As filed with the Securities and Exchange Commission on December 3, 2007
Registration No. 333- 140571
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM SB-2/A
POST-EFFECTIVE AMENDMENT NO. 3
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. [ __ ]
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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 REGISTERED OFFERING PRICE PER AGGREGATE OFFERING REGISTRATION FEE
UNIT (1) PRICE (1)
============================= ================== ======================= ====================== ======================
Common Stock underlying the 1,980,096 (2) (3) $1.25 $2,475,120.00 $264.84
Preferred Stock
============================= ================== ======================= ====================== ======================
Common Stock Underlying the 7,200,345 $1.25 $9,000,431.25 $963.05
Warrants
============================= ================== ======================= ====================== ======================
Common Stock Underlying the 893,945 $1.25 $1,117,431.25 $119.57
Placement Consultant
Warrants
============================= ================== ======================= ====================== ======================
Common Stock underlying 400,000 $1.25 $500,000.00 $53.50
common stock purchase
warrants
============================= ================== ======================= ====================== ======================
Total 10,474,386 $13,092,982.50 $1,400.96
============================= ================== ======================= ====================== ======================
(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 $1.25 on
February 6, 2007.
(2) This number represents 110% of the aggregate number of shares of
common stock necessary to effect the conversion of all of our Series B
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.
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
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EXPLANATORY NOTE: We are filing this amendment to conform the disclosure
contained herein to our Annual Report on Form 10-KSB for the year ending August
31, 2007, which we filed on November 29, 2007.
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
EDGEWATER FOODS INTERNATIONAL, INC.
10,474,386 SHARES OF COMMON STOCK
The 10,474,386 shares of common stock, $.0001 par value, being offered
by the selling shareholders listed on page 11. The shares of our common stock
covered by this prospectus include:
o 1,980,096 shares of common stock issuable upon conversion of the
Series B Convertible Preferred Stock granted to investors in our
January 2007 private financing; this number represents 110% of the
aggregate number of shares of common stock necessary to convert the
currently outstanding 207 shares of our Series B Preferred Stock, as
required by the transaction documents;
o 7,200,345 shares of common stock issuable upon exercise of 7,200,345
warrants to purchase shares of our common stock to investors in our
January 2007 private financing;
o 893,945 shares of common stock issuable upon exercise of one placement
consultant warrant granted to the placement consultant of our January
2007 private financing; and,
o 400,000 shares of common stock underlying four common stock purchase
warrants, each to purchase 100,000 shares of our common stock, issued
to Kitsilano Capital Corp. in consideration for services they will
provide to us pursuant to their consulting agreement dated February 2,
2007.
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.
Our common stock is listed on the Over the Counter Bulletin Board, also
called the OTCBB, under the trading symbol "EDWT." On November 28, 2007, the
closing bid for our common stock as reported on the OTCBB was $1.01 per share.
As of November 28, 2007, we had the following amount of shares issued and
outstanding:
o 23,737,700 shares of Common Stock;
o 7,773,998 shares of Series A Preferred Stock; and,
o 207 shares of Series B Preferred Stock; and,
o 747,870 shares of Series C Preferred Stock.
THIS INVESTMENT INVOLVES RISK.
SEE "RISK FACTORS"BEGINNING ON PAGE 3.
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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
iv
TABLE OF CONTENTS
Page
Corporate Information.................................................... vii
Prospectus Summary....................................................... 1
Risk Factors............................................................. 4
Cautionary Statement Regarding Forward Looking Statements................ 10
Use Of Proceeds.......................................................... 10
Selling Shareholders..................................................... 11
Plan of Distribution..................................................... 13
Business................................................................. 15
Description of Property.................................................. 22
Management............................................................... 26
Executive Compensation................................................... 31
Security Ownership of Certain Beneficial Owners and Management........... 37
Certain Relationships And Related Transactions........................... 39
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 54
Financial Disclosure
Legal Proceedings........................................................ 54
Experts.................................................................. 54
Legal Matters............................................................ 54
Financial Statements..................................................... F-1
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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
During the third quarter of our 2007 fiscal year, we started harvesting
our 2005 year-class scallops, continued moving our 2006 scallop crop into final
large grow-out nets at our tenure (farm) sites and started the spawn of our 2007
year-class. We refer to the year-class of scallops based on when the scallops
were spawned. Generally, the harvest occurs approximately 22 to 24 months after
spawning of the scallops. 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. Results from our initial plans to ear hang 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. As a result, and due to the labor costs of ear-hanging versus
lantern-style netting, we decided to use nets for the final grow-out stage of
the 2005 crop and subsequent classes.
In October 2006, 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
1
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 moved the 2006 crop from the pond sites (at our hatchery) to small mesh
nets on our farms.
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. During the first and second quarter of our
2007 fiscal year, we continued moving the 2006 scallop crop from the onshore
ponds at our harvest facility into grow-out nets at our tenure sites. During the
third quarter of our 2007 fiscal year, we began spawning our 2007 scallop
year-class. Due to improved hatchery technology and infrastructure (due to
improvements from recent capital investments) and lessons learned from the 2006
spawn, we were able to increase early stage survival rates. As of August 2007,
at least 100 million scallops had reached 2 mm size in our onshore hatchery
ponds. We recently began to move these scallops into grow-out nets at our farm
sites and will continue to do so in the coming months. Based on the recent
lessons learned and improved farm infrastructure, we anticipate that the 2007
spawning will yield up to 20 million scallops at full maturity/harvest. The use
of DNA based family analysis that started in 2000 and will continue through
2008, with the goal of breeding high meat yield scallops, began showing results
in the harvest of our 2004 scallop class. Average weight per scallop increased
from 150-180 grams to over 225-250 grams -- representing an increase of over 20%
from the previous year.
During the harvesting of our 2005 and sorting of our 2006 scallops
classes, we were able to review our mortality rates and update our class size
projections. Based on this review, we expect to bring as many as 2 million 2005
year class scallops to market over the next twelve months and harvest over 1
million 2006 year class scallops starting in the fall of 2008.
SERIES C PREFERRED STOCK AND WARRANT FINANCING
On November 5, 2007, we completed a private equity financing of
$897,444 with one accredited investor. Net proceeds from the offering are
approximately $801,000. As part of this financing, the investor returned the
following warrants to us, which it received as a result of Series B Preferred
Stock Financing described below: Series J Warrant, Series D Warrant, Series E
Warrant and Series F Warrant to purchase an aggregate of 3,739,350 shares of our
common stock. Pursuant to the current financing, we issued 747,870 shares of our
Series C Preferred Stock, par value $0.001 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, (iv) Series J Warrant, (v) Series D
Warrant, (vi) Series E Warrant, and (vii) Series F Warrant, each to purchase a
number of shares of common stock equal to fifty percent (50%) of the number of
shares of common stock issuable upon conversion of the preferred stock issued to
the investor, except for the Series J Warrants, which shall entitle the investor
to purchase a number of shares of our Series C Preferred Stock equal to one
hundred percent (100%) of the number of shares of common stock issuable upon
conversion of the purchaser's preferred stock. Each of the Warrants has a term
of 5 years, except for the Series J Warrants, which have a term of 1 year. Each
share of the preferred stock is convertible into one fully paid and
nonassessable share of our common stock at an initial conversion price of $1.20,
subject to adjustment. In connection with the financing, our management agreed
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not to sell any of our securities owned by them, their affiliates or anyone they
have influence over until the registration statement has been effective for six
months.
In connection with this financing, we paid cash compensation to a
placement consultant in the amount of $72,000 and issued him placement
consultant warrants, exercisable for a period of three years from the date of
issue. The placement consultant's warrants allow him to purchase up to (i)
74,787 shares of Series C Preferred Stock, and each of the following warrants,
which are identical to the warrants issued to the investors of the financing:
(i) Series A Warrant, (ii) Series B Warrant, (iii) Series C Warrant, (iv) Series
D Warrant, (v) Series J Warrant, (vi) Series E Warrant, and (vii) Series F
Warrant, each to purchase 37,393 shares of common stock, except for the Series J
Warrants, which shall entitle the Consultant to purchase 74,787 shares of our
Series C Preferred Stock. Like the investor, the placement consultant returned
part of the placement consultant warrant it received in the Series B Preferred
Stock financing to us in exchange for the new placement consultant warrant.
In connection with the November 2007 financing, we agreed to file a
registration statement with the Securities and Exchange Commission, on or before
December 5, 2007, to register for resale the shares of our common stock into
which the shares of our Series C Preferred Stock may be converted and the shares
of common stock issuable upon the exercise of the warrants and issuable upon
conversion of the preferred stock issuable upon exercise of the warrants issued
in such financing. We are required to keep that registration statement
continuously effective under the Securities Act for the Effectiveness Period
which continues until such date as is the earlier of the date when all of the
securities covered by that registration statement have been sold or the date on
which such securities may be sold without any restriction pursuant to Rule 144.
If that registration statement ceases to be effective prior to the expiration of
the Effectiveness Period, we will be required to pay liquidated damages equal to
2.0% of the amount invested for each calendar month or portion thereof
thereafter such date until the registration statement is declared effective.
Pursuant to the November 2007 financing, in no event shall the amount of
liquidated damages payable at any time and from time to time exceed an aggregate
of 20% of the amount of the initial investment in the Series C Preferred Stock;
however, no liquidated damages shall be paid with respect to any shares that we
are not permitted to include in the Registration Statement due to the
Commission's application of Rule 415.
The net proceeds from the financing are to be used for working capital and
general corporate purposes.
SERIES B PREFERRED STOCK AND WARRANT FINANCINGS
On January 16, 2007, we completed a private equity financing of
$2,070,000 with two accredited investors. Net proceeds from the offering were
approximately $1,864,500. We issued 207 shares of our Series B Preferred Stock,
par value $0.001 per share and stated value of $10,000 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 J Warrant,
(v) Series D Warrant, (vi) Series E Warrant, and (vii) Series F Warrant, each to
purchase a number of shares of our common stock equal to 50% of the number of
shares of common stock issuable upon conversion of the investor's Series B
Preferred Stock, except for the Series J Warrants, which entitle the investor to
purchase a number of shares of our common stock equal to 100% of the number of
shares of common stock issuable upon conversion of the investor's Series B
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Preferred Stock. Each of the Warrants has a term of 6 years, except for the
Series J Warrants, which have a term of 1 year. Each share of the Series B
Preferred Stock is convertible into a number of fully paid and nonassessable
shares of our common stock equal to the quotient of the liquidation preference
amount per share ($10,000) divided by the conversion price, which initially is
$1.15 per share, subject to certain adjustments, or approximately 8,696 shares
of common stock for each share of converted preferred stock. In connection with
the financing, our management agreed not to sell any of our securities owned by
them, their affiliates or anyone they have influence over until the registration
statement has been effective for six months.
In connection with the January 16, 2007 financing, we paid cash
compensation to a placement consultant in the amount of $165,600 and issued him
placement consultant warrants, exercisable for a period of three years from the
date of issue. The placement consultant's warrants allow him to purchase up to
(i) 20 shares of Series B Preferred Stock, and each of the following warrants,
which are identical to the warrants issued to the investors of the financing:
(i) Series A Warrant, (ii) Series B Warrant, (iii) Series C Warrant, (iv) Series
D Warrant, (v) Series J Warrant, (vi) Series E Warrant, and (vii) Series F
Warrant, each to purchase 90,004 shares of common stock, except for the Series J
Warrants, which shall entitle the Consultant to purchase 180,008 shares of
common stock.
Also in connection with the January 2007 financing, we agreed to file
this registration statement with the Securities and Exchange Commission to
register for resale the shares of common stock issuable upon conversion of the
Series B Preferred Stock and exercise of the Warrants issued pursuant to the
January 2007 financing. We are required to keep this registration statement
continuously effective under the Securities Act for the Effectiveness Period
which continues 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(k). If this registration statement ceases to be effective prior to the
expiration of the Effectiveness Period, we will be required to pay liquidated
damages equal to 2.0% of the amount invested for each calendar month or portion
thereof thereafter such date until the registration statement is declared
effective. Pursuant to the January 2007 financing, in no event shall the amount
of liquidated damages payable at any time and from time to time exceed an
aggregate of 20% of the amount of the initial investment in the Series B
Preferred Stock.
The net proceeds from the January 2007 financing are to be used for
capital expenditures necessary to expand our operations into clam farming in
Morocco; any remaining proceeds may be used for working capital and general
corporate purposes. We are currently conducting due diligence on a North African
based aquaculture company that farms shellfish products in Morocco and pending
the successful completion of such inquiry, may acquire a majority ownership
interest in the company. At the date of this filing, we have not entered into
any binding agreements for the purchase of such company and may or may not do so
depending on the results of our due diligence investigation.
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
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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. As of the
date of this filing, all of the Series J Warrants issued in the April 12, 2006
financing have been exercised. 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.
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
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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
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.
In connection with the April, May, June and July 2006 financings, we
filed, as agreed to in the corresponding Registration Rights Agreement, a
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 (Registration No. 333-135796). We are required to
keep that registration statement continuously effective under the Securities Act
for the Effectiveness Period which continues until such date as is the earlier
of the date when all of the securities covered by that registration statement
have been sold or the date on which such securities may be sold without any
restriction pursuant to Rule 144. If that registration statement ceases to be
effective prior to the expiration of the Effectiveness Period, 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. Pursuant to the April 12, 2006 financing, in no
event shall the amount of liquidated damages payable at any time and from time
to time exceed an aggregate of 24% of the amount of the initial investment in
the Series A Preferred Stock. Pursuant to the May 30, 2006, June 30, 2006 and
July 11, 2006 financings, in no event shall the amount of liquidated damages
payable at any time and from time to time exceed an aggregate of 10% of the
amount of initial investment in the Series A Preferred Stock pursuant to such
rounds of financing. As of the date of this filing, Post-Effective Amendment No.
1 to Registration No. 333-135796 was declared effective on December 8, 2006 and
Post-Effective Amendment No. 2 was declared effective on February 5, 2007.
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For further information regarding the preferred stock and warrants see
"Description of Securities - Series A Preferred Stock," "Description of
Securities - Series B Preferred Stock" and "Description of Securities
- -Warrants."
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
may occur, the Island Scallops hybrid scallop has proven resistant to Perkinsus
disease for the last ten years.
Paralytic Shellfish Poisoning (PSP or Red Tide) could limit the amount of
scallops available for sale.
Paralytic Shellfish Poisoning (PSP or red tide) is another concern when farming
scallops. The adductor muscle can be processed for sale to the traditional
scallop meat market even when there is a PSP closure. On the other hand, the
live animal market is stopped by PSP toxicity. Sewage Contamination (fecal
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
7
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
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,
8
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.
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. 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
9
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 43% of our capital
stock and 59% of our voting capital stock may decrease your influence on
shareholder decisions.
Our executive officers and directors, in the aggregate, beneficially own
approximately 43% of our capital stock and 59% 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
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
10
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
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 October 2007, our common stock traded an average of
approximately 1,500 shares per day. As of November 28, 2007, the closing bid
price of our common stock was $1.01 per share. As of November 28, 2007, we had
approximately 56 shareholders of record of our common stock, 13 shareholders of
record of our Series A Preferred Stock, 2 shareholders of record of our Series B
Preferred Stock and 1 shareholder of record of our Series C Preferred Stock, 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 $0.75 per share and a
high price of $2.00 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
11
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 29,243,568 warrants outstanding. The terms of these warrants
expire as early as 2007 and as late as 2013. The exercise price of these
warrants range from $0.5625 to $2.75 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
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.
Our Auditors have given the Company a "Going Concern" opinion, raising
substantial doubt about our ability to continuing to fund our operations.
We have suffered operating losses since inception in our efforts to establish
and execute our business strategy. As of August 31, 2007, we had a cash balance
of approximately $1,657,000. Although management believes that we have adequate
funds to maintain our business operations into the next fiscal year and/or until
we become cash flow positive, we continued to suffer operational losses in our
2007 fiscal year. Until our operations are able to demonstrate and maintain
positive cash flows, we may require additional working capital to fund our
ongoing operations and execute our business strategy of expanding our
operations. Based on these factors, there is substantial doubt about our ability
to continue as a going concern.
12
CAUTIONARY STATEMENT REGARDING
FORWARD-LOOKING INFORMATION
From time to time, we may make written statements that are "forward-looking,"
including statements contained in this prospectus and other filings with the
Securities and Exchange Commission, reports to our stockholders and news
releases. All statements that express expectations, estimates, forecasts or
projections are forward-looking statements. In addition, other written or oral
statements which constitute forward-looking statements may be made by us or on
our behalf. Words such as "expects," "anticipates," "intends," "plans,"
"believes," "seeks," "estimates," "projects," "forecasts," "may," "should,"
variations of such words and similar expressions are intended to identify such
forward-looking statements. These statements are not guarantees of future
performance and involve risks, uncertainties and assumptions which are difficult
to predict. Therefore, actual outcomes and results may differ materially from
what is expressed or forecasted in or suggested by such forward-looking
statements. We undertake no obligation to update publicly any forward-looking
statements, whether as a result of new information, future events or otherwise.
