being offered
herein. Because it is a summary, however, it may not contain all of the
information that is important to you. To understand our business and this
offering fully, you should read this entire prospectus and our financial
statements and related notes carefully. Unless the context requires otherwise,
"we," "us," "our" and similar terms refer to Edgewater.
THE COMPANY
We are 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.
RECENT DEVELOPMENTS
Business
We commenced harvesting our year-class 2004 sea scallops in February
2006. We refer to the year-class of scallops based on when the scallops were
spawned. Generally, the harvest occurs approximately 22 to 24 months after
spawning of the scallops. The 2004 year-class scallop harvest started
approximately one month sooner than we originally anticipated. The early start
to the harvest was attributed to improved scallop growth rates as a result of
selective breeding and use of proprietary farming techniques. The benefits of
five years of selective breeding are starting to show benefits with the 2004
year-class, displaying a higher weight to shell ratio. We anticipated harvesting
approximately 2 million scallops between February and October 2006, however, the
results of our experimentation with ear hanging scallops as opposed to keeping
them in nets during the final portion of their growth cycle were disappointing
and resulted in greater mortality than expected, as well as sporadic growth. In
the future, we anticipate using a combination of ear-hanging and lantern net
methods.
The 2005 year-class scallops are currently maturing in our tenured
growing sites and joint venture locations. We are currently preparing our farm
sites for the transfer of these scallops to their final stage large grow-out
nets. This transfer will be completed during the summer of 2006 and we
anticipate commencing harvesting up to approximately 4 million 2005 year-class
scallops during April of 2007. The 2006 year-class scallop spawning season
commenced in March of 2006 and was completed in April 2006. The scallop
brood-stock conditioning for this spawning began in mid-December 2005. We expect
to begin harvesting these 2006 year-class scallops during the Spring of 2008,
however, we could begin harvesting portions of the class sooner if mortality (at
various points of the growth cycle) are significantly better than our current
1
projections or if growth rates are substantially higher. We anticipate that of
the over 350 million larvae that were spawned, at least 10 million scallops
could reach full maturity and thus be harvested. The use of DNA based family
analysis started in 2005 will continue through 2006, with the goal of breeding
high meat yield scallops.
In October 2005, we installed twenty new longlines at our Hindoo Creek
scallop farm in Baynes Sound (1). Each longline is 108 yds (324 feet) long and
submerged at approximately 25 ft depth. In July 2006, we received approval for
an additional 23 longlines. The October and July additions bring the tenure up
to its management plan of 67. At harvest, each new longline has the capacity to
hold 90,000 scallops in final stage grow-out nets, thereby increasing the
production of the farm to 6 million scallops. Additionally, the Deep Bay tenure
has been expanded to 32 longlines, which has the capacity to hold 2.8 million at
harvest.
After an analysis of our production results to date, we decided to
transition production to a combination of our ear-hanging method and the use of
"lantern style" nets (for our grow-out nets), the later of which will allow for
approximately 90,000 scallops per line (vs. 100,000 "ear-hung). The costs of
"lantern style" are similar to that of "ear-hanging" ($.08 per scallop in net
vs. $.075 per ear hung scallop): labor costs for the lantern method are less
because there is less handling of the scallops, however, capital costs are more
since we will need to purchase boats capable of handling additional weight per
line caused by use of nets vs. ear hanging. In conjunction with the transfer of
our 2005 scallop class from small mesh nets to the final stage lantern nets, we
also will begin moving the 2006 crop from the pond sites (at our hatchery) to
small mesh nets on our farms; it is estimated that these animals will be ready
for harvest in the Spring of 2008.
SERIES A PREFERRED STOCK AND WARRANT FINANCINGS
On April 12, 2006 we completed a private equity financing of $1,062,000
with 2 accredited investors. Net proceeds from the offering, were approximately
$952,040. 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 50% of the number of shares of
Series A Preferred Stock purchased, except for the Series J Warrants, which
entitled the investor to purchase a number of shares of our common stock equal
to 100% of the number of shares of Series A Preferred Stock purchased. We issued
a total of 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. Each
share of the Series A Preferred Stock is convertible into one fully paid and
nonassessable share of our common stock.
In connection with the April 12, 2006 financing, our management agreed
not to sell any of our securities owned by them, their affiliates or anyone they
have influence over until this registration statement has been effective for six
months. World Wide Mortgage, to whom we borrowed the amount of CDN $1,500,000,
also entered into a lock up agreement to sell no more than 100,000 shares of our
common stock per quarter until the registration statement has been effective for
six months.
2
In connection with the April 12, 2006 financing, we paid cash
compensation to a placement consultant in the amount of $84,960 and issued him
188,800 warrants. Each of the placement consultant's warrants allows him to
purchase one share of our Series A Preferred Stock, and one half of each of the
Series A-H 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.
On May 30, 2006 we completed another round of private equity financing
of $1,500,000 pursuant to a Series A Convertible Preferred Stock Purchase
Agreement dated May 30, 2006. The net proceeds from this financing were
approximately $1,380,000. We issued 2,000,000 shares of our Series A Preferred
Stock, stated value of $0.75 per share, at a purchase price of $0.75 per share
and the investor also received one of each of the following warrants: (i) Series
A Warrant, (ii) Series B Warrant, (iii) Series C Warrant, and (iv) Series D
Warrant, each to purchase a number of shares of Common Stock equal to 50% of the
number of shares of Series A Preferred Stock purchased; we issued a total of
4,000,000 Warrants. Each of the Warrants has a term of five (5) years and is
identical to the Series A-D Warrants we issued to investors pursuant to the
financing we closed on April 12, 2006.
In connection with the May 30, 2006 financing, we paid cash
compensation to a placement consultant in the amount of $120,000 and issued him
200,000 warrants. Each of the placement consultant's warrants allows him to
purchase one share of our Series A Preferred Stock, and one-half of each of the
Series A-D Warrants. Each of the placement consultant's warrants to purchase the
securities described above is exercisable at a price of $1.50 per warrant, for a
period of three years.
On June 30, 2006 and July 11, 2006 we completed two final rounds of
private equity financing accepting subscriptions in the aggregate amount of
$2,840,000 from 9 institutional and accredited investors pursuant to the May 30,
2006 Series A Convertible Preferred Stock Purchase. On June 30, 2006 and July
11, 2006, we entered into separate Joinder Agreements to each of the Series A
Convertible Preferred Stock Purchase Agreement and the Registration Rights
Agreement, each dated as of May 30, 2006, with each of the new investors which
added such investors as additional parties to the May 30, 2006 financing
documents. Net cash proceeds from these two rounds were approximately
$2,659,000. Pursuant to these two final financings, we issued a total of
3,786,666 shares of our Series A Preferred Stock, stated value of $0.75 per
share at a purchase price of $0.75 per share and each investor also received one
of each of the following warrants: (i) Series A Warrant, (ii) Series B Warrant,
(iii) Series C Warrant, and (iv) Series D Warrant, each to purchase a number of
shares of Common Stock equal to 50% of the number of shares of Series A
Preferred Shares purchased (subject to the rounding of factional shares); we
issued a total of 7,573,344 Warrants in these two rounds of financing. Each of
the Warrants has a term of five (5) years and is identical to the Series A-D
Warrants we issued to investors pursuant to the financings we closed on April
12, 2006 and May 30, 2006. Each share of our Series A Preferred Stock is
convertible into one fully paid and nonassessable share of our common stock.
In connection with the June 30, 2006 and July 11, 2006 financings, we
paid a total placement consultant fee of $217,000. The placement consultant
received $160,000 of his fee in securities (as described below) and $57,000 in
cash. As a result, we issued the placement consultant 213,333 shares of our
Series A Preferred Stock, and one of each of the A-D Warrants, each to purchase
3
106,667 shares of our Common Stock. The A-D Warrants issued to the placement
consultant are identical to the Series A-D Warrants we issued to the investors
as described above.
Pursuant to the April, May, June and July 2006 financings, we received aggregate
net proceeds of approximately $4,991,040 and we issued an aggregate of 7,887,999
shares of our Series A Preferred Stock and Warrants to purchase an aggregate of
21,440,020 shares of our common stock.
For further information regarding the preferred stock and warrants see
"Description of Securities - Series A Preferred Stock" and "Description of
Securities -Warrants."
Also in connection with the issuance of the shares of our Series A
Preferred Stock and Warrants issued in the April, May, June and July 2006
financings described above, we agreed to file this registration statement with
the Securities and Exchange Commission to register for resale the shares of our
common stock into which the shares of our Series A Preferred Stock may be
converted and the shares of common stock issuable upon the exercise of the
warrants. We are required to file this registration statement on or before July
14, 2006. If the registration statement is not declared effective by December 6,
2006, we will be required to pay liquidated damages equal to 1.0% of the amount
invested for each calendar month or portion thereof thereafter such date until
this registration statement is declared effective. In no event however, shall
the amount of liquidated damages payable at any time and from time to time
exceed an aggregate of 10% of the amount of the initial investment in the Series
A Preferred Stock. We are required to keep this registration statement
continuously effective under the Securities Act until such date as is the
earlier of the date when all of the securities covered by this registration
statement have been sold or the date on which such securities may be sold
without any restriction pursuant to Rule 144.
RISK FACTORS
You should carefully consider the risks described below before making an
investment in EDGEWATER. All of these risks may impair our business operations.
If any of the following risks actually occurs our business, financial condition
or results of operations could be materially adversely affected. In such case,
the trading price of our common stock could decline, and you may lose all or
part of your investment.
RISKS RELATING TO AQUACULTURE
We are subject to a number of biological and environmental risks.
Our business would be adversely affected if our scallop crop is infected by
Perkinsus Quagwadi. Perkinsus affects a variety of scallops. In 1992, mortality
due to Perkinsus infection was large and mortality was high, but Island Scallops
was able to overcome this disease by breeding the remaining stock. Eight years
of successfully breeding hardy individuals resulted in the remaining populations
of scallops being Perkinsus-free. Although there is a chance that other diseases
4
may occur, the Island Scallops hybrid scallop has proven resistant to Perkinsus
disease for the last ten years.
Paralytic Shellfish Poisoning (PSP or red tide) is another concern when farming
scallops. The adductor muscle can be processed for sale to the traditional
scallop meat market even when there is a PSP closure. On the other hand, the
live animal market is stopped by PSP toxicity. Sewage Contamination (faecal
coliform) is also monitored by the Canadian Food Inspection Agency (CFIA) to
avoid this problem. These types of contaminants do not threaten the crop, it
only causes a temporary displacement to the marketing of the product. Island
Scallops' aquaculture is not without total risk; however, the development
program over the last decade has reduced the risk of disease and increased the
historical grow-out survival rate to 95% over the past six years. Despite these
advances, however, an outbreak of PSP, even if it did not affect Island
Scallops' stock, could have a depressive effect on the shellfish market in
general, which could then adversely affect our business.
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
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
5
these larvae can settle within the "grow-out" nets and settle there and prey on
these scallops. However, with proper husbandry techniques these effects can be
minimized.
Our business would be adversely affected if a majority of our scallop crop
experiences fouling.
Fouling is caused by settlement and growth of several organisms such as
macroalgae, bryozoans, barnacles and mussels on the nets. Heavy fouling of
culture nets and scallops impedes growth of the scallops. Since most fouling
occurs in shallower waters, hanging scallops at deeper depths can reduce
fouling. If culture systems are managed properly, fouling is not a problem.
Aquaculture can be subject to a variety of growing conditions that can adversely
affect product growth and development.
Certain growing conditions and sea conditions can affect the quality and
quantity of scallops produced, decreasing the supply of our products and
negatively impacting profitability. Extreme wave actions tend to make scallops
seasick. In cases of extreme seasickness, scallops stop feeding and growth is
reduced. This may create mortality by weakening the scallops and making them
susceptible to other problems and diseases. Currently, the water leases owned by
Island Scallops are located in areas where this will prove to be less
problematic. Additionally, if other environmental conditions are unfavorable,
growing conditions in the ocean can greatly inhibit scallop growth. Generally
this risk is mitigated by year-to-year variations in growing conditions.
However, we cannot guarantee that we will not be negatively affected, at least
in the short term, if we experience poor growing conditions.
Increased mortality rates would adversely impact our business.
In general, increased mortality rates in juveniles are due to improper feeding
and hatchery husbandry. Once scallops are introduced to the ocean, increased
mortality rates are caused by the above factors as well as fluctuations in
salinity and currents. Given the location of Island Scallops' current farming
areas, the salinity and currents should not be problematic. Mortality rates can
also increase due to overcrowding problems. In cases of extreme overcrowding
scallops actually bite each other and their shells become damaged.
If we are unable to expand our tenures, our projected production may be delayed.
To increase our production capacity, we must expand our tenures. However,
expanding tenures requires government approval, which can be a timely and costly
process. Two of our tenures, Hindoo Creek and Deep Bay, have been approved for
expansion. Our Denman tenure must be re-zoned before expansion thereof will be
approved and our Bowser bottom lease Management Plan must be reconfigured before
expansion of that area is approved. Although we are confident that such approval
will be granted after issues raised by local residents and fisherman, such as
the use of surface floats for our longlines have been addressed, there is no
guarantee that it will be granted. In the future, we will seek expansion of our
other tenures, which also may not be granted. If we do not receive expansion
approval for our Denman tenure and Bowser bottom lease, it will delay our
proposed expansion.