Important factors on which such statements are based are assumptions concerning
uncertainties, including but not limited to uncertainties associated with the
following:
(a) volatility or decline of our stock price;
(b) potential fluctuation in quarterly results;
(c) our failure to earn revenues or profits;
(d) inadequate capital and barriers to raising the additional capital
or to obtaining the financing needed to implement its business
plans;
(e) inadequate capital to continue business;
(f) changes in demand for our products and services;
(g) rapid and significant changes in markets;
(h) litigation with or legal claims and allegations by outside parties;
or
(i) insufficient revenues to cover operating costs.
There is no assurance that we will be profitable, we may not be able to
successfully develop, manage or market our products and services, we may not be
able to attract or retain qualified executives and technology personnel, our
products and services may become obsolete, government regulation may hinder our
business, additional dilution in outstanding stock ownership may be incurred due
to the issuance of more shares, warrants and stock options, or the exercise of
warrants and stock options, and other risks inherent in the our businesses.
We undertake no obligation to publicly revise these forward-looking statements
to reflect events or circumstances that arise after the date hereof. Readers
should carefully review the factors described in other documents we file from
13
time to time with the Securities and Exchange Commission, including the
Quarterly Reports on Form 10-QSB and Annual Report on Form 10-KSB and any
Current Reports on Form 8-K filed by us. All forward-looking statements
attributable to us are expressly qualified in their entirety by the cautionary
statement above.
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 $1,864,400 from the initial sale of the preferred
shares and we could receive up to approximately $15,710,000, net of fees and
expenses, from the exercise of the warrants when and if exercised.
The net proceeds from the sale of the Series B Preferred Stock and any proceeds
received from 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
SERIES B PREFERRED STOCK EXERCISE OF THE WARRANTS
- ------------------------------------------ ---------------------------------- ---------------------------
- ------------------------------------------ ---------------------------------- ---------------------------
Expand operations into clam farming $1,000,000 (1) -
in Morocco
- ------------------------------------------ ---------------------------------- ---------------------------
Working Capital 864,000 $15,710,000
- ------------------------------------------ ---------------------------------- ---------------------------
Total $1,864,400 $15,710,000
- ------------------------------------------ ---------------------------------- ---------------------------
(1) We are currently conducting due diligence on a North African
based aquaculture company that farms shellfish products in
Morocco and pending the successful completion of such inquiry,
may acquire a majority ownership interest in such company. At the
date of this filing, we have not entered into any binding
agreements for the purchase of such company and may or may not do
so depending on the results of our due diligence investigation.
SELLING SHAREHOLDERS
The following table sets forth certain information concerning the
14
resale of the shares of common stock by the selling shareholders (the "Selling
Shareholders"). None of the Selling Shareholders 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 indicated below, none of the
Selling Shareholders are broker-dealers or affiliates of a broker-dealer within
the meaning of Section 3 of the Securities Exchange Act.
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
Series B Preferred Stock 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 formula equal to the quotient of the liquidation
preference amount per share ($10,000) divided by the conversion price, which
initially is $1.15 per share, subject to certain adjustments, or approximately
8,696 shares of common for each share of converted Series B Preferred Stock. The
amount of shares owned by each Selling Shareholder also includes the number of
shares of common stock underlying the Selling Shareholder's Series A Preferred
Stock, which is calculated based upon a conversion ratio of one share of common
stock for each share of Series A 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 November 28, 2007. See "Description of Securities -Warrants."
As of November 28, 2007, there were 23,737,700 shares of our common
stock outstanding, 7,773,998 shares of our Series A Preferred Stock outstanding,
207 shares of our Series B Preferred Stock outstanding and 747,870 shares of our
Series C Preferred Stock outstanding, which are treated on an 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.
Unless otherwise indicated, all of the Selling Shareholders received
their shares pursuant to the January 16, 2007 private financing, which is
described above in Recent Developments, Series B Preferred Stock and Warrant
Financings.
OWNERSHIP OF COMMON STOCK BY SELLING SHAREHOLDERS
- ------------------------- ---------------------- ----------------------- ------------------- -------------------------
NAME OF SELLING NUMBER OF SHARES NUMBER OF SHARES NUMBER OF SHARES PERCENTAGE OF OWNERSHIP
STOCKHOLDER PRIOR TO THE OFFERING OFFERED HEREBY TO BE OWNED AFTER AFTER THE OFFERING (1)
THE OFFERING (2) (3)
========================= ====================== ======================= =================== =========================
15
========================= ====================== ======================= =================== =========================
Vision Opportunity 28,559,331 (4) 7,506,610 (5) 0 (2) *
Master Fund, Ltd.
========================= ====================== ======================= =================== =========================
========================= ====================== ======================= =================== =========================
Union Bancaire Privee 5,573,552 (6) 1,527,411 (7) 0 (2) *
========================= ====================== ======================= =================== =========================
========================= ====================== ======================= =================== =========================
Pai's International 893,945 (8) 893,945 0 (2) *
Trade, Inc.
Kitsilano Capital Corp. 400,000 (9) 400,000 0 (2) *
========================= ====================== ======================= =================== =========================
* 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 the selling shareholders will sell all of the shares
offered herein and all of such selling shareholders' shares offered in
our other registration statement on Form SB-2 (Registration No.
333-135796) for purposes of determining how many shares they will own
after the offering and 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 Series B
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 Series
B Preferred Stock and the warrants issued in the January 2007
financing, holders may not convert the Series B 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 Series B 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 Series B 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 1,495,740 shares of common stock issuable upon
conversion of Vision's Series B Convertible Preferred Stock, 5,982,960
shares of common stock issuable upon exercise of the Warrants it
received in the January 16, 2007 financing and 27,910 shares of common
stock Vision received as dividends on June 30, 2007. Although not being
offered hereby, this amount includes 1.920,000 shares of common stock
as a result of Vision's conversion of some of its shares of Series A
Convertible Preferred Stock, the receipt of 50,000 shares transferred
to Vision from another selling shareholder and 1,800,000 shares of
common stock issued pursuant to Vision's exercise of some of the
Warrants they received in the April 2006 financing, 5,063,333 shares of
common stock issuable upon conversion of Vision's Series A Convertible
Preferred Stock, 13,866,668 shares of common stock issuable upon
exercise of Vision's Warrants Vision received in the April, May, June
and July 2006 financings, 22,107 shares of common stock Vision received
as dividends on June 30, 2006, 91,745 shares of common stock Vision
received as dividends on December 31, 2006 and 88,868 shares of common
stock Vision received as dividends on June 30, 2007, all of which were
registered in our Registration Statement on Form SB-2 File No.
333-135796. Although not being offered hereby, this number includes
747,870 shares of common stock issuable upon conversion of Vision's
Series C Convertible Preferred Stock, 2,991,480 shares of common stock
issuable upon exercise of Vision's Warrants that it received in the
November 5, 2007 financing, all of which we must register in a
Registration Statement on Form SB-2 on or before December 5, 2007
pursuant to the Registration Rights Agreement we entered into with
Vision pursuant to the financing.
5) This amount represents the aggregate number of shares of common stock
issuable upon conversion and exercise of the Series B Preferred Stock
16
and Warrants, respectively that Vision received in the January 2007
financing.
6) The persons having voting, dispositive or investment powers over Union
Bancaire Privee are Olivier Constantin and Franco Rossi, Authorized
Agents. This number includes 304,347 shares of common stock issuable
conversion of Union's Series B Convertible Preferred Stock, 1,217,385
shares of common stock issuable upon exercise of Union's Warrants that
it received in the January 16, 2007 financing and 5,679 shares of
common stock Union received as dividends on June 30, 2007. This amount
also includes 1,333,333 shares of common stock issuable upon conversion
of Union's Series A Convertible Preferred Stock, 2,666,668 shares of
common stock issuable upon exercise of the warrants it received in the
April, May, June and July 2006 financings, 22,406 shares of common
stock it received as dividends on December 31, 2006 and 23,734 shares
of common stock it received as dividends on June 30, 2007, all of which
were registered in our Registration Statement on Form SB-2 File No.
333-135796.
7) This amount represents the aggregate number of shares of common stock
issuable upon conversion and exercise of the Series B Preferred Stock
and Warrants, respectively that Union received in the January 2007
financing.
8) The person having voting, dispositive or investment powers over Pai's
International Trade, Inc. is Sam Pai, Authorized Agent. This number
includes 173,913 shares of common stock issuable upon conversion of Mr.
Pai's Series B Convertible Preferred Stock and 720,032 shares of common
stock issuable upon exercise of Mr. Pai's Warrants, all of which are
only issuable upon exercise of the placement consultant warrant that
Mr. Pai received in the January 16, 2007 financing.
9) The person having voting, dispositive or investment powers over
Kitsilano is Christopher Haugen, Authorized Agent. This amount
represents all of the shares of common stock underlying four common
stock purchase warrants, each to purchase 100,000 shares of our common
stock, issued to Kitsilano in consideration for services they will
provide to us pursuant to their consulting agreement dated February 2,
2007. Pursuant to the consulting agreement, we agreed to register all
400,000 shares although the first warrant does not vest until May 1,
2007, the second does not vest until August 1, 2007, the third does not
vest until February 1, 2008 and the fourth does not vest until June 1,
2008 and have an exercise price of $1.20, $1.40, $1.60 and $1.80,
respectively. Each warrant is exercisable for three years from the
vesting date.
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;
o to cover short sales made after the date that the registration
17
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
such distributions, subject to specified exceptions or exemptions. All of these
limitations may affect the marketability of the shares.
18
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
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 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.
19
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.
KEY CORPORATE OBJECTIVES
Our key business development objectives over the next 36 months are to
expand scallop and sablefish production using both existing and new
infrastructure at our facilities in Qualicum Beach, Canada, which we anticipate
20
will enable us to reach annual sales of as much as approximately US$40.0 million
and earnings of approximately US$15.0 million by the end of our 2010 fiscal year
on scallop sales alone. This significant expansion will be accomplished as a
result of the following four factors:
o We expect to begin harvesting the 2007 year-class scallops during the
spring of 2009, however, we could begin harvesting portions of the
class sooner if mortality rates (at various points of the growth
cycle) are significantly lower than our current projections or if
growth rates are substantially higher. We anticipate that at least 20
million scallops could reach maturity and thus be harvested.
o We plan to capitalize on the high demand for sablefish in foreign
markets by entering into the blackcod market in the next 2 to 3 years.
o We plan to expand current distribution by establishing new strategic
relationships with 10-15 American fisheries importers in Seattle,
Portland, San Francisco, San Jose, and Los Angeles and overseas in
Hong Kong in 2008 and the introduction of frozen on the half-shell
product targeting the Eastern United States and Canada .
o We expect to produce more than 200 million scallop seeds in 2008, with
a projected 2008 scallop class of at least 40 million scallops at
various sizes.
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 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.
21
Supply is another key factor where Island Scallops has a distinct
advantage. Based on our planned increase in scallop production, we believe that
Island Scallops will have a large quantity of scallops for sale. Therefore, a
distributor would not have to deal with numerous suppliers, which costs
additional time and money. This makes Island Scallops an attractive source for
scallops, since we believe that we will be able to satisfy the demand of
distributors, which will save them time and money.
Island Scallops has also developed a unique live holding system for use
with our distribution model. This system allows Island Scallops to deliver live
product directly to seafood suppliers and individual restaurants.
Traditionally, as described above, we have sold live scallops within
the Pacific Northwest market. We recently hired outside seafood sales and
distribution consultants who have began to introduce new product lines of fresh
meat and a new unique frozen half-shell product that is generating significant
interest. Part of the new marketing strategy includes working with various
high-end restaurants and chefs to develop new menu items based on our scallops.
We believe that this will help create product and encourage additional
wholesalers to carry our scallops. As part of our overall strategy and in
conjunction with the introduction of our frozen half-shell product, we are
currently evaluating strategic relationships with three major US-based
distributors.
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.
22
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 produce up to 15 million scallops annually and, with an
additional capital investment of approximately $1.0 million, which we hope to
fund from the exercise of warrants or improving cash flow, up to 30 million
scallops annually by the fall of 2009. If we are not able to fund this expansion
via the exercise of warrants or cash flow, we will have to seek additional
financings. Given the high worldwide demand for scallops, Island Scallops is
poised to rapidly expand production and significantly increase revenues.
The Pacific Scallop is sold live in four sizes: medium, large, extra
large and jumbo. Pricing ranges from a low of US$3.95 per pound to $4.20 per
pound for the larger sized scallops. Previously, due to the large demand and
high value for live scallops, our focus was on the sale of live scallops in
2006. We recently hired outside seafood sale and distribution consultants who
have begun to introduce new product lines of fresh meat and a new unique frozen
half-shell product that is generating significant interest.
The basis for our anticipated scallop farming production increase stems
from a combination of our tenure expansion, our recent financing, improved
grow-out techniques and our transition to a combination of "lantern-style"
netting and ear-hanging methods. Scallops culture utilizes two styles of small
cages referred to as "pearl nets and lantern nets." Pearl nets are shaped like a
pyramid with a 35 by 35 cm square base and grow small scallops from 2-3 mm to
10mm. The 10-mm scallops are grown in cylindrical nets called lantern nets and
are 60 cm in diameter and 1.2 meters deep containing 12 layers. Once the
scallops reach 5cm they can be grown 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 our next fiscal year,
we will be able to increase capacity to approximately 15,000,000 animals per
annum. Thereafter, we intend to change our management plan to include off bottom
culture at our Bowser tenure in late 2007 or 2008, which would supply us with
the capacity to produce an additional 20 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.
23
Marketed scallops generally take the following product forms:
o Whole-live (shelf life of seven days);
o Whole dried; o Eviscerated whole;
o Shucked fresh (shelf life of about 15-20 days);
o Shucked frozen (shelf life of about a year);
o Frozen on the half-shell (shelf life of about a year); and
o Value added forms (smoked, breaded, canned).
The shucked product form is the most significant form for North
American markets. A whole-live product form is the most desirable from the
aquaculturist's point of view, as processing costs are minimal. Island Scallops
has developed a market for whole live scallops, which exceeds 5,000 lbs. per
week into Vancouver. We are currently in the process of expanding our live
scallop distribution network into Hong Kong and the western United States to up
to 15,000 lbs. per week in the near future. We are also in the process of
introducing fresh scallop meat into high end restaurants in Toronto and Montreal
and frozen half-shell product into the eastern US and Canada. In 2008, we
expected our overall product mixture to consist of 40% live scallops, 30% fresh
meat and 30% frozen half-shell and 50% frozen half-shell, 30% live and 20% fresh
thereafter.
Island Scallops currently distributes through specialty wholesalers
with particular expertise in selling to restaurants and has developed a market
for whole live scallops that exceeds 5,000 lbs. per week into Vancouver.
Vancouver wholesalers 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,
24
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.
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 2008, with production
planned to increase by at least 500,000 annually by 2009 and beyond. We
currently plan to fund this new sablefish facility via the exercise of existing
warrants. Since the exercise of the warrants is, however, to a large extent
dependent upon the price of our stock in the public market, we cannot guarantee
when any of the warrants will be exercised, if at all and, as a result, the
proceeds from the exercise of the warrants may not be available to us. If we are
not able to fund this expansion via the exercise of warrants, we need to seek
additional financings to fund this project.
Over the past eight years, Island Scallops has also developed
proprietary hatchery technology for the production of sablefish juveniles. We
believe that sablefish will be the next species, after salmon, for successful
large-scale commercial farming. Sablefish, which is a premium-quality whitefish
with a delicate texture and moderate flavor, is an ideal substitute for Chilean
sea bass (currently over-fished in all oceans). To date, Island Scallops has
marketed a limited number of live sablefish into the Vancouver market. Initial
response was excellent for a small 1-kilogram live sablefish (~$11/kg). To
capitalize on Island Scallops' breakthrough sablefish hatchery technology, in
the next two to three years, we plan to construct a new sablefish hatchery
consisting of the following:
o An expanded Brood Stock facility with larger capacity to hold the
various families of selected strains of sablefish. This new facility
will incorporate a new state-of-the-art water treatment system.
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
25
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 within
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, 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 four years.