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BUSINESS RISKS
We will require additional capital to fund our current business plan.
Our success is dependent on future financings. The aquaculture or marine farming
industry is a capital-intensive business, which requires substantial capital
expenditures to develop and acquire farms and to improve or expand current
production. Further, the farming of marine life and acquisition of additional
farms may require substantial amounts of working capital. We project the need
for significant capital spending and increased working capital requirements over
the next several years. There can be no assurance that we will be able to secure
such financing on terms, which are acceptable, if at all. The failure to secure
future financing with favorable terms could have a material adverse effect on
our business and operations.
We are dependent on certain key existing and future personnel.
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 49% of our capital
stock and 68% of our voting capital stock may decrease your influence on
shareholder decisions.
Our executive officers and directors, in the aggregate, beneficially own
approximately 49% of our capital stock and 68% of our voting capital stock. As a
result, our officers and directors, will have the ability to influence our
management and affairs and the outcome of matters submitted to shareholders for
approval, including the election and removal of directors, amendments to our
bylaws and any merger, consolidation or sale of all or substantially all of our
assets.
Our acquisitions and potential future acquisitions involve a number of risks.
Our potential future acquisitions involve risks associated with assimilating
these operations into our company; integrating, retaining and motivating key
personnel; integrating and managing geographically-dispersed operations
integrating the technology and infrastructures of disparate entities; and risks
inherent in the husbandry and farming of marine species.
We may have difficulty competing with larger and better-financed companies in
our sector.
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
7
to the extent we are not able to compete successfully against such seafood
producers.
Contamination of our seafood would harm our business.
Because our products are designed for human consumption, our business is subject
to certain hazards and liabilities related to food products, such as
contamination. A discovery of contamination in any of our products, through
tampering or otherwise, could result in a recall of our products. Any such
recall would significantly damage our reputation for product quality, which we
believe is one of our principal competitive assets, and could seriously harm our
business and sales. Although we maintain insurance to protect against such
risks, we may not be able to maintain such insurance on acceptable terms and
such insurance may not be adequate to cover any resulting liability.
We may experience barriers to conducting business due to potential government
regulations.
There are no hatchery/producer competitors in the scallop farming business in
British Columbia. The United States will not allow the farming of the species
farmed by Island Scallops in their waters, 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.
Foreign exchange rates risks, political stability risk, and/or the imposition of
adverse trade regulations could harm our business.
We conduct some of our business in foreign currencies. Our profitability depends
in part on revenues received in United States dollars as a result of sales into
the United States. A decline in the value of the United States dollar against
the Canadian dollar would adversely affect earnings from sales in the United
States. As part of our plans to acquire other businesses we may expand our
8
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.
RISKS RELATING TO THE OFFERING
There may not be sufficient liquidity in the market for our securities in order
for investors to sell their securities.
There is currently only a limited public market for our common stock, which is
listed on the Over-the-Counter Bulletin Board, and there can be no assurance
that a trading market will develop further or be maintained in the future.
During the month of June 2006, our common stock traded an average of
approximately 318 shares per day. As of July 11, 2005, the closing bid price of
our common stock was $1.40 per share. As of July 11, 2005, we had approximately
50 shareholders of record not including shares held in street name. In addition,
during the past two years our common stock has had a trading range with a low
price of $0.51 per share and a high price of $1.95 per share.
The market price of our common stock may be volatile.
The market price of our common stock has been and will likely continue to be
highly volatile, as is the stock market in general, and the market for OTC
Bulletin Board quoted stocks in particular. Some of the factors that may
materially affect the market price of our common stock are beyond our control,
such as changes in financial estimates by industry and securities analysts,
conditions or trends in the industry in which we operate or sales of our common
stock. These factors may materially adversely affect the market price of our
common stock, regardless of our performance. In addition, the public stock
markets have experienced extreme price and trading volume volatility. This
volatility has significantly affected the market prices of securities of many
companies for reasons frequently unrelated to the operating performance of the
specific companies. These broad market fluctuations may adversely affect the
market price of our common stock.
The outstanding warrants may adversely affect us in the future and cause
dilution to existing shareholders.
There are currently 24,308,823 warrants outstanding. The terms of these warrants
expire as early as 2007 and as late as 2011. The exercise price of these
warrants range from $0.5625 to $2.25 per share, subject to adjustment in certain
circumstances. Exercise of the warrants may cause dilution in the interests of
other shareholders as a result of the additional common stock that would be
issued upon exercise. In addition, sales of the shares of our common stock
issuable upon exercise of the warrants could have a depressive effect on the
price of our stock, particularly if there is not a coinciding increase in demand
by purchasers of our common stock. Further, the terms on which we may obtain
additional financing during the period any of the warrants remain outstanding
may be adversely affected by the existence of these warrants as well.
Our common stock may be considered a "penny stock" and may be difficult to sell.
The SEC has adopted regulations which generally define a "penny stock" to be an
equity security that has a market price of less than $5.00 per share or an
9
exercise price of less than $5.00 per share, subject to specific exemptions. The
market price of our common stock is less than $5.00 per share and, therefore, it
may be designated as a "penny stock" according to SEC rules. This designation
requires any broker or dealer selling these securities to disclose certain
information concerning the transaction, obtain a written agreement from the
purchaser and determine that the purchaser is reasonably suitable to purchase
the securities. These rules may restrict the ability of brokers or dealers to
sell our common stock and may affect the ability of investors to sell their
shares.
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 prospectus. 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.
USE OF PROCEEDS
We have registered these shares because of registration rights granted to the
investors in our recent private equity financing and the other selling
shareholders. We will not receive any proceeds upon the conversion of the
preferred shares into shares of our common stock, however, we received net
proceeds of approximately $4,990,000 from the initial sale of the preferred
shares and we could receive up to approximately $34350,000, net of fees and
expenses, from the exercise of the warrants when and if exercised. The net
proceeds from the sale of the Preferred shares and any proceeds received form
the exercise of the warrants have been and will be used as set forth in the
table below.
The following table represents estimates only. The actual amounts may vary from
these estimates.
Use of Funds Funds Received from Sale of Funds Received from Sale
Preferred Shares of Preferred Shares and
Exercise of the Warrants
- --------------------------------------------------------------------------------
Working Capital $3,540,000 $34,350,000
Repayment of Bridge Loan $1,450,000 -
Total $4,990,000 $34,350,000
- ---------------
SELLING SHAREHOLDERS
The following table sets forth certain information concerning the
resale of the shares of common stock by the selling shareholders (the "Selling
Shareholders"). Unless otherwise described below, to our knowledge, no Selling
Shareholder nor any of their affiliates has held any position or office with,
been employed by or otherwise has had any material relationship with us or our
affiliates during the three years prior to the date of this prospectus. Unless
otherwise described below, the Selling Shareholders have confirmed to us that
10
they are not broker-dealers or affiliates of a broker-dealer within the meaning
of Rule 405 of the Securities Act, as amended.
The Selling Shareholders may offer all or some portion of the shares of
the common stock or the shares of common stock issuable upon conversion of the
Term Notes and/or exercise of the warrants. Accordingly, no estimate can be
given as to the amount or percentage of our common stock that will be held by
the Selling Shareholders upon termination of sales pursuant to this prospectus.
In addition, the Selling Shareholder identified below may have sold, transferred
or disposed of all or a portion of their shares since the date on which they
provided the information regarding their holdings in transactions exempt from
the registration requirements of the Securities Act. The amount of shares owned
and offered hereby by the Selling Shareholders are calculated assuming a
conversion ratio of one share of common stock for each share of Preferred Stock,
which conversion price is subject to adjustment under certain circumstances. See
"Description of Securities." Individual beneficial ownership of the Selling
Shareholders also includes shares of common stock that a person has the right to
acquire within 60 days from July 11, 2006. See "Description of Securities
- -Warrants."
As of July 11, 2006, there were 20,983,260 shares of our common stock
outstanding and 7,887,999 shares of our preferred stock outstanding, which are
treated on as converted basis for the purposes of computing the percentage of
outstanding securities owned by the Selling Shareholders. Unless otherwise
indicated, the Selling Shareholders have the sole power to direct the voting and
investment over the shares owned by them. We will not receive any proceeds from
the resale of the common stock by the Selling Shareholders. We estimate that our
costs and expenses of registering the shares listed herein for resale will be
approximately $10,000.
OWNERSHIP OF COMMON STOCK BY SELLING SHAREHOLDERS
-------------------------------------------------
NAME OF SELLING NUMBER OF SHARES NUMBER OF SHARES NUMBER OF SHARES PERCENTAGE OF
STOCKHOLDER PRIOR TO THE OFFERED HEREBY TO BE OWNED AFTER THE OWNERSHIP AFTER THE
OFFERING OFFERING OFFERING (1)(2)(3)
-------------------------------------------------------------------------------------------------------------------
Vision Opportunity 22,107 20,822,108(4) 20,822,108 *
Master Fund, Ltd
Michael Ross 753 688,753(5) 688,753 *
IRA FBO, Michael P. 0 200,003(17) 200,003 *
Ross, Pershing LLC as
Custodian
Nite Capital, LP 0 1,000,001(6) 1,000,001 *
IRA FBO, Richard M. 0 400,001(7) 400,001 *
Ross, Pershing LLC as
Custodian
Irene S. Ross 2005 GS 0 400,001(8) 400,001 *
Trust
11
Lenore Rabin-Koster 0 200,003 (9) 200,003 *
Jack Halpern 0 800,003 (10) 800,003 *
Judith S. Brauner 0 200,003 (11) 200,003 *
Union Bancaire Privee 0 4,000,001 (12) 4,000,001 *
Chi Pai and Shu Ching
Pai 0 3,508,804 (13) 3,508,804 *
Bridge Financing Group 800,000 400,000 (14) 400,000 *
(doing business as
"World Wide Mortgage
Corporation")
Aurelius Consulting 100,000 100,000 (15) 100,000 *
Group, Inc.
Gallatin Consulting,
Inc. 100,000 100,000 (16) 100,000 *
Gary Shemano 12,500 12,500 12,500 *
Christian Galatti 12,500 12,500 12,500 *
* Less than 1% ownership of our common stock following the offering.
(1) All Percentages have been rounded up to the nearest one hundredth of
one percent.
(2) Since we do not have the ability to control how many, if any, of their
shares each of the selling shareholders listed above will sell, we have
assumed that all of the selling shareholders will sell all of the
shares offered herein for purposes of determining their percentage of
ownership following the offering.
(3) The number of shares offered by this prospectus will vary from time to
time based upon several factors including the amount of Preferred Stock
the holder intends to convert and the amount of warrants that may be
exercised. See "Prospectus Summary - Recent Developments - Financing."
Based upon the terms of the both the Preferred Stock and the warrants,
holders may not convert the Preferred Stock and/or exercise the
warrants, if on any date, such holder would be deemed the beneficial
owner of more than 9.99% of the then outstanding shares of our common
stock. Additionally, the shares of Preferred Stock are subject to
certain anti-dilution provisions, which would be triggered if we were
to sell securities at a price below the price at which we sold the
Preferred Stock.
(4) The person having voting, dispositive or investment powers over Vision
Opportunity Master Fund, Ltd, is Adam Benowitz, Authorized Agent. This
amount includes 5,133,333 shares of common stock issuable upon
conversion of Vision's Series A Convertible Preferred Stock, 15,666,668
shares of common stock issuable upon exercise of Vision's Warrants
Vision received in the April, May, June and July 2006 financings and
22,107 shares of common stock Vision received as dividends on June 30,
2006.
(5) This amount includes 141,333 shares of common stock issuable upon
conversion of his Series A Convertible Preferred Stock, 546,668 shares
of common stock issuable upon exercise of his Warrants received in the
April, May, June and July 2006 financings and 753 shares of common
stock he received as dividends on June 30, 2006.
(6) The person having voting, dispositive or investment powers over Nite
Capital is Keith Goodman, Authorized Agent. This amount includes
333,333 shares of common stock issuable upon conversion of Nite's
Series A Convertible Preferred Stock and 666,668 shares of common stock
issuable upon exercise of the warrants Nite received in the April, May,
June and July 2006 financings.
12
(7) This amount includes 133,333 shares of common stock issuable upon
conversion of his Series A Convertible Preferred Stock and 266,668
shares of common stock issuable upon exercise of the warrants he
received in the April, May, June and July 2006 financings.
(8) This amount includes 133,333 shares of common stock issuable upon
conversion of her Series A Convertible Preferred Stock and 266,668
shares of common stock issuable upon exercise of the Warrants she
received in the April, May, June and July 2006 financings.
(9) This amount includes 66,667 shares of common stock issuable upon
conversion of her Series A Convertible Preferred Stock and 133,336
shares of common stock issuable upon exercise of the warrants she
received in the April, May, June and July 2006 financings.