DESCRIPTION OF PROPERTY
For the fiscal year ended August 31, 2007, our U.S. corporate office
was located at 400 Professional Drive, Suite 310, Gaithersburg, Maryland 20878.
This space was provided on a rent free basis by one of our shareholders.
Island Scallops' main office and hatcheries are located on the east
side of Vancouver Island in the town of Qualicum Bay at 5552 West Island
Highway, Qualicum Beach, British Columbia, Canada V9K 2C8. The shellfish
hatchery and processing facilities are housed in a 930 square meter building. A
300 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 scallops. Approximately 30% of the farm area is currently being farmed.
As part of our expansion plans, we are currently adding additional main lines
and plan to increase our capacity at these tenures to more than 24 million
scallops in the near future. An additional bottom tenure of 926 acres is located
10 minutes north of the main facility (at Bowser) and is capable of producing at
26
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
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 Hindoo Creek farms has been approved and
such approval does not need to be renewed for twenty years. An amended tenure
agreement has been signed with the government of BC to expand the Denman Island
site. The biggest hurdle to completing the Denman expansion process is the
re-zoning application, which must be approved before we can use the expanded
tenure. At the Bowser tenure, we are waiting for approval to convert the method
of farming from bottom to off-bottom culture in one-third of the tenure area.
Once approved, this will allow us to accommodate around 20 million scallops.
Island Scallops' location is a distinct advantage for producing marine
species. The waters off British Columbia are pristine and unspoiled by large
populations or major industries. The close proximity to major western cities
allows us to effectively put our products into the hands of the consumer within
24 hours.
The source of our raw material comes from our own hatchery brood stock.
In the case of the Pacific Scallop, we have been selectively breeding this
species for superior growth and survival for the past 15 years. The breeding
program has produced a vigorous, rapid growing, disease resistant scallop with
exceptional meat yield. In the case of sablefish we have been selecting fast
growing fish for the past 5 years; these display a high degree of domestication.
27
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 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 tend to
be chronically underfinanced and production from these growers usually totals
less than 1,000,000 scallops per year. Island Scallops is uniquely positioned to
rapidly expand these farms (up to six farms) under an exclusive farming and
marketing contract. Three joint venture farmers are currently farming scallops
and receive free scallop seed, technology and support for a 12% royalty on the
harvest and exclusive marketing of their product through Island Scallops.
Due to its large size and small count per pound, the sea scallop is the
prime competitor in the United States market. The fishery for this scallop is
28
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 there in the near future.
Washington State contains two parties interested in sablefish farming.
The first is the Makah Tribe and the second is a private company, which is
trying to obtain farming permits in Port Angeles. These parties have made
inquiries to Island Scallops for juvenile sablefish. However, to date, no orders
have been placed.
RESEARCH AND DEVELOPMENT
Due to changes in Canadian Federal Government's Research and
Development tax credits (SRED) program, which prevents any part of the research
to be combined with commercial production, no Research and Development claims
were made in fiscal2006 and 2007. 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 November 28, 2007, we have 26 full-time employees and 2 temporary
employees. We anticipate hiring between 10 and 15 temporary workers during the
upcoming spring and summer growing seasons.
None of our current employees is represented by a labor union and we
consider our relationships with our employees to be good.
REGULATORY ENVIRONMENT
29
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 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 have CEA Act approvals but are waiting on re-zoning approval for our
Denman tenure, along with a approvals for 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 November 28, 2007. The Board of Directors
is comprised of only one class. All of the directors will serve until the next
annual meeting of shareholders and until their successors are elected and
qualified, or until their earlier death, retirement, resignation or removal. Dr.
Kristina Miller, our Chief Scientific Advisor is the wife of Robert Saunders,
our Chairman, CEO and President; otherwise, there are no family relationships
among our directors and executive officers. Also provided herein are brief
descriptions of the business experience of each director, executive officer and
30
advisor during the past five years and an indication of directorships held by
each director in other companies subject to the reporting requirements under the
Federal securities laws.
NAME AGE POSITION
- ------------------------ ---------- ----------------------------------
Robert Saunders 54 Chairman, CEO and President
Douglas C. MacLellan 51 Vice Chairman
Mark H. Elenowitz 37 Director
Robert L. Rooks 52 Director
Ian Fraser 46 Director
Michael Boswell 38 Director, Acting Chief Accounting
Officer
Darryl Horton 57 Director
Victor Bolton 53 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
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
31
of TriPoint Capital Advisors, LLC. Mr. Elenowitz is responsible for the overall
corporate development of the firm and assisting their clients with high-level
financial services and general business development. In this role he provides
high level advice regarding corporate finance, corporate structure, SOX 404
compliance, employee option programs and capital market navigation including
providing advice as a member of the board of directors. Mr. Elenowitz integrates
a strong, successful entrepreneurial background with extensive financial
services and capital markets experience. Mr. Elenowitz has assisted in numerous
companies in a "soup-to-nuts" process of preparing a company for the public
markets, bringing them public and advising on an ongoing basis via board seats
and executive positions to oversee further rounds of financing, strategic
acquisitions and a broader investor market via a listing on "higher" securities
exchange or market. Mr. Elenowitz is also currently a director of Global Growth
Acquisition Corp. 1, a Cayman Islands corporation. From December 2002 to
September 2005, Mr. Elenowitz was a board member of AXM Pharma formerly (AMEX:
AXJ) He was 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 50 publicly traded companies providing the above mentioned financial
consulting and strategic planning services. Mr. Elenowitz holds the Series 24,
82 and 63 licenses and is also CEO of TriPoint Global Equities, LLC, a FINRA
member firm. Mr. Elenowitz is the recipient of several entrepreneurial awards
and has been profiled in BusinessWeek and CNBC, as well as several other
publications. He is a graduate of the University of Maryland School of Business
and Management, with a Bachelor of Science in Finance.
DR. ROBERT L. ROOKS, DIRECTOR. Dr. Robert L. Rooks has been Chief of Staff of
All Care Animal Referral Center (ACARC) in Fountain Valley, California, since
1990. ACARC is the largest strictly referral veterinary center in the United
States. Dr. Rooks has a staff of over 20 veterinarians in the areas of surgery,
critical care, internal medicine, oncology, dentistry, radiology and neurology.
Their services include 24-hour critical care/emergency service, MRI and CT
scans, color-flow Doppler ultrasounds, hyperbaric oxygen therapy, a complete
orthopedic program including total hip replacements and joint reconstruction,
cobalt radiation therapy, a complete neuro-diagnostic service, a kidney
transplant program and a physical rehabilitation department and much more. He is
the published author of over 100 journals, magazine and newspaper articles. Dr.
Rooks is also the author of the book "Canine Orthopedics" published in 1997 by
Howell Bookhouse. Dr. Rooks completed his undergraduate studies at Iowa State
University in 1978. He graduated from the College of Veterinary Medicine at Iowa
State. Dr. Rooks received his Masters Degree as well as completed his surgical
residency at the University of Illinois in 1981. He is a Diplomat of both the
American College of Veterinary Surgeons and the American College of Veterinary
Practitioner.
IAN FRASER, DIRECTOR. Since 1997, Mr. Ian Fraser has been President of Fraser
Yacht Sales Ltd., a successful Yacht Brokerage located in Vancouver, B.C. Prior
to establishing Fraser Yacht Sales Ltd., Mr. Fraser gained experience in sales
and marketing both nationally and internationally as a yacht broker for two top
brokerage houses in Vancouver. Previously, Mr. Fraser was worked as an
advertising sales executive with Naylor communications from 1988 to 1990 and
learned valuable communication skills while working with numerous trades
including the Truck Logger's association, the I.W.A of America, and the B.C.
Construction industry. He also operated as a commercial fisherman on the West
coast working on commercial salmon fishing boats for the B.C. Packer Corporation
over a 4 year period and gained valuable knowledge of the coastline of Vancouver
32
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. Mr. Boswell is also
currently a director of Global Growth Acquisition Corp. 1, a Cayman Islands
corporation. Mr. Boswell holds the Series 24, 82 and 63 licenses and is also
Managing Director and Chief Compliance Officer of TriPoint Global Equities, LLC,
a FINRA member firm. Prior to the founding of TriPoint, Mr. Boswell had a number
of executive positions focusing on business development and management
consulting. Mr. Boswell also spent eight years as a senior analyst and/or senior
engineer for various branches of the United States Government. He earned a MBA
from John Hopkins University and a BS degree in Mechanical Engineering from
University of Maryland.
DARRYL HORTON, DIRECTOR. Mr. Horton has been a businessman successfully involved
in numerous construction and development projects for the past 35 years. He is
the President, Manager and a Partner of Abbotsford Development Corporation and
is currently managing a development project in Abbotsford, British Columbia
called Eagle Mountain. Eagle Mountain is an upscale, master planned community of
single family homes, town homes and commercial properties covering approximately
60 acres that is expected to be valued, upon completion, in excess of 200
million dollars. Prior to Eagle Mountain, Mr. Horton managed, owned and marketed
numerous other residential and commercial projects including the construction of
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
33
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.
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.
34
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 407 of Regulation S-B and the Board has determined that Mr.
MacLellan is independent, as that term is defined in Section 121 of the American
Stock Exchange's Listing Standards and Section 10A(m)(3) of the Securities
Exchange Act of 1934. Mr. MacLellan's qualifications as an audit committee
financial expert are described in his biography above.
BOARD COMMITTEES
We currently have six committees appointed by our Board of Directors:
o Audit Committee, which is comprised of Douglas MacLellan (Chair),
Robert Rooks and Ian Fraser. The Board has determined that all of
these members are independent, as that term is defined in Section
121(A) of the American Stock Exchange's Listing Standards.
o Finance Committee, which is comprised of Mark Elenowitz (Chair),
Douglas MacLellan and Robert Saunders.
o Compensation Committee, which is comprised of Ian Fraser (Chair), Mark
Elenowitz and Doug MacLellan.
o Disclosure Committee, which is comprised of Douglas MacLellan (Chair),
Robert Saunders and Michael Boswell.
o Nominating Committee, which is comprised of Robert Saunders (Chair),
Douglas MacLellan and Robert Rooks. The Board has determined that Mr.
Rooks and Mr. MacLellan are independent, as that term is defined in
Section 121(A) of the American Stock Exchange's Listing Standards.
o Sarbanes-Oxley Steering Committee, which is comprised of Douglas
MacLellan, Robert Saunders, Michael Boswell and Louis Taubman (Louis
Taubman is our outside corporate and securities counsel).
35
EXECUTIVE COMPENSATION
Summary Compensation Table
- ----------------------- ------------------ ------------------ ------------------- ------------------- ----------------
Name and Principal Year Salary Bonus Stock Awards Option Awards
Position ($) ($) ($) ($)
(a) (b) (c) (d) (e) (f)
- ----------------------- ------------------ ------------------ ------------------- ------------------- ----------------
Robert Saunders 2007 60,000 (1) 0 0 20,651 (3)
Chief Executive
Officer
- ----------------------- ------------------ ------------------ ------------------- ------------------- ----------------
Robert Saunders 2006 60,000 (1) 150,000 (1) 0 0
Chief Executive
Officer
- ----------------------- ------------------ ------------------ ------------------- ------------------- ----------------
Michael Boswell 2007 0 (2) 0 0 26,847 (3)
Acting Chief
Accounting Officer
- ----------------------- ------------------ ------------------ ------------------- ------------------- ----------------
Michael Boswell 2006 0 (2) 0 0 0
Acting Chief
Accounting Officer
- ----------------------- ------------------ ------------------ ------------------- ------------------- ----------------
- --------------------- ------------------ -------------------- ------------------- ------------------- ----------------
Year Non-Equity Non-Qualified
Deferred
Incentive Plan Compensation
Name and Principal Compensation Earnings All other Total
Position ($) ($) Compensation ($)
(a) (b) (g) (h) (i) (j)
- --------------------- ------------------ -------------------- --------------------- -------------------- -------------
Robert Saunders 2007 0 0 1,000,000 1,080,651
Chief Executive
Officer
- --------------------- ------------------ -------------------- --------------------- -------------------- -------------
Robert Saunders 2006 0 0 1,000,000 1,210,000
Chief Executive
Officer
- --------------------- ------------------ -------------------- --------------------- -------------------- -------------
Michael Boswell 2007 0 0 0 26,847
Acting Chief
Accounting Officer
36
- --------------------- ------------------ -------------------- --------------------- -------------------- -------------
Michael Boswell 2006 0 0 0 0
Acting Chief
Accounting Officer
- --------------------- ------------------ -------------------- --------------------- -------------------- -------------
(1) In June 2005, we entered into an employment agreement with Robert
Saunders, our Chairman, CEO and President. Mr. Saunders will serve at
the pleasure of the Board of Directors. Pursuant to his employment
agreement, Mr. Saunders' compensation will be $60,000 (USD) per annum
for his services as our President. Following the receipt of at least
$5,000,000 (USD) min outside funding, Mr. Saunders will receive an
additional $10,000 per month for his services as Chairman and,
thereafter, $20,000 per month provided that we achieve gross revenues
of at least $20,000,000 (USD) for our most recent fiscal year and
continuing as long as we maintain gross revenues of at least
$20,000,000 (USD) for each successive fiscal year. If we fail to
achieve gross revenue of $20,000,000 (USD) in a successive fiscal
year, Mr. Saunders compensation as Chairman shall be reduced to
$10,000 (USD) per month. Additionally, we agreed to grant Mr. Saunders
a signing bonus of $150,000 (USD) to be paid upon the closing of at
least $3,500,000 in new third party financing. In August 2006, our
Board approved the following revisions to Mr. Saunders' compensation:
reduce Mr. Saunders' compensation from $10,000 to $5,000 per month
until our cash flow position improves, at which time the Compensation
Committee will recommend that Mr. Saunders' compensation increase back
to $10,000 per month. As of August 31, 2007, we had paid Mr. Saunders
$75,000 of the $150,000 bonus that was due under the terms of the
agreement. Additionally, we are currently discussing possible
restructuring/payment terms of the accrued salary of $130,000 as of
August 31, 2007, until such time that we become significantly cash
flow positive for its operations.
(2) Mr. Boswell served as our President from March to June 2005, at which
time Mr. Saunders replaced Mr. Boswell as President. Mr. Boswell has
served as our Acting Chief Accounting Officer since August 2005. Mr.
Boswell indirectly owns a minority interest in TriPoint Capital
Advisors, LLC, a significant shareholder and party with which we
maintain a consulting agreement. In August 2006, the Board approved
the Compensation Committee's recommendation to pay TriPoint $15,000
per month, which includes fees for Mr. Boswell's services as our
Acting Chief Accounting during 2005, however TriPoint agreed to reduce
such fee to $7,000 per month until our cash flow position improves, at
which time the Committee will reconvene and recommend a return to
$15,000 per month. In addition, TriPoint has agreed not to accept any
additional fees, other than expenses, until we are sufficiently funded
to carry out our business and operations. According to the above
37
reasons, Mr. Boswell did not receive any compensation in 2006 and only
received the options listed in the table above in 2007.
(3) On August 17, 2007, Mr. Saunders and Mr. Boswell were granted
five-year nonqualified stock options, pursuant to our 2005 Equity
Plan, that vest on a 1/12 monthly basis over a twelve month period
beginning on the grant date. The exercise price of the options is
$1.21, which represents 110% of the closing price of our common stock
on August 17, 2007. Based on the Black-Scholes option pricing model,
the total fair value of these options were determined to be $247,815
and $322,159 for Mr. Saunders and Mr. Boswell, respectively. Since
these options vest monthly, the company will incur a monthly cost of
$20,651 and $26,847 respectively. As of August 31, 2007, only one
month of these stock options costs had been realized.
Outstanding Equity Awards at Fiscal Year-End
Outstanding Equity Awards at Fiscal Year-End
- --------------------- ----------------- --------------------- -------------------- -------------------- --------------
Equity
Incentive Plan
Awards:
Number of Number of Number of
Securities Securities Securities
Underlying Underlying Underlying
Unexercised Unexercised Unexercised
Options Options Unearned Option Option
(#) (#) Options Exercise Price Expiration
Name Exercisable Unexercisable (#) ($) Date
(a) (b) (c) (d) (e) (f)
- --------------------- ----------------- --------------------- -------------------- -------------------- --------------
Robert Saunders 300,000 (1) 0 0 1.21 8-14-2007
- --------------------- ----------------- --------------------- -------------------- -------------------- --------------
Michael Boswell 390,000 (1) 0 0 1.21 8-14-2007
- --------------------- ----------------- --------------------- -------------------- -------------------- --------------
Equity Incentive Equity Incentive
Plan Awards: Number Plan Awards:
Number of Market Value of of Unearned Shares, Market or Payout
Shares or Units Shares of Units of Units or Other Value of Unearned
of Stock That Stock That Have Rights That Have Shares, Units or
Have Not Vested Not Vested Not Vested Other Rights That
(#) ($) (#) Have Not Vested
Name
(a) (g) (h) (i) (j)
- ---------------------- ----------------- -------------------- --------------------- --------------------
Robert Saunders 275,000 227,164 0 0
- ---------------------- ----------------- -------------------- --------------------- --------------------
Michael Boswell 357,500 295,312 0 0
- ---------------------- ----------------- -------------------- --------------------- --------------------
(1) Pursuant to our 2005 Equity Incentive Plan, Mr. Saunders and Mr.