(10) This amount includes 266,667 shares of common stock issuable upon
conversion of his Series A Convertible Preferred Stock and 533,336
shares of common stock issuable upon exercise of the warrants he
received in the April, May, June and July 2006 financings.
(11) This amount includes 66,667 shares of common stock issuable upon
conversion of her Series A Convertible Preferred Stock and 133,336
shares of common stock issuable upon exercise of the warrants he
received in the April, May, June and July 2006 financings.
(12) The persons having voting, dispositive or investment powers over Union
Bancaire Privee are Olivier Constantin and Franco Rossi, Authorized
Agents. This amount includes 1,333,333 shares of common stock issuable
upon conversion of Duration's Series A Convertible Preferred Stock and
2,666,668 shares of common stock issuable upon exercise of the warrants
it received in the April, May, June and July 2006 financings.
(13) This amount includes 213,333 shares of common stock issuable upon
conversion of Chi Pai's Series A Convertible Preferred Stock and
426,668 shares of common stock issuable upon exercise of the warrants
he received in the April, May, June and July 2006 financings. Also
includes 2,868,803 shares of common stock underlying the placement
consultant warrants Chai Pai received in the April, May, June and July
2006 financings.
(14) The person having voting, dispositive or investment powers over The
Bridge Financing Group is Randy Howarth, Authorized Agent.
(15) The person having voting, dispositive or investment powers over
Aurelius Consulting Group, Inc. is David Gentry, Authorized Agent.
(16) The person having voting, dispositive or investment powers over
Gallatin Consulting, Inc. is Thomas Bostic Smith, Authorized Agent.
(17) This Amount includes 66,667 shares of common stock issuable upon
conversion of his Series A Convertible Preferred Stock and 133,335
shares of common stock issuable upon exercise of his Warrants received
in the April, May June and July 2006 financings.
PLAN OF DISTRIBUTION
We are registering the shares of common stock on behalf of the Selling
Shareholders. The selling security holders and any of their pledgees, donees,
assignees and successors-in-interest may, from time to time, sell any or all of
their shares of common stock being offered under this prospectus on any stock
exchange, market or trading facility on which shares of our common stock are
traded or in private transactions. These sales may be at fixed or negotiated
prices. The selling security holders may use any one or more of the following
methods when disposing of shares:
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
o block trades in which the broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the
block as principal to facilitate the transaction;
o purchases by a broker-dealer as principal and resales by the
broker-dealer for its account;
o an exchange distribution in accordance with the rules of the
applicable exchange;
o privately negotiated transactions;
13
o to cover short sales made after the date that the registration
statement of which this prospectus is a part is declared
effective by the Commission;
o broker-dealers may agree with the selling security holders to
sell a specified number of such shares at a stipulated price per
share;
o a combination of any of these methods of sale; and
o any other method permitted pursuant to applicable law.
The shares may also be sold under Rule 144 under the Securities Act of
1933, as amended if available, rather than under this prospectus. The selling
security holders have the sole and absolute discretion not to accept any
purchase offer or make any sale of shares if they deem the purchase price to be
unsatisfactory at any particular time.
The selling security holders may pledge their shares to their brokers
under the margin provisions of customer agreements. If a selling security holder
defaults on a margin loan, the broker may, from time to time, offer and sell the
pledged shares.
Broker-dealers engaged by the selling security holders may arrange for
other broker-dealers to participate in sales. Broker-dealers may receive
commissions or discounts from the selling security holders (or, if any
broker-dealer acts as agent for the purchaser of shares, from the purchaser) in
amounts to be negotiated, which commissions as to a particular broker or dealer
may be in excess of customary commissions to the extent permitted by applicable
law.
If sales of shares offered under this prospectus are made to
broker-dealers as principals, we would be required to file a post-effective
amendment to the registration statement of which this prospectus is a part. In
the post-effective amendment, we would be required to disclose the names of any
participating broker-dealers and the compensation arrangements relating to such
sales.
The selling security holders and any broker-dealers or agents that are
involved in selling the shares offered under this prospectus may be deemed to be
"underwriters" within the meaning of the Securities Act in connection with these
sales. Commissions received by these broker-dealers or agents and any profit on
the resale of the shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act. Any broker-dealers or agents
that are deemed to be underwriters may not sell shares offered under this
prospectus unless and until we set forth the names of the underwriters and the
material details of their underwriting arrangements in a supplement to this
prospectus or, if required, in a replacement prospectus included in a
post-effective amendment to the registration statement of which this prospectus
is a part.
The selling security holders and any other persons participating in the
sale or distribution of the shares offered under this prospectus will be subject
to applicable provisions of the Exchange Act, and the rules and regulations
under that act, including Regulation M. These provisions may restrict activities
of, and limit the timing of purchases and sales of any of the shares by, the
selling security holders or any other person. Furthermore, under Regulation M,
persons engaged in a distribution of securities are prohibited from
simultaneously engaging in market making and other activities with respect to
those securities for a specified period of time prior to the commencement of
14
such distributions, subject to specified exceptions or exemptions. All of these
limitations may affect the marketability of the shares.
If any of the shares of common stock offered for sale pursuant to this
prospectus are transferred other than pursuant to a sale under this prospectus,
then subsequent holders could not use this prospectus until a post-effective
amendment or prospectus supplement is filed, naming such holders. We offer no
assurance as to whether any of the selling security holders will sell all or any
portion of the shares offered under this prospectus.
We have agreed to pay all fees and expenses we incur incident to the
registration of the shares being offered under this prospectus. However, each
selling security holder and purchaser is responsible for paying any discounts,
commissions and similar selling expenses they incur.
We and the selling security holders have agreed to indemnify one
another against certain losses, damages and liabilities arising in connection
with this prospectus, including liabilities under the Securities Act.
BUSINESS
OVERVIEW
We were incorporated under the laws of the State of Nevada on June 12,
2000, with the name Heritage Management Corporation. In August 2005, we entered
into a share exchange agreement with Edgewater Foods International, Inc., the
parent company of Island Scallops Ltd. an aquaculture company located in
Vancouver Island, British Columbia. As a result of the Share Exchange, Edgewater
became our wholly owned subsidiary and Edgewater's shareholders became the
owners of the majority of our voting stock. Pursuant to the terms of the Share
Exchange Agreement, Edgewater's officers and directors have been appointed as
our officers and Directors. Additionally, we changed our name from Heritage
Management, Inc. to Edgewater Foods International, Inc.
Our wholly owned subsidiary, Edgewater Foods International Inc., a
Nevada Corporation, is the parent company of Island Scallops Ltd., a Vancouver
Island aquaculture company. Island Scallops was established in 1989 and for over
17 years has successfully operated a scallop farming and marine hatchery
business. Island Scallops is dedicated to the farming, processing and marketing
of high quality, high value marine species: scallops and sablefish. Scallop
farming is relatively new to North America and Island Scallops is the only
producer of both live-farmed Pacific scallops and live sablefish (or blackcod).
Given Island Scallops' unique hatchery technology and extensive research and
development, we believe that there is currently no significant competition for
these marine species. Island Scallops is committed to rapidly expanding
production and profits while continuing to finance the aggressive growth of the
company and maintaining a healthy respect for the marine environment.
Edgewater acquired Island Scallops in June 2005 through a tax free
share exchange. Island Scallops was established in 1989 to commercialize
Canadian government research on scallop aquaculture. Island Scallops' hatchery
operations have diversified to produce other species of shellfish such as
mussels, clams, geoducks and oysters. Island Scallops has also investigated the
culture of halibut, spot prawn, sea urchin and abalone. Island Scallops is the
first hatchery to successfully produce sablefish juveniles for commercial
grow-out.
Currently, Island Scallops' primary product is farmed pacific scallops
for sale in the west coast of North America. Island Scallops offers a variety of
other products and services to the industry including aquaculture equipment,
consulting, research and development, and custom processing and marketing.
15
Internationally, Island Scallops has collaborated with both Japanese and
Moroccan fisheries interests.
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. 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), we 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.
16
KEY CORPORATE OBJECTIVES
Our key business development objectives over the next 36 months are to: expand
scallops sales and begin blackcod production using both existing and new
infrastructure at our facilities in Qualicum Beach, Canada, that we anticipate
will allow us to reach annual sales of approximately US$18.4 million and
earnings of approximately US$6 million by the end of 2008 (on scallops sales
alone). We plan to implement this significant expansion through the following
six initiatives:
o Increase scallops sales from approximately US$500,000 per year to
approximately US$1.0 million for the year ending 2006 using existing
inventory.
o Produce at least 15 million scallops of our 2006 scallop class, which
we will start harvesting in the spring of 2008.
o Capitalize on the high demand for sablefish in foreign markets by
entering into the blackcod market in the next 2 to 3 years.
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 2007.
o During 2007, rapidly increase farm production with a projected minimum
2007 scallop class of at least 50 million which we will begin to
harvest in early 2009.
o Produce more than 200 million scallop seeds in 2008, with a projected
2008 scallop class 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
distributors are important. To develop these relationships, Island Scallops has
identified key purchasing criteria for the distributors: price, quality and
consistent farmed supply. In the short term, Island Scallops intends to adopt a
pricing policy equal to the market wholesale prices. In other words, we do not
intend to set any promotional or premium prices for either the whole or shucked
product, but instead intend to sell our products at the market rate. This would
mean Island Scallops' products would compete on other factors, such as supply
and consistent quality.
Over the long term, for the reasons noted below, Island Scallops wants to
differentiate its products so that it can command premium prices. Freshness is
an important factor for scallops since whole scallops only have a shelf life of
17
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.
PRODUCTS
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. Additionally, our hatchery
has produced and is capable of producing a variety of shellfish seed (for
grow-out and sale by our companies) including mussel, oysters and geoduck as
well as scallop seed.
Island Scallops has been a leader in marine hatchery technology for the past 17
years. Island Scallops has developed proprietary hatchery techniques for a
number of marine species, most notably the hybridizing of the Pacific Scallop
and becoming the first company to produce commercial quantities of sablefish
juveniles. Both of these breakthroughs have required many years of research and
considerable investment. In the case of sablefish, which is a cold-water fish
that spawns at depths of 800 - 2400 ft, a variety of techniques were required to
successfully mature, spawn, incubate and rear the larvae. In addition, there
were technical difficulties associated with egg and yolk sac incubation (as well
as larvae rearing and weaning) that were resolved using proprietary technology
developed at Island Scallops. Island Scallops was only able to reach its goal of
commercially farming sablefish with over 8 years of dedicated research and
capital investment of approximately US$2.4 million. We intend to begin
significant further commercialization of sablefish in the next two to three
years, provided we are able to finance the expansion of this product which we
estimate will require at least $5.0 million of capital.
18
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 a minimum of 15 million
scallops annually beginning with the 2006 scallop class which will begin its
harvest in early 2008. 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 $4.00 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 stems from a
combination of our tenure expansion, our recent financing, improved grow-out
techniques and our transition to a combination of "lantern-style" netting and
ear-hanging methods. Scallops culture utilizes two styles of small cages
referred to as "pearl nets and lantern nets." Pearl nets are shaped like a
pyramid with a 35 by 35 cm square base and grow small scallops from 2-3 mm to
10mm. The 10-mm scallops are grown in cylindrical nets called lantern nets and
are 60 cm in diameter and 1.2 meters deep containing 12 layers. Once the
scallops reach 5cm they can be grown to harvest using a method called
"earhanging" or be grown out in lantern nets. Our Hindoo Creek and Deep Bay
tenures have been approved for expansion and once expansion of our Denman tenure
is approved, which we believe will occur by the second or third quarter of our
next fiscal year, we will be able to increase capacity to approximately
25,000,000 animals per annum. Thereafter, we intend to further expand our Bowser
tenure in 2007, which would supply us with the capacity to produce additional
30-50 million animals at harvest.
As the only hatchery/producer of cultured scallops on the west coast of North
America, Island Scallops has the ability to supply fresh scallops (of a
predictable quality and quantity) throughout the year. Although the supply of
scallops has fluctuated in the past, consumer demand has always absorbed the
available supply. A primary factor for increased consumption is the increasing
health consciousness among consumers. Scallops are low in saturated fats and
cholesterol and high in protein. All parts of the scallop body are edible;
however, different parts tend to be consumed in different regions of the world.
In North America, the adductor muscle is traditionally the only part eaten, with
the rest of the body discarded. In Europe, Australia and Tasmania, the adductor
muscle is usually marketed and eaten with the gonad attached. Japan utilizes the
whole animal, where most of the product is cooked in the shell prior to sale.
Marketed scallops generally take the following product forms:
o Whole-live (shelf life of seven days);
o Whole dried; o Eviscerated whole;
o Shucked fresh (shelf life of about 15-20 days);
19
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 per city 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 their product
is shucked aboard ship then supplied to primarily frozen to seafood processors
onshore. The processors then distribute the product to various restaurants,
retail outlets and seafood brokers.
Sablefish (Blackcod) Overview
Sablefish (Anoplopoma fimbria), often called blackcod although not a member of
the cod family, is an elongate fish with two dorsal fins and an anal fin similar
to and opposite the second dorsal fin. Adults are black or greenish gray;
usually with slightly paler blotches or chainlike pattern on the upper back. At
30-61 cm in size they are often greenish with faint stripes on the back.