Boswell were granted five-year nonqualified stock options on August
17, 2007 that vest on a 1/12 monthly basis over a twelve month period
beginning on the grant date. The exercise price of the options is
$1.21, which represents 110% of the closing price of our common stock
38
on August 17, 2007. As Of August 31, 2007 only 1/12 of these options
have vested.
Retirement/Resignation Plans
We do not have any plans or arrangements in place regarding the payment to any
of our executive officers following such persons retirement or resignation.
DIRECTOR COMPENSATION
- -------------------------- ----------------------- ---------------------- ----------------------- --------------------
Name Fees Earned or Paid Stock Awards Option Awards Non-Equity
in Cash ($) ($) incentive Plan
($)
Compensation
($)
(a) (b) (c) (d) (e)
- -------------------------- ----------------------- ---------------------- ----------------------- --------------------
Douglas MacLellan 36,000 0 13,768 (1) (2) 0
- -------------------------- ----------------------- ---------------------- ----------------------- --------------------
Mark Elenowitz 0 0 35,795 (1) (3) (4) 0
- -------------------------- ----------------------- ---------------------- ----------------------- --------------------
Darryl Horton 1,000 0 688 (1) (5) 0
- -------------------------- ----------------------- ---------------------- ----------------------- --------------------
Ian Fraser 1,000 0 5,163 (1) (6) 0
- -------------------------- ----------------------- ---------------------- ----------------------- --------------------
Victor Bolton 1,000 0 688 (1) (7) 0
- -------------------------- ----------------------- ---------------------- ----------------------- --------------------
Robert Rooks 1,000 0 3,442 (1) (8) 0
- -------------------------- ----------------------- ---------------------- ----------------------- --------------------
- ----------------------------------------------------------------------------------------------------------------------
Name Change in Pension Value All other Compensation Total
and Nonqualified Deferred ($) ($)
Compensation Earnings
(a) (f) (g) (h)
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Douglas MacLellan 0 0 49,768
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Mark Elenowitz 0 0 35,795
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Darryl Horton 0 0 1,688
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Ian Fraser 0 0 6,163
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Victor Bolton 0 0 1,688
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Robert Rooks 0 0 4,442
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
(1) At the end of the fiscal year, 2,962,000 options are outstanding.
(2) These include the five-year incentive stock options granted to such
individual on August 17, 2007 pursuant to our 2005 Equity Plan. These
options vest on a 1/12 monthly basis over a twelve month period
beginning on the grant date and are exercisable at $1.21, which
represents 110% of the closing price of our common stock on August 17,
2007. Based on the Black-Scholes option pricing model, the total fair
value of these 200,000 options were determined to be $165,210. Since
these options vest monthly, we will incur a monthly cost of $13,768. As
of August 31, 2007, only one month of these stock options costs had
been realized.
(3) These include the five-year incentive stock options granted to such
individual on August 17, 2007 pursuant to our 2005 Equity Plan. These
options vest on a 1/12 monthly basis over a twelve month period
beginning on the grant date and are exercisable at $1.21, which
39
represents 110% of the closing price of our common stock on August 17,
2007. Based on the Black-Scholes option pricing model, the total fair
value of these 520,000 options were determined to be $429,546. Since
these options vest monthly, we will incur a monthly cost of $35,795. As
of August 31, 2007, only one month of these stock options costs had
been realized.
(4) Mr. Elenowitz indirectly owns a minority interest in TriPoint Capital
Advisors, LLC, a significant shareholder and party with which we
maintain a consulting agreement. In August 2006, the Board approved the
Compensation Committee's recommendation to pay TriPoint $15,000 per
month, which includes fees for Mr. Elenowitz's services as a Director;
however, TriPoint agreed to reduce such fee to $7,000 per month until
our cash flow position improves, at which time the Committee will
reconvene and recommend a return to $15,000 per month. In addition,
TriPoint has agreed not to accept any additional fees, other than
expenses, until we are sufficiently funded to carry out our business
and operations.
(5) These include the five-year incentive stock options granted to such
individual on August 17, 2007 pursuant to our 2005 Equity Plan. These
options vest on a 1/12 monthly basis over a twelve month period
beginning on the grant date and are exercisable at $1.21, which
represents 110% of the closing price of our common stock on August 17,
2007. Based on the Black-Scholes option pricing model, the total fair
value of these 10,000 options were determined to be $8,260. Since these
options vest monthly, we will incur a monthly cost of $688. As of
August 31, 2007, only one month of these stock options costs had been
realized.
(6) These include the five-year incentive stock options granted to such
individual on August 17, 2007 pursuant to our 2005 Equity Plan. These
options vest on a 1/12 monthly basis over a twelve month period
beginning on the grant date and are exercisable at $1.21, which
represents 110% of the closing price of our common stock on August 17,
2007. Based on the Black-Scholes option pricing model, the total fair
value of these 75,000 options were determined to be $61,954. Since
these options vest monthly, we will incur a monthly cost of $5,163. As
of August 31, 2007, only one month of these stock options costs had
been realized.
(7) These include the five-year incentive stock options granted to such
individual on August 17, 2007 pursuant to our 2005 Equity Plan. These
options vest on a 1/12 monthly basis over a twelve month period
beginning on the grant date and are exercisable at $1.21, which
represents 110% of the closing price of our common stock on August 17,
2007. Based on the Black-Scholes option pricing model, the total fair
value of these 10,000 options were determined to be $8,260. Since these
options vest monthly, we will incur a monthly cost of $688. As of
August 31, 2007, only one month of these stock options costs had been
realized.
(8) These include the five-year incentive stock options granted to such
individual on August 17, 2007 pursuant to our 2005 Equity Plan. These
options vest on a 1/12 monthly basis over a twelve month period
beginning on the grant date and are exercisable at $1.21, which
represents 110% of the closing price of our common stock on August 17,
2007. Based on the Black-Scholes option pricing model, the total fair
value of these 50,000 options were determined to be $41,302. Since
these options vest monthly, we will incur a monthly cost of $3,442. As
of August 31, 2007, only one month of these stock options costs had
been realized.
Our directors who are employees do not receive any compensation from us for
40
services rendered as directors. The Board has created three classes of fees for
outside directors: (1) outside directors who are "independent," as defined in
the Exchange Act will be paid $500 per meeting, whether telephonic or in person
for director fee - there shall not be any fees for written consents in lieu of
board meetings; (2) outside directors who are not "independent" will not receive
any fees at this time, but once our cash flow position improves, the
Compensation Committee will reconvene and make recommendations; (3) the Vice
Chairman will receive $3,000 per month, which includes $1,500 per month for his
role as Chairman of our Audit Committee. Additionally, although we do not
currently have an arrangement or agreement to provide stock based compensation
to our outside directors, we may, from time to time, grant outside directors
incentive stock options pursuant to our 2005 Equity Incentive Plan.
2005 Equity Incentive Plan
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 August 31, 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 November 28, 2007,
there are 6 Directors, 2 executive officers, 3 consultants and approximately 26
employees other than executive officers, who are eligible to receive awards
under the Equity Plan.
The Board may delegate a Committee to administer the Equity Plan. The
Committee shall not consist of fewer than two members, each of whom is a member
of the Board and all of whom are disinterested persons, as contemplated by Rule
16b-3 promulgated under the Securities Exchange Act of 1934, as amended and each
41
of whom is an outside director for purposes of Section 162(m) of the Code,
acting in accordance with the provisions of Section 3.
On April 18, 2007 our board of directors authorized the issuance of
190,000 options to purchase our common stock to 19 employees pursuant to the
Equity Plan. The options vest on April 18, 2008. Each option is exercisable for
a period of five years from the vesting date and has an exercise price of $1.25
respectively. Otherwise, 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
42
price, term, methods of exercise, methods of settlement, and any other terms and
conditions of any Stock Appreciation Right shall be as determined by the Board
or the Committee. The Board and the Committee may impose such conditions or
restrictions on the exercise of any Stock Appreciation Right as it may deem
appropriate.
FEDERAL INCOME TAX CONSEQUENCES
The current federal income tax consequences of grants under the Equity
Plan are generally described below. This description of tax consequences is not
a complete description, and is based on the Internal Revenue Code as presently
in effect, which is subject to change, and is not intended to be a complete
description of the federal income tax aspects of options and stock awards under
the Equity Plan. Accordingly, the discussion does not deal with all federal
income tax consequences that may be relevant to a particular recipient, or any
foreign, state or local tax considerations. Accordingly, potential recipients
are urged to consult their own tax advisors as to the specific federal, foreign,
state and local tax consequences to them as a result of receiving an Award under
the Equity Plan.
Nonqualified Stock Options
A recipient will not be subject to federal income tax upon the grant of
a nonqualified stock option. Upon the exercise of a nonqualified stock option,
the recipient will recognize ordinary compensation 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.
43
Stock Awards
If a recipient receives an unrestricted stock award, he/she will
recognize compensation income upon the grant of the stock award. If a recipient
receives a restricted stock award, he/she normally will not recognize taxable
income upon receipt of the stock award until the stock is transferable by the
recipient or no longer subject to a substantial risk of forfeiture, whichever
occurs earlier. When the stock is either transferable or no longer subject to a
substantial risk of forfeiture, the recipient will recognize compensation income
in an amount equal to the fair market value of the shares (less any amount paid
for such shares) at that time. A recipient may, however, elect to recognize
ordinary compensation income in the year the stock award is granted in an amount
equal to the fair market value of the shares (less any amount paid for the
shares) at that time, determined without regard to the restrictions. We will
generally be entitled to a corresponding deduction at the same time, and in the
same amount, as the recipient recognizes compensation income with respect to a
stock award. Any gain or loss recognized by the recipient upon subsequent
disposition of the shares will be capital gain or loss.
Tax Deductibility under Section 162(m)
Section 162(m) of the Internal Revenue Code disallows a public
company's deductions for employee compensation exceeding $1,000,000 per year for
the chief executive officer and the four other most highly compensated executive
officers. Section 162(m) contains an exception for performance-based
compensation that meets specific requirements. The Equity Plan is intended to
permit all options to qualify as performance-based compensation at the Board of
Directors or Committee's discretion. If an Award is to qualify as such, it shall
clearly state so in the award agreement.
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.
EMPLOYMENT AGREEMENTS
In June 2005, we entered into an employment agreement with Robert
Saunders, our Chairman, CEO and President. Mr. Saunders will serve at the
pleasure of the Board of Directors. Pursuant to his employment agreement, Mr.
Saunders' compensation will be $60,000 (USD) per annum for his services as our
President. Following the receipt of at least $5,000,000 (USD) min outside
funding, Mr. Saunders will receive an additional $10,000 per month for his
services as Chairman and, thereafter, $20,000 per month provided that we achieve
gross revenues of at least $20,000,000 (USD) for our most recent fiscal year and
continuing as long as we maintain gross revenues of at least $20,000,000 (USD)
for each successive fiscal year. If we fail to achieve gross revenue of
$20,000,000 (USD) in a successive fiscal year, Mr. Saunders compensation as
Chairman shall be reduced to $10,000 (USD) per month. Additionally, we agreed to
44
grant Mr. Saunders a signing bonus of $150,000 (USD) to be paid upon the closing
of at least $3,500,000 in new third party financing. In August 2006, our Board
approved the following revisions to Mr. Saunders' compensation: reduce Mr.
Saunders' compensation from $10,000 to $5,000 per month until our cash flow
position improves, at which time the Compensation Committee will recommend that
Mr. Saunders' compensation increase back to $10,000 per month. As of August 31,
2007 we had paid Mr. Saunders $75,000 of the $150,000 bonus that was due under
the terms of the agreement. Additionally, we are currently discussing possible
restructuring/payment terms of the accrued salary of $130,000 as of August 31,
2007 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 November 28, 2007, we had a total of 23,737,700 shares of common
stock, 7,773,998 shares of Series A Preferred Stock, 207 shares of Series B
Preferred Stock and 747,870 shares of our Series C Preferred Stock issued and
outstanding, which are our only issued and outstanding equity securities.
However, our 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 such class and except as otherwise required by Nevada law. (For
further information regarding the preferred stock see "Description of Securities
- - Series A Preferred Stock" and "Description of Securities - Series B Preferred
Stock" and "Description of Securities - Series C Preferred Stock".) At the date
of this Prospectus, each share of our Series A Preferred Stock and Series C
Preferred Stock is convertible into one share of common stock and each share of
our Series B Preferred Stock is convertible into a number of fully paid and
nonassessable shares of our common stock equal to the quotient of the
liquidation preference amount per share ($10,000) divided by the conversion
price, which initially is $1.15 per share, subject to certain adjustments, or
approximately 8,696 shares of common for each share of converted Series B
Preferred Stock.
The following table sets forth, as of November 28, 2007: (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.
45
Name and Address Amount and Nature of Beneficial Percentage
Ownership Of Voting of Securities (1)
- ------------------------------------------------ ------------------------------------- -------------------------------------
- ------------------------------------------------ ------------------------------------- -------------------------------------
Robert Saunders 10,025,000 (2) 29.44%
Chairman, President and CEO
5552 West Island Highway
Qualicum Beach, British Columbia
Canada V9K 2C8
Douglas C. MacLellan 1,123,333 (3) 3.30%
Vice Chairman
8324 Delgany Avenue
Playa del Ray, CA 90293
Mark Elenowitz 1,454,667 (4) (5) 4.27%
Director
400 Professional Drive
Suite 310
Gaithersburg, MD 20879
Dr. Robert Rooks 320,833 (6) 0.94%
Director
912 Pine Avenue
Huntington Beach, CA 90293
Ian Fraser 831,250 (7) (8) 2.44%
Director
3056 West 2nd Avenue
Vancouver, British Columbia
Canada V6T 1E9
Michael Boswell 1,100,500 (9) (10) 3.23%
Director and
Acting Chief Accounting Officer
400 Professional Drive
Suite 310
Gaithersburg, MD 20879
Victor Bolton 4,167 (11) 0.01%
Director
345-916 W. Broadway
Vancouver, BC V5Z 1K7
Darryl Horton 4,167 (12) 0.01%
Director
33568 Eagle Mountain Drive
Abbortsford, BC V3G 2X7
Vision Opportunity Master Fund, Ltd. 1,699,577 (13) 4.99%
20 West 55th St., 5th Floor
New York, NY 10019
46
All directors and officers as a group 14,863,917 43.64%
(8 persons)
(1) All Percentages have been rounded up to the nearest one hundredth of
one percent and such percentage is based upon the amount of
outstanding our common stock and preferred stock, on an as converted
basis. The percentage assumes in the case of each shareholder listed
in the above list that all warrants or options held by such
shareholder that are exercisable currently or within 60 days were
fully exercised by such shareholder, without the exercise of any
warrants or options held by any other shareholders.
(2) In addition to his stock ownership, Mr. Saunders was granted 300,000
five-year nonqualified stock options on August 17, 2007 that vest on a
1/12 monthly basis over a twelve month period beginning on the grant
date. The exercise price of the options is $1.21, which represents
110% of the closing price of our common stock on August 17, 2007. As
of November 28, 2007, only 3/12 of these options have vested, but an
additional 2/12 will vest within 60 days from such date.
(3) In addition to his stock ownership, Mr. MacLellan was granted 200,000
five-year nonqualified stock options on August 17, 2007 that vest on a
1/12 monthly basis over a twelve month period beginning on the grant
date. The exercise price of the options is $1.21, which represents
110% of the closing price of our common stock on August 17, 2007. As
of November 28, 2007, only 3/12 of these options have vested, but an
additional 2/12 will vest within 60 days from such date.
(4) Mr. Elenowitz is a 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.
(5) In addition to his stock ownership, Mr. Elenowitz was granted 520,000
five-year nonqualified stock options on August 17, 2007 that vest on a
1/12 monthly basis over a twelve month period beginning on the grant
date. The exercise price of the options is $1.21, which represents
110% of the closing price of our common stock on August 17, 2007. As
of November 28, 2007, only 3/12 of these options have vested, but an
additional 2/12 will vest within 60 days from such date.
(6) In addition to his stock ownership, Dr. Rooks was granted 50,000
five-year nonqualified stock options on August 17, 2007 that vest on a
1/12 monthly basis over a twelve month period beginning on the grant
date. The exercise price of the options is $1.21, which represents
110% of the closing price of our common stock on August 17, 2007. As
of November 28, 2007, only 3/12 of these options have vested, but an
additional 2/12 will vest within 60 days from such date.
(7) Mr. Fraser is a 100% shareholder of One Way Grill Limited, which owns
800,000 shares of our voting stock. Therefore, Mr. Fraser beneficially
owns 800,000 shares of our voting stock.
(8) In addition to his stock ownership, Mr. Fraser was granted 75,000
five-year nonqualified stock options on August 17, 2007 that vest on a
1/12 monthly basis over a twelve month period beginning on the grant
date. The exercise price of the options is $1.21, which represents
110% of the closing price of our common stock on August 17, 2007. As
of November 28, 2007, only 3/12 of these options have vested, but an
additional 2/12 will vest within 60 days from such date.
(9) Mr. Boswell and his wife jointly own Invision, LLC, which owns 38,000
47
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.
(10) In addition to his stock ownership, Mr. Boswell was granted 390,000
five-year nonqualified stock options on August 17, 2007 that vest on a
1/12 monthly basis over a twelve month period beginning on the grant
date. The exercise price of the options is $1.21, which represents
110% of the closing price of our common stock on August 17, 2007. As
of November 28, 2007, only 3/12 of these options have vested, but an
additional 2/12 will vest within 60 days from such date.
(11) Mr. Bolton was granted 10,000 five-year nonqualified stock options on
August 17, 2007 that vest on a 1/12 monthly basis over a twelve month
period beginning on the grant date. The exercise price of the options
is $1.21, which represents 110% of the closing price of our common
stock on August 17, 2007. As of November 28, 2007, only 3/12 of these
options have vested, but an additional 2/12 will vest within 60 days
from such date.
(12) Mr. Horton was granted 10,000 five-year nonqualified stock options on
August 17, 2007 that vest on a 1/12 monthly basis over a twelve month
period beginning on the grant date. The exercise price of the options
is $1.21, which represents 110% of the closing price of our common
stock on August 17, 2007. As of November 28, 2007, only 3/12 of these
options have vested, but an additional 2/12 will vest within 60 days
from such date.
(13) Vision owns 2,204,296 shares of common stock, 5,238,333 shares of
common stock issuable upon conversion of their Series A Convertible
Preferred Stock, 1,495,740 shares of common stock issuable upon
conversion of their Series B Convertible Preferred Stock, 747,870
shares of common stock issuable upon conversion of their Series C
Convertible Preferred Stock and 230,630 shares of common stock
received as dividends. However, based upon the terms of the preferred
stock, Vision may not convert its preferred stock if on any date, it
would be deemed the beneficial owner of more than 4.99% of the then
outstanding shares of our common stock. In addition to the shares
listed in the table, Vision holds warrants to purchase up to
19,787,758 shares of our common stock, but based upon the terms of
these warrants, Vision cannot exercise them if on any date, it would
be deemed the beneficial owner of more than 4.99% of the then
outstanding shares of our common stock. However, Vision can elect to
waive the cap upon 61 days notice to us, except that during the 61 day
period prior to the expiration date of their warrants, they can waive
the cap at any time but a waiver during such period will not be
effective until the expiration date of the warrant.
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
48
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
TriPoint. Louis Taubman, our outside corporate and securities counsel also
indirectly owns an interest (30%) in TriPoint. Our Board recently approved the
Compensation Committee's recommendation of a flat rate $15,000 per month fee,
which shall be reduced to $7,500 per month until our cash flow position
improves, for the legal services Louis Taubman provides us. The Board also
approved the recommendation of a flat rate $15,000 per month fee, which shall be
reduced to $7,000 per month until our cash flow position improves, for the
financial advisory services and Acting CFO type services TriPoint and Michael
Boswell, respectively, provide us. Additionally, our corporate offices in
Gaithersburg, Maryland are currently provided by Tripoint Holdings, LLC, the
parent company of Tripoint, at no cost to us.
Island Scallops, our wholly owned subsidiary, recently transferred 100%
ownership of RKS Laboratories, Inc. to Robert Saunders, our Chairman, CEO and
President. RKS is a Vancouver research and development that is working towards
developing superior strains of scallops (developed by Island Scallops and known
as the Pacific Scallop) with beneficial traits such as higher meat yield and
rapid growth. Island Scallops agreed to transfer its ownership of RKS in
consideration for the grant to Island Scallops by RKS and Robert Saunders of a
right of first refusal to commercialize any intellectual property developed by
RKS. Island Scallops has the right to acquire or use any intellectual property
from RKS at RKS' cost, in perpetuity or until such time as RKS shall cease to
exist. Between June 2006 and August 2007, Island Scallops agreed to loan RKS a
total of approximately $82,000 under eight non-interest bearing notes that are
secured by all of RKS' assets and are due on August 31, 2008.
DESCRIPTION OF SECURITIES
Our authorized capital consists of 100,000,000 shares of common stock,
$.0001 par value per share, and 10,000,000 shares of preferred stock, $.001 par
value per share. As of November 28, 2007, there were outstanding 23,737,700
shares of our common stock outstanding, 7,773,998 shares of our Series A
Preferred Stock, 207 shares of our Series B Preferred Stock and 747,870 shares
of our Series C Preferred Stock outstanding.
COMMON STOCK
The holders of common stock are entitled to one vote for each share
49
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
and 220 shares of our authorized preferred stock as Series B Convertible
Preferred Stock and 1,000,000 shares of our authorized preferred stock as Series
C Convertible Preferred Stock.
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
50
volume weighted average price (VWAP) of our common stock for such date on the
OTC Bulletin Board for the 20 trading days immediately preceding the date the
dividend payment is due, but in no event less than $0.65. Dividends on the
Series A Preferred Stock are cumulative, accrue and are payable semi-annually.
Dividends on the Series A Preferred Stock are prior and in preference to any
declaration or payment of any distribution on any outstanding shares of junior
stock. So long as any shares of Series A Preferred Stock are outstanding, we
will not declare, pay or set apart for payment any dividend or make any
distribution on any junior stock (other than dividends or distributions payable
in additional shares of junior stock), unless at the time of such dividend or
distribution we shall have paid all accrued and unpaid dividends on the
outstanding shares of Series A Preferred Stock.
Conversion. At any time on or after the issuance date, the holder of
any such shares of Series A Preferred Stock may, at the holder's option, elect
to convert all or any portion of the shares of the Series A Preferred Stock held
by such person into a number of fully paid and nonassessable shares of common
stock equal to the quotient of (i) the liquidation preference amount ($0.75) of
the shares of Series A Preferred Stock being converted plus any accrued but
unpaid dividends divided by (ii) the conversion price, which initially is $0.75
per share, subject to certain adjustments.
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
51
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.
Series B Preferred Stock
Our Board of Directors of has designated 220 shares of our authorized
preferred stock as Series B 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 B Preferred
Stock and except as otherwise required by Nevada law, the Series B 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 B 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 B 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 B Preferred Stock vote separately as
a class. The common stock into which the Series B 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 B Preferred Stock.
Dividends. The holders of record of shares of Series B 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 6% 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 B Preferred Stock are cumulative, accrue and are payable semi-annually.
Dividends on the Series B 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 B Preferred Stock are outstanding, we
52
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 B Preferred Stock.
Voluntary Conversion. At any time on or after the issuance date, the
holder of any such shares of Series B Preferred Stock may, at the holder's
option, elect to convert all or any portion of the shares of the Series B
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 ($10,000) of the shares of Series B Preferred
Stock being converted plus any accrued but unpaid dividends divided by (ii) the
conversion price, which initially is $1.15 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 B Preferred Stock or to issue a new preferred
stock certificate representing the number of shares of Series B 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 B
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.
Mandatory Conversion. Any and all outstanding shares of Series B
Preferred Stock on January 16, 2012 shall automatically and without any action
on the part of the holder thereof, convert into a number of fully paid and
nonassessable shares of common stock equal to the quotient of (i) the
Liquidation Preference Amount of the number of shares of Series B Preferred
Stock being converted on such date divided by (ii) the conversion price, which
initially is $1.15 per share, subject to certain adjustments. Such mandatory
conversion shall only take place however, if (i) the registration statement
providing for the resale of shares of the common stock issuable upon conversion
of the Series B Preferred Stock is effective and has been effective, without
lapse or suspension of any kind, for a period 60 consecutive calendar days, or
the shares of common stock into which the Series B Preferred Stock can be
converted may be offered for sale to the public pursuant to Rule 144(k) under
the Securities Act of 1933, as amended, (ii) trading in the common stock shall
not have been suspended by the Securities and Exchange Commission or the OTC
Bulletin Board (or other exchange or market on which the common stock is
trading), and (iii) we are in material compliance with the terms and conditions
of the Certificate of Designation of the Rights and Preferences of the Series B
Preferred Stock and other transaction documents creating same. Notwithstanding
the foregoing, the Mandatory Conversion Date will be extended if certain events
occur, including events such as a lapse in the effectiveness of the registration
statement registering the Series B Preferred Stock or the delisting of such
stock from the then current principal exchange on which such security is traded.
53
The conversion price of the Series B 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 B Preferred Stock then outstanding shall be entitled to receive, out of
our assets available for distribution to its stockholders, an amount equal to
$10,000 per share or the liquidation preference amount, of the Series B
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 B 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 B Preferred Stock,
then all of said assets will be distributed among the holders of the Series B
Preferred Stock and the other classes of stock ranking pari passu with the
Series B 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 B Preferred Stock shall be equal to a ratably
proportionate amount of the liquidation payment with respect to each outstanding
share of Series B 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 B
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 B 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 B Preferred Stock will not be entitled to any
further participation as such in any distribution of our assets.
Series C Preferred Stock
Our Board of Directors of has designated 1,000,000 shares of our
authorized preferred stock as Series C 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 C Preferred
Stock and except as otherwise required by Nevada law, the Series C 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 C 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 C 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 C Preferred Stock vote separately as
a class. The common stock into which the Series C 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 C Preferred Stock.
54
Dividends. The holders of record of shares of Series C 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 6% 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 C Preferred Stock are cumulative, accrue and are payable semi-annually.
Dividends on the Series C 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 C 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 C Preferred Stock.
Voluntary Conversion. At any time on or after the issuance date, the
holder of any such shares of Series C Preferred Stock may, at the holder's
option, elect to convert all or any portion of the shares of the Series C
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 ($1.20) of the shares of Series C Preferred Stock
being converted plus any accrued but unpaid dividends divided by (ii) the
conversion price, which initially is $1.20 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 C Preferred Stock or to issue a new preferred
stock certificate representing the number of shares of Series C 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 C
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.
Mandatory Conversion. Any and all outstanding shares of Series C
Preferred Stock on November 5, 2012 shall automatically and without any action
on the part of the holder thereof, convert into a number of fully paid and
nonassessable shares of common stock equal to the quotient of (i) the
Liquidation Preference Amount of the number of shares of Series C Preferred
Stock being converted on such date divided by (ii) the current conversion price.
Such mandatory conversion shall only take place however, if (i) the registration
55
statement providing for the resale of shares of the common stock issuable upon
conversion of the Series C Preferred Stock is effective and has been effective,
without lapse or suspension of any kind, for a period 60 consecutive calendar
days, or the shares of common stock into which the Series C Preferred Stock can
be converted may be offered for sale to the public pursuant to Rule 144(k) under
the Securities Act of 1933, as amended, (ii) trading in the common stock shall
not have been suspended by the Securities and Exchange Commission or the OTC
Bulletin Board (or other exchange or market on which the common stock is
trading), and (iii) we are in material compliance with the terms and conditions
of the Certificate of Designation of the Rights and Preferences of the Series C
Preferred Stock and other transaction documents creating same. Notwithstanding
the foregoing, the Mandatory Conversion Date will be extended if certain events
occur, including events such as a lapse in the effectiveness of the registration
statement registering the Series C Preferred Stock or the delisting of such
stock from the then current principal exchange on which such security is traded.
The conversion price of the Series C 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 C Preferred Stock then outstanding shall be entitled to receive, out of
our assets available for distribution to its stockholders, an amount equal to
$1.20 per share or the liquidation preference amount, of the Series C 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 C 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 C Preferred Stock, then
all of said assets will be distributed among the holders of the Series C
Preferred Stock and the other classes of stock ranking pari passu with the
Series C 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 C Preferred Stock shall be equal to a ratably
proportionate amount of the liquidation payment with respect to each outstanding
share of Series C 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 C
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 C 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 C Preferred Stock will not be entitled to any
further participation as such in any distribution of our assets.
WARRANTS
2006 Series A-D and E-H Warrants
56
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, however the E-H Warrants may only be exercised
once the holder exercises his/her Series J Warrant, which have all now been
exercised. As of November 28, 2007 there were 20,307,220 2006 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 restricted 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 2006 Warrants and the number of shares of
common stock purchasable upon exercise of the 2006 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 2006 Warrants, we shall not effect the
exercise of any Warrants, and no person who is a holder of any 2006 Warrant
shall have the right to exercise his/her 2006 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. However, the holder is
entitled to waive this cap upon 61 days notice to us.
No fractional shares of common stock issuable upon exercise of the 2006
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 2006 Warrants expire at the close of business on the fifth
anniversary of the date of issuance.
2007 Series A-C and D-F Warrants
57
Each 2007 A-C Warrant allows its holder to purchase one share of common
stock for $1.41, $2.30, $2.60 respectively, subject to adjustment, until six
years after the date of issuance , however the D-F Warrants may only be
exercised once the holder exercises his/her Series J Warrant. Pursuant to the
November 2007 financing, as described elsewhere in this Registration Statement,
some of the D-F Warrants we issued pursuant to the January 2007 financing were
exchanged for the following warrants: a Series A-C Warrant, each of which allows
its holder to purchase one share of common stock for $1.56, $2.45, $2.75
respectively, subject to adjustment, until five years after the date of
issuance; and, a Series D-F Warrant, each of which have the same pricing and
term as the A-C Warrants, however the D-F Warrants may only be exercised once
the holder exercises his/her Series J Warrant. As of November 28, 2007 there
were 3,156,648 of the January 2007 Warrants outstanding and 2,243,610 of the
November 2007 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 2007 Warrants through a cashless exercise
using the following formula:
X = Y - (A)(Y)
-----
B
Where X = the number of restricted 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 2007 Warrants or, if only a portion
of the 2007 Warrant is being exercised, the portion of the
2007 Warrant being exercised.
A = the exercise price of the 2007 Warrant.
B = the closing bid price of one share of our common stock.
The exercise price of the 2007 Warrants and the number of shares of
common stock purchasable upon exercise of the 2007 Warrants are subject to
adjustment upon the occurrence of certain events. Such events include
recapitalizations or consolidations, combinations of our common stock and
dividends payable in our common stock.
Pursuant to the terms of the Warrants we issued in the January 2007
financing, we shall not effect the exercise of any such Warrants, and no person
who is a holder of any Warrant shall have the right to exercise them, 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.
However, the holder is entitled to waive this cap upon 61 days notice to us.
This limit was reduced to 4.99% for the Warrants we issued in the November 2007
financing and in addition to being able to waive the cap upon 61 days notice to
us, during the 61 day period prior to the expiration date of the November 2007
warrants, the holders can waive the cap at any time during such period, but a
waiver during such period will not be effective until the expiration date of
such warrants.
No fractional shares of common stock issuable upon exercise of the 2007
Warrants will be issued in connection with any exercise, but in lieu of such
58
fractional shares, we shall round the number of shares to be issued upon
exercise up to the nearest whole number of shares.
The January 2007 Warrants and the November 2007 Warrants expire at
the close of business on the sixth or fifth anniversary of the date of issuance
respectively.
January 2007 Series J Warrants
Each January 2007 J Warrant allows its holder to purchase one share of
common stock for $1.30, subject to adjustment, until one year after the date of
issuance. As of November 28, 2007 there were 304,347 January 2007 J Warrants
outstanding.
The exercise price of the January 2007 J Warrants and the number of
shares of common stock purchasable upon exercise of such 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 January 2007 J Warrants, we shall not
effect the exercise of any Warrants, and no person who is a holder of any
January 2007 J Warrant shall have the right to exercise such 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.
However, the holder is entitled to waive this cap upon 61 days notice to us.
No fractional shares of common stock issuable upon exercise of the
January 2007 J 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 January 2007 J Warrants expire at the close of business on the
first anniversary of the date of issuance.