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 causing sablefish to be parasite free.
Wild sablefish carry a parasite that does not allow the fish to be eaten raw.
20
With adequate funding, Island Scallops has already demonstrated the feasibility
of onshore sablefish farming and plans to develop a new blackcod facility that
could produce at least 500,000 sablefish as early as 2007, with production
planned to increase by at least 500,000 annually by 2008 and beyond.
Over the past eight years, Island Scallops has also developed proprietary
hatchery technology for the production of sablefish juveniles. We believe that
sablefish will be the next species, after salmon, for successful large-scale
commercial farming. Sablefish, which is a premium-quality whitefish with a
delicate texture and moderate flavor, is an ideal substitute for Chilean sea
bass (currently over-fished in all oceans). To date, Island Scallops has
marketed a limited number of live sablefish into the Vancouver market. Initial
response was excellent for a small 1-kilogram live sablefish (~$11/kg). To
capitalize on Island Scallops' breakthrough sablefish hatchery technology, in
the next two to three years, we plan to construct a new sablefish hatchery
consisting of the following:
o An expanded Brood Stock facility with larger capacity to hold the
various families of selected strains of sablefish. This new facility
will incorporate a new state-of-the-art water treatment system.
o An improved incubation and larval rearing facility incorporating
proprietary improvements in tank design and seawater systems.
o An upgraded zooplankton culture facility with improved handling and
enrichment techniques.
o An expanded and improved juvenile rearing facility incorporating
proprietary recirculation system designs.
As part of this expansion, we also intend to construct a new onshore tank farm
consisting of large and small ponds and tanks complete with associated
recirculation systems. This onshore facility will be used to augment the
juvenile rearing area and will house and grow juvenile fish.
At the present time, worldwide "non-farming" sablefish catches are struggling to
meet the worldwide demand according to DFOWeb, NPFMCWeb and Pacific Fishery
Management Council Website. Currently, there are only two hatchery facilities:
Island Scallops Ltd. and Sablefish Hatcheries Inc. that have produced sablefish
juveniles. Current production is only approximately 100,000 juveniles per year.
Based on our analysis of present market conditions, increasing worldwide
hatchery production tenfold (to roughly 1 million 3 kilo sablefish) would fill
less than 10% of the current world demand shortfall. If Island Scallops' new
sablefish facilities are able to reach a production of 3 million sablefish
annually, this will only fill less than 30% of the current overall shortfall.
The economic potential for sablefish is therefore considerable. Given these
market conditions and opportunities, Island Scallops is determined to enter the
market for sablefish in a significant manner with the next two to three years.
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,
21
manila clams, geoduck clams, oysters, abalone and sea urchins. Island Scallops
has established suppliers of aquaculture equipment in Japan and China and
supplies nets, ropes, floats, and processing equipment into the British Columbia
industry. Currently, Island Scallops is focused almost exclusively on expansion
of scallop sales and development of its sablefish operation with a goal of
further commercialization of sablefish in two to three years.
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
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 farms
sites total approximately 200 acres and can currently accommodate more than 8
million. Approximately 30% of the farm area is currently being farmed. As part
of our expansion plans, we are currently adding additional main lines and plan
to increase our capacity at these tenures to more than 24 million scallops in
the near future. An additional bottom tenure of 926 acres is located 10 minutes
north of the main facility (at Bowser) and is capable of producing at least 30
million scallops annually. The final farm site on the west coast of Vancouver
Island near Tofino is capable of producing at least three million scallops,
although that site is currently under-developed. Baynes Sound, the marine
waterway situated between eastern Vancouver Island and the western shore of
Denman Island, is considered the most productive and highly utilized shellfish
growing area in coastal British Columbia. The area supports extensive beach
culture (manila clams and oysters) as well as deepwater culture that produces
oysters, scallops and some mussels.
- --------------------- ------------------- ------------------- ------------------
Common Site Name Lands File No. ACRES Type
- --------------------- ------------------- ------------------- ------------------
Denman 1406063 38.64 Deepwater
- --------------------- ------------------- ------------------- ------------------
Hindoo Creek 1406664 123.32 Deepwater
- --------------------- ------------------- ------------------- ------------------
Deep Bay 1406711 43 Deepwater
- --------------------- ------------------- ------------------- ------------------
Tofino 1406061 9.6 Deepwater
- --------------------- ------------------- ------------------- ------------------
Bowser 1407517 926 Bottom lease
- --------------------- ------------------- ------------------- ------------------
The three Baynes Sound tenures (Denman, Hindoo Creek and Deep Bay) and the
Tofino tenure offer unique features, which will add additional value to these
properties. These include the split of tenures between east and west shores of
Baynes Sound as well as the east and west coast of Vancouver Island, allowing
continual accessibility to shellfish despite managed closures (harvest
22
restrictions) due to incidental water quality or Paralytic Shellfish Poisoning
(PSP or red tide). The seasonal closures caused by short-term bacteriological
contamination related to rainfall and upland bacterial sources, are limited to
the western shore of the Baynes Sound and thus to only two of the three tenures
retained by Island Scallops. The result of having operating tenures on both
sides of the Baynes Sound ensures that product can be continually harvested
despite closures that may occur within this management area. The expanded
tenures should easily accommodate our increasing scallop harvest in 2009 and
beyond. At their current size and with the introduction of sufficient main
lines, our tenures have the capacity to accommodate approximately 13-15 million
scallops without any increase in their footprints.
Expansion of our Deep Bay and Hindo Creek has been approved and such approval
does not need to be renewed for twenty years. We are seeking approval of our
Denman tenure and our Bowser bottom lease, which once approved, will allow us to
accommodate 30-50 million scallops at harvest. The biggest hurdle to obtaining
the Denman tenure approval is the corresponding re-zoning application that also
must be approved before we can expand the tenure.
Island Scallops' location is a distinct advantage for producing marine species.
The waters off British Columbia are pristine and unspoiled by large populations
or major industries. The close proximity to major western cities allows us to
effectively put our products into the hands of the consumer within 24 hours.
The source of our raw material comes from our own hatchery brood stock. In the
case of the Pacific Scallop, we have been selectively breeding this species for
superior growth and survival for the past 15 years. The breeding program has
produced a vigorous, rapid growing, disease resistant scallop with exceptional
meat yield. In the case of sablefish we have been selecting fast growing fish
for the past 5 years, these display a high degree of domestication. The spawning
season has been extended for both of these species allowing for juvenile
production almost year round. This ability to hold seed stock and select
superior strains gives Island Scallops an advantage in the industry. It also
allows Island Scallops to tailor its production to varying seasonal and market
demands.
COMPETITION
Fisheries Industry in General
Island Scallops is in the farmed seafood business. The main concentration of
marine farming in British Columbia has traditionally been in the salmon sector.
The salmon farming business has developed into a mature industry dominated by
Norwegian farmers. The rest of the British Columbia marine farming sector is in
the shellfish industry, mainly in oysters and Manila clams and more recently
mussels. This sector is rapidly expanding and it accounted for approximately
US$16 million in British Columbia in 2002, according to the British Columbia
Shellfish Growers Association website. Given Island Scallops' expertise and
significant research and development experience, we believe that there is little
or no direct competition in the production of farmed scallops or farmed
sablefish.
Scallops
There are no significant direct competitors in the scallop farming business in
23
British Columbia. The United States will not allow farming this species in their
waters, as this species is considered "exotic". Although scallop farming is a
very significant industry in Japan and China, only frozen shucked scallops are
currently sold into North America from these countries. Recent examination by
the United States and Canadian Food Inspection authorities of the growing waters
in China resulted in reduced exporting due to high levels of pollution.
Island Scallops is the only hatchery, outside of China, that has successfully
produced the Japanese scallop, and the only company that has successfully,
hybridized the weathervane and the Japanese scallop. Island Scallops is uniquely
positioned as the sole producer of live Pacific Scallops in North America. There
currently are no other hatcheries in North America that we are aware of that are
capable of producing this unique breed. Although a large commercial scallop
fishery exists on the east coast of North America, the majority of the scallops
are shucked at sea with only limited quantities sold live. These scallops are
sold as "Digby" or "Sea" scallops. A number of companies have attempted to grow
the bay scallop and the sea scallop on the east coast, but these companies have
only achieved limited success.
The primary British Columbia participants in scallop farming are Island Scallops
joint venture farmers or independent scallop farmers, which receive their supply
of seed scallops solely from Island Scallops. These farmers are chronically
underfinanced and are generally able to purchase and 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 only one of two hatcheries to produce quantities of
juvenile sablefish. These fish were sold to five commercial salmon farming
facilities and the fish have been marketed successfully. Little demand for a new
species has materialized. Although hatcheries have been constructed in British
Columbia, neither has successfully produced large quantities of sablefish. The
farming of sablefish is still in its infancy and only limited production has
occurred.
This limited production is not a matter of biological barriers but rather a lack
of interest by the major producers to venture into a new marine species. Alaska
sablefish fishermen have expressed interest in farming sablefish and the
Sablefish Association of Alaska has voted unanimously to start farming sablefish
in southern Alaska. Island Scallops has been in discussion with this association
and has been told that due to "anti-aquaculture" policy in Alaska, it is very
unlikely that any farming will occur in the near future.
Washington State contains two parties interested parties in sablefish farming.
24
The first is the Makah Tribe and the second is a private company, which is
trying to obtain farming permits in Port Angeles. These parties have made
inquiries to Island Scallops for juvenile sablefish. However, to date, no orders
have been placed.
RESEARCH AND DEVELOPMENT
Due to changes in Canadian Federal Government's Research and Development tax
credits (SRED) program, which prevents any part of the research to be combined
with commercial production, no Research and Development claims were made in
fiscal 2004 and 2005. Research did continue on the genetic selection of superior
strains of scallops, as did developments in the culture process for both marine
algae and developments in re-circulation systems. In the near future Island
Scallops plans to conduct research and development under a separate company
called RKS Laboratories Ltd., which has no commercial production and whose
primary goal is the genetic improvement in breeds of the Pacific Scallops and
other marine species. We believe that this will allow the continued support from
the SRED program.
EMPLOYEES
At July 11, 2006, we have 25 employees.
None of our current employees is represented by a labor union and we
consider our relationships with our employees to be good.
REGULATORY ENVIRONMENT
Effect of Government Regulation
There are a limited number of regulations that restrict the fishing,
distributing or purchase of scallops in Canada and the United States. Therefore,
the country of origin makes little difference for the pricing or demand of
scallops.
A limitation to market supply is paralytic shellfish poisoning (PSP) or "red
tide". PSP is a toxin generated by plankton (scallops' food) at particular times
of the year. The toxin is passed to the scallop when plankton is digested, but
the toxin does not harm the shellfish. However, the shellfish containing the
toxin can be harmful to humans who consume it. Although only a limited number of
human deaths caused by red-tide poisoning have been reported, the public
announcement of red tide has a devastating effect on most shellfish sales. The
exception is scallop meat, because the adductor muscle of the scallop does not
concentrate the toxin; shucked scallops are safe to eat at any time of the year.
Nevertheless, public perception could still influence demand over short periods
of time. To monitor for PSP, the federal Fisheries Inspection Branch constantly
monitors samples of shellfish production and wild shellfish populations.
Tenure Expansion and Compliance with Environmental Laws
Our planned tenure expansions will require that we undergo an environmental
screening from Transports Canada pursuant to Canadian Environmental Assessment
Act, which includes a review of factors such as the environmental effects of the
planned expansions, including the environmental effects of malfunctions or
accidents that may occur in connection with the planned expansions and any
cumulative environmental effects that are likely to result from such planned
expansions; the significance of such environmental effects and any comments from
25
the public that are received in accordance with the CEA Act and applicable
regulations; and measures that are technically and economically feasible and
that would mitigate any significant adverse environmental effects of the planned
expansions.
Our Deep Bay and Hindo Creek tenures have received final CEA Act approval, which
lasts for twenty years and which allows us to expand these 2 tenures. We still
need CEA Act approval and re-zoning approval for our Denman tenure and approval
of our Management Plan, along with a satisfactory environmental assesment of our
Bowser bottom lease. Please see our risk factor, If we are unable to expand our
tenures, our projected production may be delayed.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table and text set forth the names and ages of all directors and
executive officers as of July 11, 2006. The Board of Directors is comprised of
only one class. All of the directors will serve until the next annual meeting of
shareholders, which is anticipated to be held in January or February of 2007,
and until their successors are elected and qualified, or until their earlier
death, retirement, resignation or removal. To date we have not had an annual
meeting. Except as disclosed herein, 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.
Dr. Kristina Miller, our Chief Scientific Advisor is the wife of Robert
Saunders, our Chairman, CEO and President.
NAME AGE POSITION
- ---- --- --------
Robert Saunders 53 Chairman, CEO and President
Douglas C. MacLellan 50 Vice Chairman
Mark H. Elenowitz 36 Director
Robert L. Rooks 51 Director
Ian Fraser 45 Director
Michael Boswell 36 Director, Acting Chief Accounting Officer
Darryl Horton 57 Director
Victor Bolton 52 Director
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
26
species in British Columbia. Mr. Saunders has direct experience with managing
projects similar to the type proposed, such as developing the hatchery
technology for producing the Japanese scallop and the development of sablefish
aquaculture.
DOUGLAS C. MACLELLAN, VICE-CHAIRMAN. Since May 1992, Mr. MacLellan has been
President and Chief Executive Officer of the MacLellan Group, Inc., a privately
held business incubator and financial advisory firm. Mr. MacLellan is currently
a member of the board of directors and chairman of the audit committee of AMDL,
Inc. (AMEX: ADL), a publicly held biotechnology firm. From 2002 until September
2005, Mr. MacLellan was Vice Chairman and a Director of AXM Pharma, Inc. (AMEX;
AXJ). From March 1998 through October 2000, Mr. MacLellan was the co-founder and
a significant shareholder of Wireless Electronique, Ltd., a China-based
telecommunications company having joint venture operations with China Unicom
(NASDAQ: CHU) in Yunnan, Inner Mongolia and Ningxia provinces. He is also a
co-founder and, since May 1997, has been a director of Datalex Corporation, a
Canadian-based legacy software solution provider. From November 1996 to March
1998, Mr. MacLellan was co-Chairman and an Investment Committee member of the
Strategic East European Fund. From November 1995 to March 1998, Mr. MacLellan
was President, Chief Executive Officer and a Director of PortaCom Wireless,
Inc., a company engaged as a developer and operator of cellular and wireless
telecommunications ventures in selected developing world markets. Mr. MacLellan
is a former member of the board of directors and co-founder of FirstCom
Corporation (NASDAQ: FCLX), an international telecommunications company that
operates a competitive access fiber and satellite network in Latin America,
which became AT&T Latin America (NASDAQ: ATTL) in August 2000. During 1996, he
was also the Vice-Chairman of Asia American Telecommunications (now Metromedia
China Corporation), a majority-owned subsidiary of Metromedia International
Group, Inc. (AMEX: MMG). Mr. MacLellan was educated at the University of
Southern California in economics and finance, with advanced training in
classical economic theory.
MARK H. ELENOWITZ, DIRECTOR. Mr. Elenowitz is a co-founder and managing director
of the TriPoint family of companies. 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.
27
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.
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.
DARRYL HORTON, DIRECTOR. Mr. Horton has been a businessman successfully involved
28
in numerous construction and development projects for the past 35 years. He is
the President, Manager and a Partner of Abbotsford Development Corporation and
is currently managing a development project in Abbotsford, British Columbia
called Eagle Mountain. Eagle Mountain is an upscale, master planned community of
single family homes, town homes and commercial properties covering approximately
60 acres that is expected to be valued, upon completion, in excess of 200
million dollars. Prior to Eagle Mountain, Mr. Horton managed, owned and marketed
numerous other residential and commercial projects including the construction of
a 30 million dollar multi-function residential Intermediate Care Facility in
LaJolla California. For 15 years Mr. Horton was a partner in a general
contracting company that did various contracts with an average volume of about
25 million per year. In the 1970's, Mr. Horton was the Vice president of
Community Builders, the largest single family developer in British Columbia. Mr.
Horton is also the director of several other building and development companies
in British Columbia.
VICTOR BOLTON, DIRECTOR. Mr. Bolton founded a Mechanical contracting firm after
graduating from college and evolved that firm into all aspects of the
construction industry including building and raw land developing as well as
extensive property management. Retiring from this business in 2000, Mr. Bolton
now focuses time and energy towards the food manufacturing field.
Significant Employees
The following are employees who are not executive officers, but who are expected
to make significant contributions to our business:
BRUCE EVANS, FARM MANAGER. Mr. Bruce Evans has been involved in shellfish
production since 1985. He successfully established an oyster business, employing
methods of long-line and beach culture production. That business is still in
operation today, producing 7,000 gals of shucked oysters annually and employing
3 full time people and 4 part time people. He moved to Island Scallops in 1989.
Mr. Evans was responsible for securing the leases from the Provincial government
for this scallop grow-out project. He built the established long-line systems
that currently produce scallops for Island Scallops. Mr. Evans worked with a
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, an MSc in Biology from University of
British Columbia in 1986. Dr. Miller is Robert Saunders, our Chairman, CEO and
President's wife.
29
AUDIT COMMITTEE AND FINANCIAL EXPERT
We have an Audit Committee as specified in Section 3(a)(58)(A) of the Securities
Exchange Act of 1934, as amended, composed of Douglas MacLellan (Chair), Robert
Rooks and Ian Fraser. The Audit Committee focuses its efforts on assisting our
Board of Directors to fulfill its oversight responsibilities with respect to
our:
o Quarterly and annual consolidated financial statements and financial
information filed with the Securities and Exchange Commission;
o System of internal controls;
o Financial accounting principles and policies;
o Internal and external audit processes; and
o Regulatory compliance programs.
The committee meets periodically with management to consider the adequacy of our
internal controls and financial reporting process. It also discusses these
matters with our independent auditors and with appropriate financial personnel
that we employ. The committee reviews our financial statements and discusses
them with management and our independent auditors before those financial
statements are filed with the Securities and Exchange Commission.
The committee has the sole authority to retain and dismiss our independent
auditors and periodically reviews their performance and independence from
management. The independent auditors have unrestricted access and report
directly to the committee.
AUDIT COMMITTEE FINANCIAL EXPERT
Douglas MacLellan is our Audit Committee Financial Expert, as that term is
defined in Item 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 in his biography above.
EXECUTIVE COMPENSATION
Summary Compensation Table
30
------------------------------ -----------
ANNUAL COMPENSATION AWARDS Payouts
------------------------------ -----------
- -------------------------------------------------------------- -------------- --------------- -----------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other All
Name Annual Securities LTIP Other
And Compen- Restricted Underlying Payouts Compen-
Principal sation Stock Award(s) Options/ ($) sation
Position Year Salary($) Bonus($) ($) ($) SARs(#) ($)
- ---------------- -------- ---------- -------------- --------- --------------- --------------- ------------ -----------
Robert 2005 60,000 150,000 0 0 0 0 0
Saunders,
Chairman,
President and
CEO(1)
- ---------------- -------- ---------- -------------- --------- --------------- --------------- ------------ -----------
Robert 2004 0 0 0 0 0 0 0
Saunders,
Chairman,
President and
CEO
- ---------------- -------- ---------- -------------- --------- --------------- --------------- ------------ -----------
Robert 2003 0 0 0 0 0 0 0
Saunders,
Chairman,
President and
CEO
- ---------------- -------- ---------- -------------- --------- --------------- --------------- ------------ -----------
Michael 2005 0 0 0 0 0 0 0
Boswell,
President and
Acting Chief
Account
Officer (2)
- ---------------- -------- ---------- -------------- --------- --------------- --------------- ------------ -----------
Michael 2004 0 0 0 0 0 0 0
Boswell,
President and
Acting Chief
Account Officer
- ---------------- -------- ---------- -------------- --------- --------------- --------------- ------------ -----------
Michael Boswell 2003 0 0 0 0 0 0 0
- ---------------- -------- ---------- -------------- --------- --------------- --------------- ------------ -----------
(1) In June 2005, we entered into an employment agreement with Mr. Robert
Saunders as our Chairman and President effective on June 29, 2005.
Subsequently in August 2005, Mr. Saunders was appointed CEO by our Board of
31
Directors. Mr. Saunders will serve at the pleasure of the Board of
Director's. For serving as President, Mr. Saunders' compensation will be US
$60,000 per annum. Additionally, we agreed to grant Mr. Saunders a signing
bonus of US $150,000 to be paid on closing of at least US $3,500,000 in
third party financing and increase his compensation to $120,000 per annum
if we receive at least US $5,000,000 in outside funding. We are currently
discussing possible restructuring/payment terms until such time that we
become significantly cash flow positive for its operations.
(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
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 June 30, 2006, our Board of Directors granted 282,000 options to
employees, directors and consultants under the Equity Plan. No awards have been
given to any of the named executive officers. As of July 11, 2006, there are 6
Directors, 2 executive officers, 10 consultants and approximately 25 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
32
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.
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,
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.
33
FEDERAL INCOME TAX CONSEQUENCES
The current federal income tax consequences of grants under the Equity Plan are
generally described below. This description of tax consequences is not a
complete description, and is based on the Internal Revenue Code as presently in
effect, which is subject to change, and is not intended to be a complete
description of the federal income tax aspects of options and stock awards under
the Equity Plan. Accordingly, the discussion does not deal with all federal
income tax consequences that may be relevant to a particular recipient, or any
foreign, state or local tax considerations. Accordingly, potential recipients
are urged to consult their own tax advisors as to the specific federal, foreign,
state and local tax consequences to them as a result of receiving an Award under
the Equity Plan.
Nonqualified Stock Options
A recipient will not be subject to federal income tax upon the grant of a
nonqualified stock option. Upon the exercise of a nonqualified stock option, the
recipient will recognize ordinary compensation 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.
34
When the stock is either transferable or no longer subject to a substantial risk
of forfeiture, the recipient will recognize compensation income in an amount
equal to the fair market value of the shares (less any amount paid for such
shares) at that time. A recipient may, however, elect to recognize ordinary
compensation income in the year the stock award is granted in an amount equal to
the fair market value of the shares (less any amount paid for the shares) at
that time, determined without regard to the restrictions. We will generally be
entitled to a corresponding deduction at the same time, and in the same amount,
as the recipient recognizes compensation income with respect to a stock award.
Any gain or loss recognized by the recipient upon subsequent disposition of the
shares will be capital gain or loss.
Tax Deductibility under Section 162(m)
Section 162(m) of the Internal Revenue Code disallows a public company's
deductions for employee compensation exceeding $1,000,000 per year for the chief
executive officer and the four other most highly compensated executive officers.
Section 162(m) contains an exception for performance-based compensation that
meets specific requirements. The Equity Plan is intended to permit all options
to qualify as performance-based compensation at the Board of Directors or
Committee's discretion. If an Award is to qualify as such, it shall clearly
state so in the award agreement.
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
None of our named executive officers exercised options or SARs during the last
fiscal year.
Long Term Incentive Plans
No Long Term Incentive awards were granted in the last fiscal year.
BOARD OF DIRECTORS
Our directors who are employees do not receive any compensation from us for
services rendered as directors. 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.
35
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.
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.
We are discussing possible restructuring/payment terms until such time that we
become significantly cash flow positive for its operations.
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
As used in this section, the term beneficial ownership with respect to a
security is defined by Rule 13d-3 under the Securities Exchange Act of 1934, as
amended, as consisting of sole or shared voting power (including the power to
vote or direct the vote) and/or sole or shared investment power (including the
power to dispose of or direct the disposition of) with respect to the security
through any contract, arrangement, understanding, relationship or otherwise,
subject to community property laws where applicable.
As of July 11, 2006, we had a total of 20,983,260 shares of common stock and
7,887,999 shares of preferred stock issued and outstanding, which are our only
issued and outstanding voting equity securities. However, our Series A Preferred
Stock does not have any voting rights except with respect to specified
transactions that may affect the rights, preferences, privileges or voting power
of the Series A Preferred Stock and except as otherwise required by Nevada law.
36
(For further information regarding the preferred stock see "Description of
Securities - Series A Preferred Stock.") At the date of this Prospectus, each
share of our Series A Preferred Stock is convertible into one share of common
stock.
The following table sets forth, as of July 11, 2006: (a) the names and addresses
of each beneficial owner of more than five percent (5%) of our common stock and
Preferred Stock (taken together as one class) known to us, the number of shares
of common stock and Preferred Stock beneficially owned by each such person, and
the percent of our common stock and Preferred Stock so owned; and (b) the names
and addresses of each director and executive officer, the number of shares our
common stock and Preferred Stock beneficially owned, and the percentage of our
common stock and Preferred Stock so owned, by each such person, and by all of
our directors and executive officers as a group. Each person has sole voting and
investment power with respect to the shares of our common stock and Preferred
Stock, except as otherwise indicated. Beneficial ownership consists of a direct
interest in the shares of common stock and Preferred Stock, except as otherwise
indicated.
Amount and Nature of Percentage
Name and Address Beneficial Ownership Of Voting of
Securities (1)
Robert Saunders 9,900,000 34.29%
Chairman, President and CEO
5552 West Island Highway
Qualicum Beach, British Columbia
Canada V9K 2C8
Douglas C. MacLellan 1,040,000 3.60%
Vice Chairman
8324 Delgany Avenue
Playa del Ray, CA 90293
Mark Elenowitz 1,238,000 (2) 4.29%
Director
400 Professional Drive
Suite 310
Gaithersburg, MD 20879
Dr. Robert Rooks 300,000 1.04%
Director
912 Pine Avenue
Huntington Beach, CA 90293
800,000 2.77%
Ian Fraser
Director
3056 West 2nd Avenue
Vancouver, British Columbia
Canada V6T 1E9
Michael Boswell 938,000 (3) 3.25%
37
Amount and Nature of Percentage
Name and Address Beneficial Ownership Of Voting of
Securities (1)
Director and
Acting Chief Accounting Officer
400 Professional Drive
Suite 310
Gaithersburg, MD 20879
Victor Bolton 0 0.0%
345-916 W. Broadway
Vancouver, BC V5Z1K7
Darryl Horton 0 0.0%
33568 Eagle Mountain Drive
Abbortsford, BC V3G2X7
All directors and officers as
a group (8 persons) 14,216,000 49.24%
- ----------------
(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 1,240,000shares 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
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.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Dr. Kristina Miller, our Chief Scientific Advisor is Robert Saunders, our
Chairman, CEO and President's wife.