November 2007 Series J Warrants
Each November 2007 J Warrant allows its holder to purchase one share of
common stock for $1.30, subject to adjustment, until one year after the date of
issuance. As of November 28, 2007 there were 747,870 November2007 J Warrants
outstanding.
Pursuant to the terms of the November 2007 J Warrants, we shall not
effect the exercise of any such Warrants, and no person who is a holder of any
November 2007 J Warrant shall have the right to exercise his/her November 2007 J
Warrants, to the extent that after giving effect to such exercise, such person
would beneficially own in excess of 4.99% of the then outstanding shares of our
common stock. However, the holder is entitled to waive this cap upon 61 days
notice to us, except that during the 61 day period prior to the expiration date
of these warrants, the cap can be waived at any time but the waiver will not be
effective until the expiration date.
No fractional shares of common stock issuable upon exercise of the
November 2007 J 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.
59
The 2007 J 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 on such stock in the foreseeable future. On June 30, 2006, we issued
22,860 shares of common stock to the Series A Preferred shareholders from our
April 12 and May 30, 2006 financings as payment of the semi-annual dividend and
on December 31, 2006, we issued 138,565 shares of common stock to Series A
Preferred shareholders from our April 12, May 30, 2006, June 30, 2006 and July
11, 2006 financings as payment of the semi-annual dividend. We have not paid any
dividends to our Series B preferred shareholders. Further description of our
preferred stock dividend policies are described above in the description of our
Series A Preferred Stock and Series B Preferred Stock.
REGISTRATION RIGHTS
In connection with the issuance of the Series A Preferred Stock and
2006 Warrants issued on April 12, 2006, May 30, 2006, June 30, 2006 and July 11,
2006, we filed a registration statement with the Securities and Exchange
Commission registering for resale the shares of common stock issuable upon the
exercise of the 2006 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.
In connection with the issuance of the Series B Preferred Stock and
2007 Warrants issued on January 16, 2007, we agreed to file this registration
statement with the Securities and Exchange Commission to register for resale the
shares of common stock issuable upon the exercise of the 2007 Warrants and
conversion of the Series B Preferred Stock by February 14, 2007. We also agreed
to register the shares of common stock underlying the placement consultant
warrants we issued pursuant to that same financing.
In connection with the issuance of the Series C Preferred Stock and
November 2007 Warrants issued on November 5, 2007, we agreed to file a
registration statement with the Securities and Exchange Commission to register
for resale the shares of common stock issuable upon the exercise of the November
2007 Warrants and conversion of the Series C Preferred Stock on or before
December 5, 2007. 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 2470 Saint Rose Pkwy, Suite 304, Henderson, NV 89074, 702.818.5898, Fax
702.974.1444.
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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 December 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.
High Low
------- ------
Quarter ended December 31, 2004 $0.25 $0.25
Quarter ended March 31, 2005 $0.30 $0.25
Quarter ended June 30, 2005 $0.55 $0.30
Quarter ended August 31, 2005 $1.95 $0.52
Quarter ended November 30, 2005 $1.80 $1.45
Quarter ended February 28, 2006 $1.64 $1.10
Quarter ended May 31, 2006 $1.45 $0.80
Quarter ended August 31, 2006 $1.70 $1.20
Quarter ended November 30, 2006 $1.85 $1.01
Quarter ended February 28, 2007 $1.70 $1.01
Quarter ended May 31, 2007 $1.70 $1.01
Quarter ended August 31, 2007 $1.65 $1.05
At November 28, 2007, the closing bid price of the common stock was
$1.01 and we had approximately 56 record holders of our common stock, 13 record
holders of our Series A Preferred Stock, 2 record holders of our Series B
Preferred Stock and 1 record holder of our Series C Preferred Stock. This number
excludes any estimate by us of the number of beneficial owners of shares held in
street name, the accuracy of which cannot be guaranteed.
We have not paid cash dividends on any class of common equity since
formation and we do not anticipate paying any dividends on our outstanding
common stock in the foreseeable future.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table provides information as of August 31, 2007 with
respect to compensation plans (including individual compensation arrangements)
under which our securities are authorized for issuance:
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- --------------------- ------- ------------------------ ----- ------------------------- --- ---------------------------
Plan Category Number of securities Weighted average Number of securities
to be issued upon exercise price of remaining available for
exercise of outstanding options, future issuance under
outstanding options, warrants and rights equity compensation plans
warrants and rights (excluding securities
reflected in column (a))
(a) (b) (c)
- --------------------- ------------------------ ------------------------- ---------------------------
Equity Compensation 2,962,000 $1.26 4,038,000*
plans approved by
security holders
Equity compensation N/A N/A N/A
plans not approved
by security holders
Total 2,962,000 $1.26 4,038,000*
- --------------------- ------- ------------------------ ----- ------------------------- --- ---------------------------
*As of January 1 of each year, commencing with the year 2006 and ending
with the year 2008, the aggregate number of shares available for granting Awards
under the Equity Plan shall automatically increase by a number of Shares equal
to the lesser of (x) 5% of the total number of Shares then outstanding or (y)
1,000,000.
On April 18, 2007 our board of directors authorized the issuance of
190,000 options to purchase our common stock to 19 employees pursuant to the
2005 Equity Incentive Plan. The options vest on April 18, 2008. Each option is
exercisable for a period of five years from the vesting date and has an exercise
price of $1.25.
On August 17, 2007, our board of directors authorized the issuance of
2,090,000 options to purchase our common stock to 19 of our employees, directors
and consultants pursuant to the "Edgewater Foods International 2005 Equity
Incentive Plan." The options vest on August 17, 2008. Each option is exercisable
for a period of five years from the vesting date and has an exercise price of
$1.21 respectively.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
62
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 first quarter of our 2007 fiscal year, we started harvesting the
remaining balance of our 2004 year class of scallops and completed transferring
our 2005 year-class scallops that were still maturing in our tenured growing
sites and joint venture locations, to final stage large grow-out nets on our
farm sites. During the third quarter of our 2007 fiscal year, we started
harvesting our 2005 year-class scallops, continued moving our 2006 scallop crop
into final large grow-out nets at our tenure (farm) sites and started the spawn
of our 2007 year-class. We refer to the year-class of scallops based on when the
scallops were spawned. Generally, the harvest occurs approximately 22 to 24
months after spawning of the scallops. Originally, we planned to ear-hang our
entire 2005 scallop crop and subsequent year-classes, but after inspection of
growth rates of the 2004 ear-hung crops and an analysis of the labor costs of
ear-hanging versus lantern-style netting, we decided to use nets for the final
grow-out stage of the 2005 crop and subsequent classes.
During the third quarter of 2007, harvest and sales of our 2005 scallop class
started slower than expected as we worked to develop improved sales and
marketing efforts as well as our continuing efforts to improve our processing
and handling facilities. These issues coupled with handling and harvesting
problems associated with our 2004 ear-hung scallops (during the first and second
quarters of 2007) resulted in lower than anticipated revenues during 2007.
In June 2007, we hired marketing consultants with over 40 years of combined
service in the seafood sales and distribution industry. Traditionally, we have
sold live scallops within the Pacific Northwest market. Our seafood sale and
distribution consultants have began to introduce new product lines of fresh meat
and a new unique frozen on the half-shell product that is generating significant
interest. We are currently in the process of expanding our live scallop
distribution network into Hong Kong and the western United States to up to an
additional 15,000 lbs. per week in the near future. We are also in the process
of introducing fresh scallop meat into high end restaurants in Toronto and
Montreal and frozen on the half-shell product into the eastern United States and
Canada. In 2008, we expect our overall product mixture to consist of 40% live
scallops, 30% fresh meat, 30% frozen on the half-shell and in 2009 and
thereafter increase the frozen on the half-shell to 50%, and the remainder of
30% live and 20% fresh.
Management believes that these new marketing efforts, coupled with the recently
completed processing plant will begin yielding significant revenue increases
starting as early as first quarter of 2008 and continuing thereafter. The
completed processing plant supplies us with an improved processing facility and
will provide us with several important advantages, including a significantly
larger inventory holding and handling area and the ability to mitigate future
weather related harvest delays to our sales. We believe that this will lead to
expedited sale processes in the upcoming months. In addition, recent experience
63
gained from harvesting and sorting scallops on the new longline systems should
allow for greater future harvesting rates. Additionally, we plan on generating
additional near term revenues via the sale of scallop and possibly other
shellfish seed.
During the harvesting of our 2005 and sorting of our 2006 scallops classes, we
were able to review our mortality rates and update our class size projections.
Based on this review, we expect to bring as many 2 million 2005 year class
scallops to market over the next twelve months and harvest over 1 million 2006
year class scallops starting in the fall of 2008. Originally, we believed that
our 2006 spawning would yield between 5 and 10 million scallops at full
maturity/harvest. However, mortality rates were at the higher end of our
projections due to the handling and sorting learning curve associated with the
roll-out of our new longline and anchor system. Additionally, problems
associated with the timing of moving scallops to large nets (also known as
"ocean timing") and the density (i.e. number of scallops per net level)
contributed to additional mortality problems. We anticipate that survival rates
for the future classes, starting with the 2007 scallop class, will significantly
improve due to the addition of more lines and anchors, better spacing and
sorting within each lantern net, experience gained from the sorting and farming
of both the 2005 and 2006 year classes and lessons learned on ocean timing and
scallop density during the handling of our 2006 scallop class.
During the third quarter of our 2007 fiscal year, we began spawning our 2007
scallop year-class. Due to improved hatchery technology and infrastructure (due
to improvements from recent capital investments) and lessons learned from the
2006 spawn, we were able to increase early stage survival rates. As of August
2007, at least 100 million scallops had reached 2 mm size in our onshore
hatchery ponds. We recently began to move these scallops into grow-out nets at
our farm sites and will continue to do so in the coming months. Based on the
recent lessons learned and improved farm infrastructure, we anticipate that the
2007 spawning will yield up to 20 million scallops at full maturity/harvest. In
fact, we are already noticing significant gains in animal survival rates and
individual scallop size in the 2007 class as compared to the 2006 class at a
similar point in its development. In addition, we plan to hold up to 5 million
scallops (from 2007 spawning) in our onshore ponds until February 2008 as
reserve scallops. We expect that at least 2.5 million of these scallops will
eventually reach harvest size.
The use of DNA based family analysis that started in early 2000 and will
continue through 2008, with the goal of breeding high meat yield scallops, began
showing results in the harvest of our 2004 scallop class. Average weight per
scallop increased from 150-180 grams to approximately 225-250 grams --
representing an increase of over 20% from the previous year. Management believes
that the improved meat yield will allow us to continue to demand higher scallop
prices per animal. Also, the Pacific scallop, farmed by us, continues to prove
itself highly disease resistant, with up to a 95% survival rate during the
grow-out phase.
As a result of the above, we believe that the remaining 2005 scallop-class will
produce at least $3.0 million of gross revenue over the next twelve months.
Although we originally anticipated that the harvest of our 2006 scallop class
would eventually result in total gross revenue of up to $14.0 million over the
twelve month period beginning in April 2008, we now believe the gross revenue
from the harvest of the 2006 scallop class will only result in up to $2.0
million gross revenue over a much shorter period beginning in the fall of 2008
due to the higher than expected mortality rates and problems with handling of
long lines discussed above. Based on our current projections for the 2007
scallop class, we believe this year's class could produce more than $40.0
64
million over the life of its harvest. Although the 2006 class is expected to
produce less revenue than originally expected, the improving survival rates of
the 2007 class coupled with the short harvest time of 2006 class is expected to
maintain our overall revenue levels within range of our original projections
over the next 24 to 36 months. In 2007, our cost of goods sold increased more
rapidly than our overall revenues. Part of this increase was attributable to
extreme circumstances related to costs associated with handling problems with
our 2004 ear-hang scallop class and initial operations in our improved
processing plant. In future years, we expect this trend to reverse (as the many
of the reasons for the increased cold of goods sold were unique to this fiscal
year) and to have our sales increase significantly faster than our cost of goods
sold. As such, we expect our margins to improve in future years.
If our mortality rates are better than our current projections, our revenues
from the 2005, 2006 and 2007 scallop class could be higher; conversely, if our
mortality rates are worse than we anticipate our revenues for this period could
be lower than we anticipate. In addition, changes in the anticipated growth
rates, projected harvesting cycles and large fluctuations in the price of
scallops or the US-Canadian exchange rate could impact our current projections.
LIQUIDITY AND CASH RESOURCES
At August 31, 2007, we had a cash balance of approximately $1,657,000. We
originally expected to reach positive operating cash flow during the second half
of our 2007 fiscal year, but slower than expected harvest rates and handling and
harvesting problems resulted in lower than expected revenues. As a result of
recent processing improvements, experience gained in 2007 and new marketing
efforts, we now expect to achieve operating positive cash flow in first half of
2008. During the year ending August 31, 2007, we completed one private equity
financing and had investors exercise various warrants that resulted in net
proceeds of approximately $3,075,000. During the year ending August 31, 2006, we
relied on four private equity financings that resulted in net proceeds of
approximately $5,140,000. These 2006 and 2007 financings contain warrants which
if fully exercised, could raise approximately an additional $49,350,000. To
date, exercises of these warrants resulted in net proceeds of approximately
$1,200,000; accordingly, if all of the remaining warrants from the 2006 and 2007
financings are exercised, we could receive an additional $48,150,000. The
exercise of the warrants is, however, to a large extent dependent upon the price
of our stock in the public market. As a result, we cannot guarantee when any of
the warrants will be exercised, if at all and, as a result, the proceeds from
the exercise of the warrants may not be available to us should we require
additional financing or ever. Prior to the completion of the private equity
financings in 2006, our initial expansion had been largely funded by a short
term note with a maximum limit of approximately $1,451,000. Previously, we have
also relied on short term loans from certain shareholders to assist with our
working capital needs and to meet short term cash requirements. We used a
portion of the 2006 private equity financing to repay these short term loans and
as a result we were able to deploy the bulk of the proceeds from our financing
toward our business strategy.
SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the
65
acquired entities since their respective dates of acquisition. All significant
inter-company amounts have been eliminated.
Cash and equivalents
Cash and equivalents include cash, bank indebtedness, and highly liquid short
term market investments with terms to maturity of three months or less. The
Company considers all highly liquid investments with original maturities of 90
days or less to be cash equivalents. The Company maintains its cash balances
primarily in on financial institution, which exceeded federally insured limits
by$1,561,136 at August 31, 2007. The Company has not experienced any losses, in
such accounts and believes it is not exposed to any significant credit risk on
cash and cash equivalents.
Accounts receivable
Accounts receivable is presented net of allowance for doubtful accounts. The
allowance for doubtful accounts reflects estimates of probable losses in
accounts receivable. The allowance is determined based on balances outstanding
for over 90 days at the period end date, historical experience and other current
information.
Loans receivable
Loans receivable is presented net of an allowance for loan losses, as necessary.
The loans are written off when collectibility becomes uncertain.
Inventory
We maintain inventories of raw materials for our aquaculture products, of
biomass (inventory of live aquaculture product being actively cultivated), and
of finished goods (aquaculture product ready for sale).
Inventories are reported at the lesser of cost or estimated net realizable
value. Biomass and finished goods includes direct and reasonably attributable
indirect production costs related to hatchery, cultivation, harvesting, and
processing activities. Carrying costs per unit are determined on a weighted
average basis.
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.
66
Property, plant, and equipment
Property and equipment are carried at cost, less accumulated depreciation.
Depreciation is calculated by using the straight-line method for financial
reporting and accelerated methods for income tax purposes. The recovery
classifications for these assets are listed as follows:
Years
------------------
Headend Facility and Fiber Infrastructure 20
Manufacturing Equipment 3-7
Furniture and Fixtures 2-7
Office Equipment 5
Leasehold Improvements Life of lease
Property and Equipment 5
Vehicles 5
Expenditures for maintenance and repairs are charged against income as incurred
whereas major improvements are capitalized.
Impairment of long-lived assets
We monitor the recoverability of long-lived assets, including property and
equipment and intangible assets, based upon estimates using factors such as
expected future asset utilization, business climate, and undiscounted cash flows
resulting from the use of the related assets or to be realized on sale. Our
policy is to write down assets to the estimated net recoverable amount, in the
period in which it is determined likely that the carrying amount of the asset
will not be recoverable.
Government assistance
Government assistance we receive, such as grants, subsidies, and tax credits, is
recorded as a recovery of the appropriate related expenditure in the period that
the assistance is received.
We have received government assistance in the form of loans, for which repayment
is may not be required if we fail to meet sufficient future revenue levels to
repay these loans based on a percentage of gross sales for certain products over
a defined period of time. If we receive any such assistance, it is initially
recorded as a liability, until such time as all conditions for forgiveness are
met, and is then recognized as other income in that period.