We are party to a consulting agreement with TriPoint Capital Advisors, LLC, a
company in which Mark Elenowitz, a director and one of our significant
shareholders, indirectly owns a 40% interest. Michael Boswell, our acting Chief
Accounting Officer and one of our directors, indirectly owns a 30% interest in
38
TriPoint Capital Advisors, LLC. Louis Taubman, our outside corporate and
securities counsel also indirectly owns an interest (30%) in TriPoint Capital
Advisors, LLC. We are currently negotiating a flat monthly fee for legal
services with the Law Offices of Louis E. Taubman, PC. We are also currently
negotiating a flat monthly fee for certain advisory services provided by
TriPoint Capital Advisors, LLC. Additionally, our corporate offices in
Gaithersburg, Maryland are currently provided by Tripoint Holdings, LLC, the
parent company of Tripoint Capital Advisors, LLC, at no cost to us.
DESCRIPTION OF SECURITIES
Our authorized capital consists of 100,000,000 shares of common stock, $.001 par
value per share, and 10,000,000 shares of preferred stock, $.001 par value per
share. As of July 11, 2006, there were outstanding 20,983,260 shares of our
common stock outstanding and 7,887,999 shares of our preferred stock.
COMMON STOCK
The holders of common stock are entitled to one vote for each share held of
record on all matters to be voted on by stockholders. The holders of common
stock are entitled to receive such dividends, if any, as may be declared from
time to time by the Board of Directors, in its discretion, from funds legally
available therefore. Upon liquidation or dissolution, the holders of our common
stock are entitled to receive, pro rata, assets remaining available for
distribution to stockholders. The common stock has no cumulative voting,
preemptive or subscription rights and is not subject to any future calls. There
are no conversion rights or redemption or sinking fund provisions applicable to
the shares of common stock. All the outstanding shares of common stock are fully
paid and nonassessable. There are no provisions in our Articles of Organization
or Bylaws that would delay, defer or prevent a change in control.
PREFERRED STOCK
Our Board of Directors will be authorized, without further action by the
shareholders, to issue, from time to time, up to 10,000,000 shares of preferred
stock in one or more classes or series. Similarly, our Board of Directors will
be authorized to fix or alter the designations, powers, preferences, and the
number of shares which constitute each such class or series of preferred stock.
Such designations, powers or preferences may include, without limitation,
dividend rights (and whether dividends are cumulative), conversion rights, if
any, voting rights (including the number of votes, if any, per share),
redemption rights (including sinking fund provisions, if any), and liquidation
preferences of any unissued shares or wholly unissued series of preferred stock.
As of the date of this filing, we have designated 8,000,000 shares of our
authorized preferred stock as Series A Convertible Preferred Stock.
39
Series A Preferred Stock
Our Board of Directors of has designated 8,000,000 shares of our authorized
preferred stock as Series A Convertible Preferred Stock. The principal terms of
the preferred stock are as follows:
Voting. Except with respect to specified transactions that may affect
the rights, preferences, privileges or voting power of the Series A Preferred
Stock and except as otherwise required by Nevada law, the Series A Preferred
Stock has no voting rights. We shall not affect such specified transactions,
which include authorizing, creating, issuing or increasing the authorized or
issued amount of any class or series of stock, ranking pari passu or senior to
the Series A Preferred Stock, with respect to the distribution of assets on
liquidation, dissolution or winding up, without the affirmative vote or consent
of the holders of at least 75% of the shares of the Series A Preferred Stock
outstanding at the time, given in person or by proxy, either in writing or at a
meeting, in which the holders of the Series A Preferred Stock vote separately as
a class. The common stock into which the Series A Preferred Stock is convertible
shall, upon issuance, have all of the same voting rights as other issued and
outstanding common stock and none of the rights of the Series A Preferred Stock.
Dividends. The holders of record of shares of Series A Preferred Stock
are entitled to receive, out of any assets at the time legally available
therefor and when and as declared by the Board of Directors, dividends at the
rate of 8% per annum in shares of our common stock. The number of shares of
common stock to be issued to the holder shall be an amount equal to 90% of the
quotient of (i) the dividend payment divided by (ii) the average of the daily
volume weighted average price (VWAP) of our common stock for such date on the
OTC Bulletin Board for the 20 trading days immediately preceding the date the
dividend payment is due, but in no event less than $0.65. Dividends on the
Series A Preferred Stock are cumulative, accrue and are payable semi-annually.
Dividends on the Series A Preferred Stock are prior and in preference to any
declaration or payment of any distribution on any outstanding shares of junior
stock. So long as any shares of Series A Preferred Stock are outstanding, we
will not declare, pay or set apart for payment any dividend or make any
distribution on any junior stock (other than dividends or distributions payable
in additional shares of junior stock), unless at the time of such dividend or
distribution we shall have paid all accrued and unpaid dividends on the
outstanding shares of Series A Preferred Stock.
Conversion. At any time on or after the issuance date, the holder of
any such shares of Series A Preferred Stock may, at the holder's option, elect
to convert all or any portion of the shares of the Series A Preferred Stock held
by such person into a number of fully paid and nonassessable shares of common
stock equal to the quotient of (i) the liquidation preference amount ($0.75) of
the shares of Series A Preferred Stock being converted plus any accrued but
40
unpaid dividends divided by (ii) the conversion price, which initially is $0.75
per share, subject to certain adjustments.
If within 3 business days of our receipt of an executed copy of a
conversion notice the transfer agent shall fail to issue and deliver to a holder
the number of shares of common stock to which such holder is entitled upon such
holder's conversion of the Series A Preferred Stock or to issue a new preferred
stock certificate representing the number of shares of Series A Preferred Stock
to which such holder is entitled, we shall pay additional damages to such holder
on each business day after such 3rd business day that such conversion is not
timely effected in an amount equal 0.5% of the product of (A) the sum of the
number of shares of common stock not issued to the holder on a timely basis and
to which such holder is entitled and, in the event we failed to deliver a
preferred stock certificate to the holder on a timely basis, the number of
shares of common stock issuable upon conversion of the shares of Series A
Preferred Stock represented by such certificate, as of the last possible date
which we could have issued such certificate to such holder timely and (B) the
closing bid price of our common stock on the last possible date which we could
have issued such common stock and such certificate, as the case may be, to such
holder timely. If we fail to pay those additional damages within 5 business days
of the date incurred, then such payment shall bear interest at the rate of 2.0%
per month (pro rated for partial months) until such payments are made.
The conversion price of the Series A Preferred Stock may be adjusted in
the event of (i) combination, stock split, or reclassification of the common
stock; (ii) capital reorganization; (iii) distribution of dividends; or (iv) the
issuance or sale of additional shares of common stock or common stock
equivalents.
Liquidation. In the event of the liquidation, dissolution or winding up
of our affairs, whether voluntary or involuntary, the holders of shares of
Series A Preferred Stock then outstanding shall be entitled to receive, out of
our assets available for distribution to its stockholders, an amount equal to
$0.75 per share or the liquidation preference amount, of the Series A Preferred
Stock plus any accrued and unpaid dividends before any payment shall be made or
any assets distributed to the holders of the common stock or any other junior
stock. If our assets are not sufficient to pay in full the liquidation
preference amount plus any accrued and unpaid dividends payable to the holders
of outstanding shares of the Series A Preferred Stock and any series of
preferred stock or any other class of stock ranking pari passu, as to rights on
liquidation, dissolution or winding up, with the Series A Preferred Stock, then
all of said assets will be distributed among the holders of the Series A
Preferred Stock and the other classes of stock ranking pari passu with the
Series A Preferred Stock, if any, ratably in accordance with the respective
amounts that would be payable on such shares if all amounts payable thereon were
paid in full. The liquidation payment with respect to each outstanding
fractional share of Series A Preferred Stock shall be equal to a ratably
proportionate amount of the liquidation payment with respect to each outstanding
share of Series A Preferred Stock. All payments pursuant thereto, shall be in
cash, property (valued at its fair market value as determined by an independent
appraiser reasonably acceptable to the holders of a majority of the Series A
Preferred Stock) or a combination thereof; provided, however, that no cash shall
be paid to holders of junior stock unless each holder of the outstanding shares
of Series A Preferred Stock has been paid in cash the full Liquidation
Preference Amount plus any accrued and unpaid dividends to which such holder is
entitled as provided herein. After payment of the full liquidation preference
amount plus any accrued and unpaid dividends to which each holder is entitled,
such holders of shares of Series A Preferred Stock will not be entitled to any
further participation as such in any distribution of our assets.
41
WARRANTS
Series A-D and E-H Warrants
Each A-D Warrant allows its holder to purchase one share of common
stock for $1.15, $1.35, $1.85, $2.25 respectively, subject to adjustment, until
five years after the date of issuance. The E-H Warrants have the same pricing
and term as the A-D Warrants. As of July 11, 2006 there were 19,552,020 Warrants
outstanding.
In the event that our registration statement is not effective, as
required by the registration rights agreement between us and investors, holders
would also be permitted exercise the warrants through a cashless exercise using
the following formula:
X = Y - (A)(Y)
------
B
Where X = the number of shares of common stock to be issued to
the holder.
Y = the number of shares of common stock purchasable upon
exercise of all of the Warrant or, if only a portion of
the Warrant is being exercised, the portion of the
Warrant being exercised.
A = the exercise price of the Warrant.
B = the closing bid price of one share of our common stock.
The exercise price of the Warrants and the number of shares of common
stock purchasable upon exercise of the Warrants are subject to adjustment upon
the occurrence of certain events. Such events include recapitalizations or
consolidations, combinations of our common stock, dividends payable in our
common stock, and the issuance of rights to purchase additional shares of our
common stock or to receive other securities convertible into additional shares
of common stock.
Pursuant to the terms of the Warrants, we shall not effect the exercise
of any Warrants, and no person who is a holder of any Warrant shall have the
right to exercise their Warrants, to the extent that after giving effect to such
exercise, such person would beneficially own in excess of 9.99% of the then
outstanding shares of our common stock.
No fractional shares of common stock issuable upon exercise of the
Warrants will be issued in connection with any exercise, but in lieu of such
fractional shares, we shall round the number of shares to be issued upon
exercise up to the nearest whole number of shares.
The Warrants expire at the close of business on the fifth anniversary
of the date of issuance.
Series J Warrants
42
Each Warrant allows its holder to purchase one share of common stock
for $0.5625, subject to adjustment, until one year after the date of issuance.
As of July 11, 2006 there were 1,888,000 Warrants outstanding.
In the event that our registration statement is not effective, as
required by the registration rights agreement between us and investors, holders
would also be permitted exercise the Warrants through a cashless exercise using
the following formula:
X = Y - (A)(Y)
------
B
Where X = the number of shares of common stock to be issued to
the Holder.
Y = the number of shares of common stock purchasable
upon exercise of all of the Warrants or, if only a
portion of the Warrant is being exercised, the
portion of the Warrant being exercised.
A = the exercise price of the Warrant.
B = the closing bid price of one share of our common stock.
The exercise price of the Warrants and the number of shares of common
stock purchasable upon exercise of the Warrants are subject to adjustment upon
the occurrence of certain events. Such events include recapitalizations or
consolidations, combinations of our common stock, dividends payable in our
common stock, and the issuance of rights to purchase additional shares of our
common stock or to receive other securities convertible into additional shares
of common stock.
Pursuant to the terms of the Warrants, we shall not effect the exercise
of any Warrants, and no person who is a holder of any Warrant shall have the
right to exercise their Warrants, to the extent that after giving effect to such
exercise, such person would beneficially own in excess of 9.99% of the then
outstanding shares of our common stock.
No fractional shares of common stock issuable upon exercise of the
Warrants will be issued in connection with any exercise, but in lieu of such
fractional shares, we shall round the number of shares to be issued upon
exercise up to the nearest whole number of shares.
The Warrants expire at the close of business on the first anniversary
of the date of issuance.
DIVIDEND POLICY
It is the policy of our Board of Directors to retain our earnings for
use in our day-to-day operations and expansion of our operations. We have not
declared any dividends on our common stock, nor do we intend to declare any
dividends in the foreseeable future. The description of our Series A Preferred
Stock above, describes the dividend policy associated with such stock.
43
REGISTRATION RIGHTS
In connection with the issuance of the Series A Preferred Stock and Warrants
issued on April 12, 2006, May 30, 2006, June 30, 2006 and July 11, 2006, we
agreed to file the current registration statement with the Securities and
Exchange Commission to register for resale the shares of common stock issuable
upon the exercise of the Warrants and conversion of the Series A Preferred
Stock. We also agreed to register the shares of common stock underlying the
placement consultant warrants we issued pursuant to that same financing.
TRANSFER AGENT
The transfer agent for our common stock is EMPIRE STOCK TRANSFER INC.
at 7251 West Lake Mead Blvd., Suite 300, Las Vegas, NV 89128, 702.562.4091, Fax
702.562.4081.
MARKET FOR COMMON EQUITY
AND RELATED SHAREHOLDER MATTERS
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
Quarter ended November 30, 2005 $2.00 $1.35
Quarter ended February 28, 2006 $1.64 $1.10
Quarter ended May 31, 2006 $1.45 $0.80
At July 11, 2006, the closing bid price of the common stock was $1.40 and we had
approximately 50 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.
We have not paid cash dividends on any class of common equity since formation
and we do not anticipate paying any dividends on our outstanding common stock in
the foreseeable future.
44
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table provides information as of August 31, 2005 with respect to
compensation plans (including individual compensation arrangements) under which
our securities are authorized for issuance:
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Plan Category Number of securities to be Weighted average exercise Number of securities
issued upon exercise of price of outstanding remaining available for
outstanding options, options, warrants and future issuance under
warrants and rights rights equity compensation plans
(excluding securities
reflected in column (a))
(a) (b) (c)
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Equity Compensation plans 282,000 $1.50 4,718,000*
approved by security holders
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Equity compensation plans not N/A N/A N/A
approved by security holders
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Total 282,000 $1.50 4,718,000
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
*As of January 1 of each year, commencing with the year 2006 and ending with the
year 2008, the aggregate number of shares available for granting Awards under
the Equity Plan shall automatically increase by a number of Shares equal to the
lesser of (x) 5% of the total number of Shares then outstanding or (y)
1,000,000.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 second quarter of 2006, we started harvesting our 2004 year class of
scallops and began inspecting our 2005 year class of scallops as we prepare to
begin moving these scallops to their final grow-out stage in the second half of
2006. We refer to the year-class of scallops based on when the scallops were
spawned. Generally, the harvest occurs approximately 22 to 24 months after
spawning of the scallops. Originally, we planned to ear-hang our entire 2005
45
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.
The 2005 year-class scallops are currently maturing in our tenured growing sites
and joint venture locations. We are currently preparing our farm sites for the
transfer of these scallops to their final stage large grow-out nets. This
transfer will be completed during the summer of 2006 and we anticipate
commencing harvesting up to approximately 4 million 2005 year-class scallops
during April of 2007. The 2006 year-class scallop spawning season commenced in
March of 2006 and was completed in April 2006. The scallop brood-stock
conditioning for these spawning began in mid-December 2005. We expect to begin
harvesting the 2006 year-class scallops during the Spring of 2008, however, we
could begin harvesting portions of the class sooner if mortality (at various
points of the growth cycle) are significantly better than our current projection
or if growth rates are substantially higher. We anticipate that of the over 350
million larvae that were spawned, at least 10 million scallops could reach full
maturity and thus be harvested. The use of DNA based family analysis started in
2005 will continue through 2006, with the goal of breeding high meat yield
scallops.
LIQUIDITY AND CASH RESOURCES.
- -----------------------------
At February 28, 2006 we had a cash balance of $123. As of February 28, 2006, our
recent expansion has been largely funded by a short term note with a maximum
limit of approximately $1,400,000. 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.
As a result of our recent series of financings (April 12, May 30 and June 30 and
July 11), we received net procceeds of approximately $4.99 million. After
repaying the short term note that provided the capital for initial expansion, we
believe that we will have adequate funding to execute our planned scallop
expansion and our related business strategy in the upcoming fiscal year. We
currently have sufficient cash to maintain operations at their present level
through the next fiscal year and until such a time that projected scallops sales
will be sufficient enough to maintain and grow our scallop operations.
In order to launch our planned commercialization of sablefish in the next two to
three years, we will require at least $5.0 million of additional capital to
finance this product. In the event that all of the warrants associated with the
aforementioned financing were called and converted we would receive net proceeds
of approximately $34.350 million. If we are not able to raise additional capital
through warrant exercises, we will need to seek other sources of capital for our
planned sablefish expansion. Alternatively, we could choose to focus solely on
our scallop operations and minimize the need for any additional capital.
46
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.
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.
47
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.
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 meets 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 other income in that period.
48
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.
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 United States 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.
49
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
As of February 28, 2006, we currently carry our investment in Island Scallops'
tenures at $3,486. 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 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 (in November 2005), the value is estimated to be approximately
$8,600,000. After the recent approval of the expansion of two of our tenures,
the estimated market value of our overall tenures increased to roughly
$11,060,000. If our planned expansion of our Deep Water tenure from bottom
seeding to long line culture is approved, we believe the total value of our
tenures to increase to over $17.5 million. The estimated market value is based
on the size, location and whether they are beach or deepwater in nature. In
addition, the valuation method used assumes that smaller farms have a higher
50
value per acre than larger tenures. 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 ($3,486) 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 development
and production of larger 2005 and 2006 scallop crops. Management believes that
our emphasis on expansion of future crops will yield a significant increase in
revenues 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
recognize the recoverable inventory costs and no longer assign assigned nil
carrying amount to the biomass inventor of scallops. Management believed that,
given the projected increase in upcoming annual crops, the capital costs
associated with inventory could be recovered and the net realizable value was
determined to be greater than the cost incurred. Furthermore, Management of the
Company believed that as of August 31, 2005 the Company had an adequate history
of successful sales to justify recognition of recoverable inventory costs.
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
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
51
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 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.
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
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 $98,000. Our general and
administrative expenses were approximately $57,000 for the three months ended
February 28, 2005. This is an increase of approximately $41,000. General and
administrative expenses for the six months ended February 28, 2006, were
52
approximately $368,000. Our general and administrative expenses were
approximately $103,000 for the six months ended February 28, 2005. This is an
increase of approximately $265,000. 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. This expense was recorded
as an other expense.
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 $183,000 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, 2005, we had interest expense of roughly $15,000. Other expense for the
three months ended February 28, 2006 was approximately $517,000 as opposed to no
other expense for the three months ended February 28, 2005. As a result, other
expense for the three months ended February 28, 2006 was approximately $570,000
as compared to other expense of approximately $15,000 for the three months ended
February 28, 2006. This is an increase of approximately $555,000 primarily
attributed other expense related to the issuance of 520,000 of restricted stock
to one group in consideration for the extension of the due date on a share term
loan to Island Scallops and 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 six months ended February 28, 2005, we had
interest expense of roughly $23,000. Other expense for the six months ended
February 28, 2006 was approximately $513,000 as opposed to no other expense for
the six months ended February 28, 2005. As a result, other expense for the six
months ended February 28, 2006 was approximately $619,000 as compared to other
expense of approximately $23,000 for the six months ended February 28, 2006.
This is an increase of approximately $66,000 primarily attributed to the other
expense related to the issuance of 520,000 of restricted stock to one group in
consideration for the extension of the due date on a share term loan to Island
Scallops and 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.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
53
We have had no disagreements with our certified public accountants with respect
to accounting practices or procedures or financial disclosure.
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.
EXPERTS
The financial statements included in the Prospectus have been audited by Lopez,
Blevins and Bork LLP, independent certified public accountants to the extent and
for the periods set forth in their report appearing elsewhere herein and are
included in reliance upon such report given upon the authority of said firm as
experts in auditing and accounting.
LEGAL MATTERS
Law Offices of Louis E. Taubman, P.C., has passed upon the validity of the
securities being offered hereby.
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR
SECURITIES ACT LIABILITIES
Our Articles of Incorporation include provisions, which limit the liability of
our directors. As permitted by applicable provisions of the Nevada Law,
directors will not be liable to us for monetary damages arising from a breach of
their fiduciary duty as directors in certain circumstances. This limitation does
not affect liability for any breach of a director's duty to us or our
shareholders (i) with respect to approval by the director of any transaction
from which he or she derives an improper personal benefit, (ii) with respect to
acts or omissions involving an absence of good faith, that the director believes
to be contrary to our best interests or our shareholders, that involve
intentional misconduct or a knowing and culpable violation of law, that
constitute an unexcused pattern or inattention that amounts to an abdication of
54
his or her duty to us or our shareholders, or that show a reckless disregard for
duty to us or our shareholders in circumstances in which he or she was, or
should have been aware, in the ordinary course of performing his or her duties,
of a risk of serious injury to us or our shareholders, or (iii) based on
transactions between us and our directors or another corporation with
interrelated directors or based on improper distributions, loans or guarantees
under applicable sections of Nevada Law. This limitation of directors' liability
also does not affect the availability of equitable remedies, such as injunctive
relief or rescission.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
small business issuer pursuant to the foregoing provisions, or otherwise, we
have been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement on Form SB-2 with the SEC covering the
securities that may be sold under this prospectus. This prospectus does not
contain all of the information set forth in the registration statement, and we
strongly urge you to read the registration statement in its entirety.
We also file annual, quarterly and special reports, proxy statements and other
information with the SEC. You may read or obtain a copy of the registration
statement or any other information we file with the SEC at the SEC's Public
Reference Room at 100 F. Street, N.E., Washington, D.C. 20549. You may obtain
information regarding the operation of the Public Reference Room by calling the
SEC at 1-800-SEC-0330. Our SEC filings are also available to the public from the
SEC web site at www.sec.gov, which contains our reports, proxy and information
statements, and other information we file electronically with the SEC.
55
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
F-1
EDGEWATER FOODS INTERNATIONAL
CONSOLIDATED BALANCE SHEET
AUGUST 31, 2005 and 2004
2005 2004
----------- -----------
(unaudited)
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
F-2
EDGEWATER FOODS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDING AUGUST 31, 2005 and 2004
2005 2004
------------ ------------
(unaudited)
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
F-3
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) 10
Common stock issued in
connection with
recapitalization 8,600,000 860 (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
F-4
EDGEWATER FOODS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASHFLOWS
YEARS ENDED AUGUST 31, 2005 and 2004
2005 2004
----------- -----------
(unaudited)
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
F-5
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 on a
one to one ratio for a 100% equity interest in Edgewater Foods. Per the terms of
the Share Exchange and Bill of Sale of Heritage Funding Corporation and E. Lee
Murdoch, Heritage was delivered with zero assets and zero liabilities at time of
closing. Following the reverse acquisition, we changed the name of Heritage
Management Corporation to "Edgewater Foods International, Inc." The transaction
was regarded as a reverse merger whereby Edgewater was considered to be the
accounting acquirer as it retained control of Heritage after the exchange.
Although the Company is the legal parent company, the share exchange was treated
as a recapitalization of Edgewater. Edgewater is the continuing entity for
financial reporting purposes. The Financial Statements have been prepared as if
Edgewater had always been the reporting company and then on the share exchange
date, had changed its name and reorganized its capital stock.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
F-6
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.
At August 31, 2005, inventory consisted of the following:
Biomass (Scallops): $540,126
Previously, a nil amount was assigned to biomass inventory of scallops (At
August 31, 2003 and 2004) as the Company had a recent history of larger negative
gross margins in respect to scallop sales and had experience past significant
crop failures. The Company wrote off these costs since the net realizable value
of the inventory was indeterminable if not zero. However, Management believed
that, given the projected increase in upcoming annual crops, the capital costs
associated with inventory could be recovered and the net realizable value was
determined to be greater than the cost occurred. Furthermore, Management of the
Company believed that as of August 31, 2005 the Company has an adequate history
of successful sales to justify recognition of recoverable inventory costs. Based
F-7
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 an accounting principle. We
believe the inventory accounting policy has remained unchanged, but the
application of this policy resulted in different results for the period under
August 31, 2004 and August 31, 2005.
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
amount, in the period in which it is determined likely that the carrying amount
of the asset will not be recoverable.
F-8
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 other income 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.
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.
F-9
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,
individually accounted for 27%, 15% and 10% or our revenues respectively. The
Company's ongoing operations are dependent on continued business from these
customers.
F-10
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
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
F-11
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
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
F-12
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
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
F-13
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.
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).
F-14
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.
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 $3,153,848
of unsecured debt by owed by Island Scallops to Robert Saunders, our Chairman,
F-15
President and CEO, and former sole shareholder of Island Scallops. This debt,
which represents an amount advance to Island Scallops by its 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.
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).
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
F-16
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
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
F-17
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.
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
F-18
August 2005, Edgewater was acquired by the Company pursuant to a share exchange.
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 by the founders of the
company. 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.
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.
F-19
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.
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.
F-20
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.
F-21
INTERIM FINANCIAL STATEMENTS
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
F-22
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 -- -- 182,500 --
------------ ------------ ------------ ------------
Total 98,375 57,204 368,033 102,575
------------ ------------ ------------ ------------
Loss from operations (88,469) (89,703) (370,029) (89,605)
------------ ------------ ------------ ------------
Other income (expense):
Interest (expense), net (52,573) (14,970) (106,096) (23,419)
Other income (expense), net (517,468) -- (513,350) --
------------ ------------ ------------ ------------
Other income (expense), net (570,041) (14,970) (619,446) (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
F-23
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 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
F-24
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 on a
one to one ratio for a 100% equity interest in Edgewater Foods. Per the terms of
the Share Exchange and Bill of Sale of Heritage Funding Corporation and E. Lee
Murdoch, Heritage was delivered with zero assets and zero liabilities at time of
closing. Following the reverse acquisition, we changed the name of Heritage
Management Corporation to "Edgewater Foods International, Inc." The transaction
was regarded as a reverse merger whereby Edgewater was considered to be the
accounting acquirer as it retained control of Heritage after the exchange.