Farm license costs
We must pay annual license costs in respect to government-granted tenures that
it holds, which give us the right to use certain offshore ocean waters for the
purpose of aquaculture farming. Such license costs are recognized as an expense
when incurred.
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Research and development costs
Development costs include costs of materials, wages, and reasonably attributable
indirect costs incurred by us which are directly attributable to the development
of hatchery techniques for sablefish and shellfish, these costs are expensed
when incurred.
Research costs are expensed when incurred.
Income taxes
We calculate our provision for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 (Accounting for Income Taxes) ("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 there is persuasive evidence of a
contract, the product has been delivered or the services have been provided to
the customer, the sales price is fixed or determinable, and collectibility is
reasonably assured.
Our revenue is derived principally from the sale of scallops we produce or
purchase from third parties, and from the sale of seed and farm supplies to
other aquaculture farms.
Cost of goods
Cost of goods sold consists primarily of farming, harvesting and processing
costs associated with the growth, transfer and sales preparation of our products
(principally scallops). These costs consist primarily of salaries and benefits
and allocated overhead costs for consulting and support personnel engaged in the
farming, harvesting and processing of our products. All costs are recognized at
time of delivery.
Financial instruments
The carrying amount of our financial instruments, which include cash, accounts
receivable, loans receivable, bank indebtedness, accounts payable and accrued
liabilities, short term debt and long term debt approximate fair value. It is
management's opinion that we are not exposed to significant interest, currency
or credit risk arising from these financial instruments unless otherwise noted.
Derivative financial instruments
68
In connection with the sale of debt or equity instruments, we may sell options
or warrants to purchase our common stock. In certain circumstances, these
options or warrants may be classified as derivative liabilities, rather than as
equity. Additionally, the debt or equity instruments may contain embedded
derivative instruments, such as embedded derivative features, which in certain
circumstances may be required to be bifurcated from the associated host
instrument and accounted for separately as a derivative instrument liability.
We account for all derivatives financial instruments in accordance with SFAS No.
133. Derivative financial instruments are recorded as liabilities in the
consolidated balance sheet, measured at fair value. When available, quoted
market prices are used in determining fair value. However, if quoted market
prices are not available, we estimate fair value using either quoted market
prices of financial instruments with similar characteristics or other valuation
techniques.
The identification of, and accounting for, derivative instruments is complex.
Our derivative instrument liabilities are re-valued at the end of each reporting
period, with changes in the fair value of the derivative liability recorded as
charges or credits to income, in the period in which the changes occur. For
options, warrants and bifurcated embedded derivative features that are accounted
for as derivative instrument liabilities, we estimate fair value using either
quoted market prices of financial instruments with similar characteristics or
other valuation techniques. The valuation techniques require assumptions related
to the remaining term of the instruments and risk-free rates of return, our
current common stock price and expected dividend yield, and the expected
volatility of our common stock price over the life of the option. The
identification of, and accounting for, derivative instruments and the
assumptions used to value them can significantly affect our financial
statements.
Derivative financial instruments that are not designated as hedges or that do
not meet the criteria for hedge accounting under SFAS No. 133 are recorded at
fair value, with gains or losses reported currently in earnings. All derivative
financial instruments held by us at August 31, 2007 were not designated as
hedges.
Foreign exchange
The functional currency of our foreign subsidiaries is the local foreign
currency. All assets and liabilities denominated in foreign currencies are
translated into U.S. dollars at the exchange rate prevailing on the balance
sheet date. Revenues, costs and expenses are translated at average rates of
exchange prevailing during the period. Translation adjustments resulting from
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.
69
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off-balance sheet arrangements that have or are reasonably
likely to have a current or future effect on our financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources that is material to our investors.
INVESTMENTS IN TENURES AS COMPARED TO ESTIMATED MARKET VALUE OF TENURES
We currently carry our investment in Island Scallops' tenures at $3,770. 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
24 months suggest that the current market value is approximately $10,000 to
$25,000 (CDN) per acre. Based on listings of tenures on the coast of British
Columbia, discussions with local shellfish growers and individuals from the BC
Assets and Land Corporation, and an independent appraisal (commissioned by
Island Scallops) that recently estimated the value of our roughly 1018 acres of
tenures, the value is estimated to be approximately $8,600,000. If the proposed
expansion of two of our tenures is approved, the estimated market value of our
overall tenures would increase to roughly $10,600,000. The estimated market
value is based on the size, location and whether they are beach or deepwater in
nature. However, given the variable nature of the shellfish tenures market, the
actual value that we receive from the sale of a tenure or a partial tenure could
vary significantly from these estimated values.
Although we cannot determine the exact amount we would ultimately receive from
the sale of our tenure(s), based upon the information stated above we expect to
receive more than the carrying cost ($3,770) from such sale. Accordingly, the
carrying cost of our tenures is not indicative of their actual value. This
analysis indicates our cash generating capabilities after considering
investments in capital assets necessary to maintain and enhance existing
operations.
COMPARISON OF RESULTS FOR THE FISCAL YEAR ENDED AUGUST 31, 2007, TO THE FISCAL
YEAR ENDED AUGUST 31, 2006.
Revenues. Revenues for the fiscal year ended August 31, 2007, were approximately
$657,000. We had revenues of approximately $528,000 for the fiscal year ended
August 31, 2006. This is an increase of approximately $129,000 or 24%. The
increase in our revenue was mainly the result of an increase in the sales of our
own scallops. In fact, sales of our own scallops increased by more than 281%.
Previously, our increase in sales was the result of an increase in oyster and
scallop seed sales and increased joint venture sales. As was the case in 2006,
70
management continued its emphasis on the development and production of larger
scallop crops. Management believes that our emphasis on expansion of future
crops will yield a significant increase in revenues starting in 2008 and beyond.
Gross profit (loss). Gross loss for the year ended August 31, 2007, was
approximately $379,000, a increase of approximately $331,000 as compared to
gross loss of roughly $48,000, for the year ended August 31, 2006. The increase
in the amount of gross loss for 2007 (as compared to 2006) was mainly
attributable to management's continued focus on the expansion and development of
larger scallop crops and larger scallop yields for future years. Part of this
increase was attributable to extreme circumstances related to costs associated
with handling problems with our 2004 ear-hang scallop class. We do not expect
these problems to continue in future years. Our cost of sales also increased due
to higher processing plant and trucking costs as we began to establish a larger
sales effort. In the future, we expect our sales to increase more rapidly that
these costs and margins to quickly improve. We continued to focus resources on
maintaining, developing and tending to our scallop crops and believe that we
have already seen the initial benefits in increased sales of our own scallops
and that we will continue to see additional benefits from our efforts in
developing larger crops in the first quarter of 2008 and beyond.
General and administrative. General and administrative expenses for the fiscal
year ended August 31, 2007, were approximately $1,222,000. Our general and
administrative expenses were approximately $512,000 for the fiscal year ended
August 31, 2006. This is an increase of approximately $710,000 or 109%. Our
increase in general and administrative expenses for the year ended August 31,
2007 was attributable to costs associated with establishing, building, and
supporting our infrastructure and included various consulting costs, legal and
accounting fees compensation paid as result of our recent financing, overhead,
realized stock compensation, stock option expenses and salaries. We anticipate
that these costs may continue to slightly rise as we continue to expand our
operations. However, we believe that we now have the necessary general and
administrative staff in place to maintain our expansion into scallop crops of 30
million and beyond.
Stock compensation expense. During the year ended August 31, 2007, we had stock
compensation expense of approximately $62,000. The expense was for outside
seafood sale and distribution consultants who we hired to help develop new sales
and marketing programs. During the year ended August 31, 2006, we had stock
compensation expense of approximately $183,000. The expense was for two
consulting groups who would provide services to us. As such, we incurred a stock
compensation expense of approximately $183,000 for year ended August 31, 2006.
Other income (expense), net. Interest expense for the year ended August 31, 2007
was approximately $16,000. Interest expense for the year ending August 31, 2006
was approximately $696,000. The decrease in interest expense was mainly due to
the repayment of a large short term note in the late 2006. Other income for the
year ended August 31, 2007 was approximately $167,000 as opposed to other income
of approximately $45,000 for the year ending August 31, 2006. The increase in
other income was mainly the result of a one time gain of approximately $122,000
related to the forgiveness of a third-party debt in 2007. For the year ended
August 31, 2007, we recognized a one-time gain of approximately $5,827,000 which
was related to the change in fair value of warrants issued to 10 institutional
and accredited investors in conjunction with preferred stock. We recognized a
loss of approximately $2,666,000 which was related to the change in the fair
71
value of warrants issued to 10 institutional and accredited investors in
conjunction with preferred stock financings on April 12, May 30, June 30 and
July 11 and the market price of the common stock underlying such warrants at
August 31, 2006.
As a result, other income for the year ended August 31, 2007 was approximately
$5,978,000 as compared to other expense of approximately $3,316,000 for the year
ended August 31, 2006. This increase was primarily attributed to loss associated
with the change in fair value of the recently issued warrants and interest
expense related to the extension of a former bridge financing loan. This
increase was primarily attributed to gain associated with the reclassification
of certain liabilities associated with warrants issued to investors in our
Series A and B Preferred Stock financings and the resultant change in fair value
of the warrants following the reclassification (See Foot Note 12 to our
Financial Statements "Reclassification of Warrant Liabilities Associated with
Series A and Series B Preferred Financings.").
Net profit (loss). As a result of the above, the net income for the year ended
August 31, 2007, was approximately $3,538,000 as compared to a net loss of
approximately $4,235,000 for the year ended August 31, 2006.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
We have had no disagreements with our certified public accountants with
respect to accounting practices or procedures or financial disclosure.
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 $88,925. Since it is our position that
the purchasers breached their agreements with Island Scallops, we have no
intention of seeking a settlement of this matter at this time. We are unaware of
any formal proceedings that may have been commenced by either of these two
purchasers in regard to any claims that they may have.
Other than as set forth herein, we are not a party to any material
legal proceeding and to our knowledge, no such proceeding is currently
contemplated or pending.
EXPERTS
The financial statements included in the Prospectus have been audited
by LBB & Associates, Ltd., LPP, independent certified public accountants to the
72
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
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.
73
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Edgewater Foods International, Inc.
Qualicum Beach, British Columbia, Canada
We have audited the accompanying consolidated balance sheet of Edgewater Foods
International, Inc. (the "Company") as of August 31, 2007, and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for each of the years in the two-year period ended August 31, 2007. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Edgewater Foods
International, Inc. as of August 31, 2007, and the results of its operations and
its cash flows for each of the years in the two-year period ended August 31,
2007 in conformity with accounting principles generally accepted in the United
States of America.
As discussed in Note 19 to the consolidated financial statements, the Company's
absence of significant revenues, recurring losses from operations, and its need
for additional financing in order to fund its projected loss in 2008 raise
substantial doubt about its ability to continue as a going concern. The 2007
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ LBB & Associates Ltd., LLP
- ------------------------------
LBB & Associates Ltd., LLP
Houston, Texas
October 28, 2007
F-1
EDGEWATER FOODS INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEET
AUGUST 31, 2007
2007
------------
ASSETS
Current assets:
Cash $ 1,656,868
Accounts receivable, net 73,423
Inventory 1,827,513
Other current assets 61,242
------------
Total current assets 3,619,046
Property, plant and equipment, net 2,963,234
Loans receivable, related party 82,260
Investments in other assets 3,770
------------
Total assets $ 6,668,310
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short term debt $ 110,800
Current portion of long term debt 462,306
Accounts payable and accrued liabilities 721,292
------------
Total current liabilities 1,294,398
Long term debt, net current portion 526,299
------------
Total liabilities 1,820,697
------------
Stockholders' Equity
Series A Preferred stock, par $0.001, 10,000,000 7,774
authorized, 7,773,998 issued and outstanding
Series B Preferred stock, par $0.001, 100 --
authorized, 207 issued and outstanding
Common stock, par $0.0001, 100,000,000 authorized, 2,371
23,712,700 issued and outstanding
Additional paid in capital 22,471,315
Accumulated deficit (17,528,303)
Accumulated other comprehensive income (loss) - (105,544)
foreign exchange adjustment
------------
Total stockholders' equity 4,847,613
------------
Total liabilities and stockholders' equity $ 6,668,310
============
See accompanying summary of accounting policies and notes to financial
statements
F-2
EDGEWATER FOODS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED AUGUST 31, 2007 and 2006
2007 2006
------------ ------------
Revenue $ 657,065 $ 527,623
Cost of goods sold 1,036,313 576,069
------------ ------------
Gross profit (loss) (379,248) (48,446)
------------ ------------
Expenses:
General and administrative expenses 1,222,184 512,370
Salaries and benefits 319,008 323,186
------------ ------------
Total operating expenses (1,541,192) (835,556)
------------ ------------
Loss from operations (1,920,440) (884,002)
------------ ------------
Other income (expense):
Interest (expense), net (15,876) (695,889)
Change in fair value of warrants 5,826,631 (2,665,571)
Other income (expense) 167,144 45,185
------------ ------------
Total other income (expense), net 5,977,899 (3,316,275)
------------ ------------
Net income (loss) 4,057,458 (4,200,277)
============ ============
Dividend on preferred stock (518,900) (34,709)
------------ ------------
Net income (loss) applicable to
common shareholders 3,538,558 (4,234,986)
Foreign currency translation 150,776 (85,917)
------------ ------------
Accumulated other comprehensive
income (loss) $ 3,689,334 $ (4,320,903)
============ ============
Net income (loss) per Share
Basic $ 0.16 $ (0.20)
Diluted $ 0.11 $ (0.20)
Weighted average shares outstanding
Basic 22,228,633 20,969,400
Diluted 32,273,888 20,969,400
See accompanying summary of accounting policies and notes to financial
statements
F-3
EDGEWATER FOODS INTERNATIONAL
CONSOLIDATED STATEMENT OF STOCKHOLDERS'
EQUITY FOR THE YEAR ENDED AUGUST 31, 2007
Preferred Stock
Series A Series B Common Stock
---------------------------------------------------------------------------------
Number Value Number Value Number Value
----------- ----------- ----------- ----------- ----------- -----------
Balance at August 31, 2005 -- -- -- -- 20,585,400 2,059
Comprehensive loss
Net income (loss)
Foreign
Total comprehensive loss
Common stock cancelled -- -- -- -- (150,000) (15)
Common stock issued for services -- -- -- -- 525,000 52
Common stock issued for dividends -- -- -- -- 22,860 2
Preferred Series A Stock issued in
connection with financing 7,887,999 7,888 -- -- -- --
Value Assigned to Warrants -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Balance at August 31, 2006 7,887,999 7,888 -- -- 20,983,260 2,098
=========== =========== =========== =========== =========== ===========
Comprehensive loss
Net income (loss)
Foreign
Total comprehensive loss
Conversion of Series A Preferred Stock (302,801) (303) -- -- 302,801 30
Common stock issued for dividends -- -- -- -- 309,839 31
Preferred Series B Stock issued in
connectionwith financing -- -- 207 -- -- --
Value Assigned to Series B Warrants -- -- -- -- -- --
Issue of Common and Series A preferred
Stock for warrants, net of expense 188,800 189 -- -- 2,076,800 208
Stock Option expense -- -- -- -- -- --
Series A Warrants reclassification -- -- -- -- -- --
Series B Warrants reclassification -- -- -- -- -- --
Common Stock issues for Services -- -- -- -- 40,000 4
----------- ----------- ----------- ----------- ----------- -----------
Balance at August 31, 2007 7,773,998 7,774 207 -- 23,712,700 2,371
=========== =========== =========== =========== =========== ===========
Other
Comprehensive
Additional Income -
Paid in Foreign Exchange Accumulated
Capital Adjustment Deficit Total
----------- ----------- ----------- -----------
Balance at August 31, 2005 3,151,800 (170,403) (4,341,406) (1,357,950)
Comprehensive loss
Net income (loss) (4,200,277) (4,200,277)
Foreign (85,917) (85,917)
-----------
Total comprehensive loss
(4,286,194)
Common stock cancelled 15 -- -- --
Common stock issued for services 702,448 -- -- 702,500
Common stock issued for dividends 34,707 -- (34,709) --
Preferred Series A Stock issued in
connection with financing 5,132,136 -- -- 5,140,024
Value Assigned to Warrants (9,021,106) -- (10,472,774) (19,493,880)
----------- ----------- ----------- -----------
Balance at August 31, 2006 -- (256,320) (19,049,166) (19,295,500)
=========== =========== =========== ===========
Comprehensive loss
Net income (loss) 4,057,458 4,057,458
Foreign 150,776 150,776
-----------
Total comprehensive loss
4,208,234
Conversion of Series A Preferred Stock 273 -- -- --
Common stock issued for dividends 518,869 -- (518,900) --
Preferred Series B Stock issued in
connectionwith financing 1,864,502 -- -- 1,864,502
Value Assigned to Series B Warrants (2,099,044) -- (2,017,695) (4,116,739)
Issue of Common and Series A preferred
Stock for warrants, net of expense 1,189,042 -- 1,189,439
Stock Option expense 486,118 -- -- 486,118
Series A Warrants reclassification 17,364,812 -- -- 17,364,812
Series B Warrants reclassification 3,084,747 -- -- 3,084,747
Common Stock issues for Services 61,996 -- -- 62,000
----------- ----------- ----------- -----------
Balance at August 31, 2007 22,471,315 (105,544) (17,528,303) 4,847,613
=========== =========== =========== ===========
See accompanying summary of accounting policies and notes to financial
statements
F-4
EDGEWATER FOODS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED AUGUST 31, 2007 and 2006
2007 2006
------------ ------------
Cash flows from operating activities:
Net income (loss) $ 4,057,458 $ (4,200,277)
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization 351,092 123,008
Changes in fair value of warrants (5,826,630) 2,665,570
Stock option expense 486,118 --
Common stock issued for services 62,000 702,500
Gain on forgiveness of debt (158,728) --
Changes in current assets and liabilities:
Accounts receivable (34,573) (38,850)
Prepaid expenses (16,661) (16,061)
Other current assets -- (2,628)
Loan receivable (59,245) --
Inventory (575,462) (711,925)
Accounts payable 33,198 197,681
Bank overdrafts -- (38,538)
------------ ------------
Net cash used in operating activities (1,681,433) (1,319,520)
------------ ------------
Cash flows from investing activities:
Purchase of property, plant and equipment (1,408,247) (784,291)
------------ ------------
Net cash used in investing activities (1,408,247) (784,291)
------------ ------------
Cash flows from financing activities:
Net proceeds from line of credit -- (64,675)
Proceeds from short term debt 4,175 862,451
Payment of short term debt (199,384) (1,609,901)
Proceeds from long term debt 237,486 62,112
Payment of long term debt (259,688) (382,456)
Common stock issued for cash 1,083,239 --
Preferred stock issued for cash 1,970,702 5,140,024
------------ ------------
Net cash provided by financing activities 2,836,530 4,007,555
------------ ------------
Foreign currency translation effect 93,276 (87,562)
------------ ------------
Net increase (decrease) in cash (159,874) 1,816,182
F-5
Cash, beginning of period 1,816,742 560
------------ ------------
Cash, end of period $ 1,656,868 $ 1,816,742
============ ============
Supplemental disclosure of cash flow information
Net cash paid during year ended
Interest $ 31,533 $ 160,269
============ ============
Income taxes $ -- $ --
============ ============
Supplemental disclosure of non-cash flow
information
Issuance of stock for dividends $ 518,900 $ --
============ ============
Warrant liability incurred in connection with financing $ 4,116,739 $ --
============ ============
Reclassification of warrant liability to equity $(20,449,559) $ --
============ ============
See accompanying summary of accounting policies and notes to financial
statements
F-7
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.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the
acquired entities since their respective dates of acquisition. All significant
inter-company amounts have been eliminated.