Although 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.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
F-25
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).
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.
F-26
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
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.
F-27
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 other income 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
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.
F-28
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.
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.
F-29
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.
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
F-30
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.
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.
F-31
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.
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
F-32
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
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
F-33
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
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.
F-34
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 other expense.
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
Number of Average
Shares Exercise Price
-------------------------------
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.
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
F-35
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.
F-36
EDGEWATER FOODS INTERNATIONAL, INC.
--------------------------------
PROSPECTUS
--------------------------------
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PART II
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our Articles of Incorporation include provisions, which limit the
liability of our directors. As permitted by applicable provisions of the Nevada
Law, directors will not be liable to Edgewater for monetary damages arising from
a breach of their fiduciary duty as directors in certain circumstances. This
limitation does not affect liability for any breach of a director's duty to
Edgewater or our shareholders (i) with respect to approval by the director of
any transaction from which he or she derives an improper personal benefit, (ii)
with respect to acts or omissions involving an absence of good faith, that the
director believes to be contrary to the best interests of Edgewater or our
shareholders, that involve intentional misconduct or a knowing and culpable
violation of law, that constitute an unexcused pattern or inattention that
amounts to an abdication of his or her duty to Edgewater or our shareholders, or
that show a reckless disregard for duty to Edgewater or our shareholders in
circumstances in which he or she was, or should have been aware, in the ordinary
course of performing his or her duties, of a risk of serious injury to Edgewater
or our shareholders, or (iii) based on transactions between Edgewater and our
directors or another corporation with interrelated directors or based on
improper distributions, loans or guarantees under applicable sections of Nevada
Law. This limitation of directors' liability also does not affect the
availability of equitable remedies, such as injunctive relief or rescission.
We have been advised that it is the position of the Commission that
insofar as the provision in Edgewater's Articles of Incorporation, as amended,
may be invoked for liabilities arising under the Securities Act, the provision
is against public policy and is therefore unenforceable.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
We are issuing a new series of Preferred Stock under this Registration
Statement. All common stock registered pursuant to this Registration Statement
is being registered on behalf of selling shareholders. We have agreed to pay all
costs of this Registration Statement. The estimated expenses for the
distribution of the common stock registered hereby, other than underwriting
commissions, fees and Representative's nonaccountable expense allowance are set
forth in the following table:
ITEM AMOUNT
---- ------
SEC Registration Fee $ 5,156.45
Transfer Agent Fees $ 0.00
Legal Fees $32,500.00
Accounting Fees $10,000.00
Printing and Engraving Costs $ 0.00
Miscellaneous $ 5,000.00
----------
Total $52,656.45
==========
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
During the past three years, we effected the following transactions in
reliance upon exemptions from registration under the Securities Act as amended.
Unless stated otherwise; (i) that each of the persons who received these
unregistered securities had knowledge and experience in financial and business
matters which allowed them to evaluate the merits and risk of the receipt of
these securities, and that they were knowledgeable about our operations and
financial condition; (ii) no underwriter participated in, nor did we pay any
commissions or fees to any underwriter in connection with the transactions;
(iii) the transactions did not involve a public offerings; and (iv) each
certificate issued for these unregistered securities contained a legend stating
that the securities have not been registered under the Act and setting forth the
restrictions on the transferability and the sale of the securities.
ii
To accomplish the Share Exchange with Edgewater, we issued an aggregate
of 19,000,000 shares of common stock in exchange for all of the issued and
outstanding capital stock of Edgewater. The shares were issued to 17 accredited
investors pursuant to the exemption from registration provided by Section 4(2)
of the Securities Act for issuances not involving any public offering.
In October 2005, we engaged Aurelius Consulting to provide marketing
and investor relations services. The initial term of the agreement is one year.
Aurelius is entitled to receive 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. The shares were issued in
accordance with the exemption from the registration provisions of the Securities
Act of 1933, as amended, provided by Section 4(2) of such Act for issuances not
involving any public offering.
On 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. The shares were issued in accordance with the exemption
from the registration provisions of the Securities Act of 1933, as amended,
provided by Section 4(2) of such Act for issuances not involving any public
offering.
On January 31, 2006, we issued 400,000 shares of our restricted common
stock to World Wide Mortgage as consideration for agreeing to extend the due
date for us to repay our CDN $1,500,000 loan pursuant to the bridge loan
agreement dated November 9, 2004 and amended on April 15, 2005 between us and
World Wide. The shares have piggy-back registration rights that require us to
register the shares in our next registration statement. The shares were valued
at $1.30 per share, the closing bid price for shares of our common stock on the
date we issued the shares. The shares were issued in accordance with the
exemption from the registration provisions of the Securities Act of 1933, as
amended, provided by Section 4(2) of such Act for issuances not involving any
public offering.
Pursuant to the financings we closed on April 12, May 30, June 30, 2006
and July 11, 2006, we issued an aggregate of 30,905,619 shares. The shares were
issued to 9 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 27. EXHIBITS
EXHIBIT DESCRIPTION
NUMBER -----------
-------
3.1 Articles of Incorporation, (Incorporated by reference to
Exhibit 3.1 to the Company's Annual Report on Form 10-K filed
on December 14, 2005).
3.2 Amended and Restated Bylaws, (Incorporated by reference to
Exhibit 3.1 to the Company's Current Report on Form 8-K filed
on August 16, 2005).
4.1 Securities Purchase Agreement dated as of April 12, 2006
(Incorporated by reference to Exhibit 10.0 to the Company's
Current Report on Form 8-K filed on April 14, 2006).
4.2 Registration Rights Agreement dated as of April 12, 2006
(Incorporated by reference to Exhibit 10.2 to the Company's
Current Report on Form 8-K filed on April 14, 2006).
4.3 Designation of Rights and Preferences of Series A Preferred
Stock dated as of April 12, 2006 (Incorporated by reference to
Exhibit 10.3 to the Company's Current Report on Form 8-K filed
on April 14, 2006).
4.4 Form of Warrant to Purchase Common Stock (Incorporated by
reference to Exhibits 10.6 through 10.14 to the Company's
Current Report on Form 8-K filed on April 14, 2006).
iii
4.5 Amendment to Registration Rights Agreement dated as of May 30,
2006 (Incorporated by reference to Exhibit 10.7 to the
Company's Current Report on Form 8-K filed on May 30, 2006).
4.6 Form of Joinder Agreement to the Securities Purchase Agreement
dated as of June 30, 2006 and July 11, 2006 (Incorporate by
reference to Exhibits 10.1 and 10.2 to the Company's Current
Report on Form 8-K filed on June 30, 2006).
4.7 Joinder Agreement to the Registration Rights Agreement dated
as of June 30, 2006 and July 11, 2006 (Incorporate by
reference to Exhibits 10.1 and 10.2 to the Company's Current
Report on Form 8-K filed on June 30, 2006).
5.1 Opinion and Consent of Law Offices of Louis E. Taubman, P.C.
10.1 Employment Agreement of Robert Saunders
10.5 Consulting Agreement with Aurelius Consulting Group, Inc.
10.6 Consulting Agreement with Gallatin Consulting, Inc.
23.1 Consent of Malone & Bailey, PLLC
ITEM 28. UNDERTAKINGS.
a) The undersigned Registrant hereby undertakes:
1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933, as amended (the "Securities Act");
(ii) To reflect in the prospectus any facts or events arising after
the effective date of this registration statement (or the most
recent post-effective amendment thereof) which, individually
or in the aggregate, represent a fundamental change in the
information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in the
volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered)
and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of
prospectus filed with the SEC pursuant to Rule 424(b) if in
the aggregate, the changes in volume and price represent no
more than a 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement; and,
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in this registration
statement or any material change to such information in this
registration statement; provided, however, that paragraphs (1)
(i), (1) (ii) and (1) (iii) do not apply if the information
required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed with or
furnished to the SEC by the Registrant pursuant to Section 13
or Section 15(d) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act") that are incorporated by
reference in this registration statement
2) That, for the purposes of determining any liability under the
Securities Act, each post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein,
and the offering of such securities at the time shall be deemed to be
the initial bona fide offering thereof.
3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the
termination of the offering.
4) Not applicable.
5) That for the purpose of determining liability under the Securities Act
of 1933 to any purchaser:
iv
(i) If the registrant is relying on Rule 430B:
(A) Each prospectus filed by the registrant pursuant to Rule 424
(b)(3) shall be deemed to be part of the registration
statement as of the date the filed prospectus was deemed part
of and included in the registration statement; and
(B) Each prospectus required to be filed pursuant to Rule
424(b)(2), (b)(5), or (b)(7) as part of a registration
statement in reliance on Rule 430B relating to an offering
made pursuant to Rule 415(a)(1)(i), (vii) or (x) for the
purpose of providing the information required by Section 10(a)
of the Securities Act of 1933 shall be deemed to be part of
and included in the registration statement as of the earlier
of the date such form of prospectus is first used after
effectiveness or the date of the first contract of sale of
securities in the offering described in the prospectus. As
provided in Rule 430B, for liability purposes of the issuer
and any person that is at that date an underwriter, such date
shall be deemed to be a new effective date of the registration
statement relating to the securities in the registration
statement to which that prospectus relates, and the offering
of such securities at that time shall be deemed to be the
initial bona fide offering thereof. Provided, however, that no
statement made in a registration statement or prospectus that
is part of the registration statement or made in a document
incorporated or deemed incorporated by reference into the
registration statement or prospectus that is part of the
registration statement will, as to a purchaser with a time of
contract of sale prior to such effective date, supersede or
modify any statement that was made in the registration
statement or prospectus that was part of the registration
statement or made in any such document immediately prior to
such effective date; or
(ii) If the registrant is subject to Rule 430C, each prospectus filed
pursuant to Rule 424(b) as part of a registration statement relating to
an offering, other than registration statements relying on Rule 430B or
other than prospectuses filed in reliance on Rule 430A, shall be deemed
to be part of and included in the registration statement as of the date
it is first used after effectiveness. Provided, however, that no
statement made in a registration statement or prospectus that is part
of the registration statement or made in a document incorporated or
deemed incorporated by reference into the registration statement or
prospectus that is part of the registration statement will, as to a
purchaser with a time of contract of sale prior to such first use,
supersede or modify any statement that was made in the registration
statement or prospectus that was part of the registration statement or
made in any such document immediately prior to such date of first use.
(6) That, for the purpose of determining liability of the registrant under
the Securities Act of 1933 to any purchaser in the initial distribution
of the securities: The undersigned registrant undertakes that in a
v
primary offering of securities of the undersigned registrant pursuant
to this registration statement, regardless of the underwriting method
used to sell the securities to the purchaser, if the securities are
offered or sold to such purchaser by means of any of the following
communications, the undersigned registrant will be a seller to the
purchaser and will be considered to offer or sell such securities to
such purchaser:
(i) Any preliminary prospectus or prospectus of the undersigned
registrant relating to the offering required to be filed
pursuant to Rule 424;
(ii) Any free writing prospectus relating to the offering prepared
by or on behalf of the undersigned registrant or used or
referred to by the undersigned registrant;
(iii) The portion of any other free writing prospectus relating to
the offering containing material information about the
undersigned registrant or its securities provided by or on
behalf of the undersigned registrant; and
(iv) Any other communication that is an offer in the offering made
by the undersigned registrant to the purchaser.
(b) The undersigned Registrant undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the Registrant pursuant to the indemnification provisions herein, or
otherwise, the Registrant has been advised that in the opinion of the SEC such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer, or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements of filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in the City of
Vancouver, State of British Columbia, on July 14,2006 and in the City of
Gaithersburg, State of Maryland, on July 14,2006.
Edgewater Foods International, Inc.
By: /s/ Robert Saunders
--------------------
Name: Robert Saunders
Title: President & Chief Executive Officer
By: /s/ Michael Boswell
--------------------
Name: Michael Boswell
Title: Acting Chief Accounting Officer
Dated:
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates stated.
/s/ Robert Saunders Dated: July 14, 2006
---------------------------
Robert Saunders
President and Chief Executive Officer
/s/ Michael Boswell Dated: July 14, 2006
---------------------------
Michael Boswell
Director & Acting Chief Accounting Officer
/s/ Douglas C. MacLellan Dated: July 14, 2006
---------------------------
Douglas C. MacLellan
Vice-chairman of the Board
/s/ Mark H. Elenowitz Dated: July 14, 2006
---------------------------
Mark H. Elenowitz
Director
Dated:
---------------------------
Robert L. Rooks
Director
/s/ Ian Fraser Dated: July 14, 2006
---------------------------
Ian Fraser
Director
/s/ Victor Bolton Dated: July 14, 2006
---------------------------
Victor Bolton
Director
/s/ Darryl Horton Dated: July 14, 2006
---------------------------
Darryl Horton
Director