Cash and equivalents
Cash and equivalents include cash, bank indebtedness, and highly liquid short
term market investments with terms to maturity of three months or less. We
consider all highly liquid investments with original maturities of 90 days or
less to be cash equivalents. We maintain our cash balances primarily in on
financial institution, which exceeded federally insured limits by $1,561,136 at
August 31, 2007. We have not experienced any losses, in such accounts and
believes it is not exposed to any significant credit risk on cash and cash
equivalents.
Accounts receivable
Accounts receivable is presented net of allowance for doubtful accounts. The
allowance for doubtful accounts reflects estimates of probable losses in
accounts receivable. The allowance is determined based on balances outstanding
for over 90 days at the period end date, historical experience and other current
information.
Loans receivable
Loans receivable is presented net of an allowance for loan losses, as necessary.
The loans are written off when collectibility becomes uncertain.
Inventory
We maintain inventories of raw materials for its aquaculture products, of
biomass (inventory of live aquaculture product being actively cultivated), and
of finished goods (aquaculture product ready for sale).
F-8
Inventories are reported at the lesser of cost or estimated net realizable
value. Biomass and finished goods includes direct and reasonably attributable
indirect production costs related to hatchery, cultivation, harvesting, and
processing activities. Carrying costs per unit are determined on a weighted
average basis.
At August 31, 2007, inventory consisted of the following:
Biomass (Scallops): $1,827,513
Reclassification
Certain amounts in the 2006 financial statements have been reclassified to
conform to the 2007 financial statement presentation.
Long term investments
Long term investments are recorded at cost. We review our investments
periodically to assess whether there is an "other than temporary" decline in the
carrying value of the investment. We consider whether there is an absence of an
ability to recover the carrying value of the investment by reference to
projected undiscounted future cash flows for the investment. If the projected
undiscounted future cash flow is less than the carrying amount of the asset, the
asset is deemed impaired. The amount of the impairment is measured as the
difference between the carrying value and the fair value of the asset.
Property, plant, and equipment
Property and equipment are carried at cost, less accumulated depreciation.
Depreciation is included with general and administrative expenses in the
accompanying statement of operations and calculated by using the straight-line
method for financial reporting and accelerated methods for income tax purposes.
The recovery classifications for these assets are listed as follows:
Years
------------------
Headend Facility and Fiber Infrastructure 20
Manufacturing Equipment 3-7
Furniture and Fixtures 2-7
Office Equipment 5
Leasehold Improvements Life of lease
Property and Equipment 5
Vehicles 5
Expenditures for maintenance and repairs are charged against income as incurred
whereas major improvements are capitalized.
F-9
Change in Depreciation Method
Effective September 1, 2006, as a result of management's evaluation of
long-lived depreciable assets, we adopted the straight-line method of
depreciation for all property, plant and equipment. Under the new provisions of
SFAS No. 154 "Accounting Changes and Error Corrections, a replacement of APB
Opinion No. 20 and FASB Statement No. 3," which becomes effective as of
September 1, 2006, a change in depreciation method is treated as a change in
estimate. The effect of the change in depreciation method will be reflected on a
prospective basis beginning September 1, 2006, and prior period results will not
be restated. As the results of management's evaluation indicated the current
estimated useful lives of our assets were appropriate, the depreciable lives of
property, plant and equipment will not be changed. We believe that the change
from the declining balance depreciation method to the straight-line method will
better reflect the pattern of consumption of the future benefits to be derived
from those assets being depreciated and will provide a better matching of costs
and revenues over the assets' estimated useful lives.
Impairment of long-lived assets
We monitor the recoverability of long-lived assets, including property, plant
and equipment and intangible assets, based upon estimates using factors such as
expected future asset utilization, business climate, and undiscounted cash flows
resulting from the use of the related assets or to be realized on sale. 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. At August 31, 2007 no indication of impairment was
present.
Government assistance
Government assistance we receive, such as grants, subsidies, and tax credits, is
recorded as a recovery of the appropriate related expenditure in the period that
the assistance is received.
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, if received, is initially recorded as a
liability, until such time as all conditions for forgiveness are met, and is
then recognized as other income in that period.
Farm license costs
We must pay annual license costs in respect to government-granted tenures that
it holds, 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 incurred by us which are directly attributable to the development
of hatchery techniques for sablefish and shellfish. These costs are expensed
when incurred.
F-10
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.
Cost of goods
Cost of goods sold consists primarily of farming, harvesting and processing
costs associated with the growth, transfer and sales preparation of our products
(principally scallops). These costs consist primarily of salaries and benefits
and allocated overhead costs for consulting and support personnel engaged in the
farming, harvesting and processing of our products. All costs are recognized at
time of delivery. Financial instruments
The carrying amount of our financial instruments, which includes cash, accounts
receivable, loans receivable, bank indebtedness, accounts payable and accrued
liabilities, short term debt, shareholder debt, and long term debt, approximate
fair value. It is management's opinion that we are not exposed to significant
interest, currency or credit risk arising from these financial instruments
unless otherwise noted.
Derivative Financial Instruments
In connection with the sale of debt or equity instruments, we may sell options
or warrants to purchase our common stock. In certain circumstances, these
options or warrants may be classified as derivative liabilities, rather than as
equity. Additionally, the debt or equity instruments may contain embedded
derivative instruments, such as embedded derivative features, which in certain
circumstances may be required to be bifurcated from the associated host
F-11
instrument and accounted for separately as a derivative instrument liability.
We account for all derivatives financial instruments in accordance with SFAS No.
133. Derivative financial instruments are recorded as liabilities in the
consolidated balance sheet, measured at fair value. When available, quoted
market prices are used in determining fair value. However, if quoted market
prices are not available, we estimate fair value using either quoted market
prices of financial instruments with similar characteristics or other valuation
techniques.
The identification of, and accounting for, derivative instruments is complex.
Our derivative instrument liabilities are re-valued at the end of each reporting
period, with changes in the fair value of the derivative liability recorded as
charges or credits to income, in the period in which the changes occur. For
options, warrants and bifurcated embedded derivative features that are accounted
for as derivative instrument liabilities, we estimate fair value using either
quoted market prices of financial instruments with similar characteristics or
other valuation techniques. The valuation techniques require assumptions related
to the remaining term of the instruments and risk-free rates of return, our
current common stock price and expected dividend yield, and the expected
volatility of our common stock price over the life of the option. The
identification of, and accounting for, derivative instruments and the
assumptions used to value them can significantly affect our financial
statements.
Derivative financial instruments that are not designated as hedges or that do
not meet the criteria for hedge accounting under SFAS No. 133 are recorded at
fair value, with gains or losses reported currently in earnings. All derivative
financial instruments we held as of August 31, 2007, were not designated as
hedges.
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 our
business.
F-12
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.
During the year ended August 31, 2007, four customers, Sea World Fisheries,
TriStar Seafood Supply Ltd., Port Hardy Seafood Ltd. and Lobsterman,
individually accounted for 17%, 13%, 12% and 12% or our revenues respectively,
and we therefore are materially dependent upon such customers. Our ongoing
operations are dependent on continued business from these customers.
Location risk
Most, if not all, of our aquaculture are concentrated in one growing region off
the coast of Vancouver Island, British Columbia. As such, if there were a major
environmental disaster, our ongoing operations could be materially impacted.
Stock-based compensation
We account for stock-based employee compensation arrangements using the fair
value method in accordance with the provisions of 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 periodically issue common stock for acquisitions and services rendered.
Common stock issued is valued at the estimated fair market value, as determined
by our management and board of directors. Management and the board of directors
consider market price quotations, recent stock offering prices and other factors
in determining fair market value for purposes of valuing the common stock. The
fair value of each option granted is estimated on the date of grant using the
Black-Scholes option-pricing model with the various weighted average
assumptions, including dividend yield, expected volatility, average risk-free
interest rate and expected lives
Basic and diluted net loss per share
Basic income or loss per share includes no dilution and is computed by dividing
net income or loss by the 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 (using the treasury stock method for
stock options and using the if-converted method for convertible notes), if
dilutive.
F-13
The following is a reconciliation of the numerators and denominators of the
basic and diluted net income per share computations (in thousands, except per
share data):
Year ending August 31,
2007
Numerator:
Net income $ 3,358,558
Denominator: --
Denominator for basic net income per share: 22,228,633
Weighted average dilutive potential common shares
Series A Preferred Stock 7,752,699
Series B Preferred Stock 1,114,574
Options and warrants 1,177,982
----------
Denominator for diluted net income per share 32,273,888
==========
Basic net income per share $0.16
Diluted net income per share $0.11
The computation of diluted net income per share for the fiscal year ended August
31, 2007, excludes the impact of options to purchase 2.86 million shares of
common stock and warrants to purchase 24.04 shares of common stock,
respectively, as such an impact would be anti-dilutive. The treasury stock
effect of options and warrants to purchase shares of common stock outstanding at
August 31, 2006 has not been included in the calculation of the net loss per
share as such effect would have been anti-dilutive. As a result of these items,
the basic and diluted loss per share for the year ending August 31, 2006 are
presented are identical.
Recent accounting pronouncements
During September 2006, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 108 ("SAB 108"), Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial
Statement. This SAB provides guidance on how the effects of the carryover or
reversal of prior year misstatements should be considered in quantifying a
current year misstatement. This interpretation is effective for the first fiscal
year ending after November 15, 2006. We do not expect the adoption of this
interpretation to have an impact on our financial position or results of
operations.
F-14
In December 2006, the FASB issued FASB Staff Position EITF 00-19-2, Accounting
for Registration Payment Arrangements ("FSP EITF 00-19-2"). FSP EITF 00-19-2
specifies that the contingent obligation to make future payments or otherwise
transfer consideration under a registration payment arrangement, whether issued
as a separate agreement or included as a provision of a financial instrument or
other agreement, should be separately recognized and measured in accordance with
FASB Statement No. 5, Accounting for Contingencies. A registration payment
arrangement is defined in FSP EITF 00-19-2 as an arrangement with both of the
following characteristics: (1) the arrangement specifies that the issuer will
endeavor (a) to file a registration statement for the resale of specified
financial instruments and/or for the resale of equity shares that are issuable
upon exercise or conversion of specified financial instruments and for that
registration statement to be declared effective by the US SEC within a specified
grace period, and/or (b) to maintain the effectiveness of the registration
statement for a specified period of time (or in perpetuity); and (2) the
arrangement requires the issuer to transfer consideration to the counterparty if
the registration statement for the resale of the financial instrument or
instruments subject to the arrangement is not declared effective or if
effectiveness of the registration statement is not maintained. FSP EITF 00-19-2
is effective for registration payment arrangements and the financial instruments
subject to those arrangements that are entered into or modified subsequent to
December 21, 2006. For registration payment arrangements and financial
instruments subject to those arrangements that were entered into prior to the
issuance of FSP EITF 00-19-2, this guidance is effective for financial
statements issued for fiscal years beginning after December 15, 2006, and
interim periods within those fiscal years. We do not expect the adoption of FSP
EITF 00-19-2 to have a material impact on our consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities ("SFAS 159") which permits entities
to choose to measure many financial instruments and certain other items at fair
value that are not currently required to be measured at fair value. SFAS 159
will be effective for us on September 1, 2008. We are currently evaluating the
impact of adopting SFAS 159 on our financial position, cash flows, and results
of operations.
Management has evaluated other recent accounting pronouncements and do not
believe that the adoption of these would have a material impact on our
consolidated financial statements.
NOTE 3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at August 31, 2007 consisted of the following:
Accumulated Net Book
Cost Amortization Value
-----------------------------------------
Land $ 237,534 $ -- $ 237,534
Buildings 953,896 (256,913) 696,983
Seawater piping and tanks 630,877 (308,509) 322,368
F-15
Boats and barge 398,551 (151,355) 247,196
Field equipment 2,425,922 (1,012,682) 1,413,240
Office equipment 19,556 (14,044) 5,512
Vehicles 66,466 (39,778) 26,688
Computer equipment 28,021 (14,308) 13,713
----------- ----------- -----------
$ 4,760,823 $(1,797,589) $ 2,963,234
=========== =========== ===========
Depreciation expense for the years ended August 31, 2007 and 2006 was
approximately $351,000 and 123,000, respectively.
NOTE 4. RELATED PARTY TRANSACTIONS
We have eight secured notes receivable from RKS Laboratories, Inc., a Vancouver
research and development company that is working towards developing superior
strains of scallops with beneficial traits such as higher meat yield and rapid
growth. (Robert Saunders, our President and CEO, owns 100% of RKS.) The first
seven non-interest bearing notes in the combined amount of $73,701 are secured
by all assets of RKS were originally due on or before various dates between June
15, 2007 and May 31, 2008, but were recently extended to August 31, 2008. The
eighth non-interest bearing note in the amount of $8,559 is also secured by all
assets of RKS is due on or before August 31, 2008. These amounts are included in
assets as loans receivable.
NOTE 5. INVESTMENTS IN TENURES
We carry our Investment in Tenures at $3,770 at August 31, 2007. This amount
represents the carrying costs of certain shellfish tenures acquired by Island
Scallops' subsidiary, 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 us and our
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 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 one of our shareholders totaling
$25,578 at August 31, 2007. We used these credit cards as a means of short term
financing and incur interest charges on such unpaid balances.
F-16
Included in accounts payable and accrued liabilities at August 31, 2007, is an
amount of $124,290 in respect to an agreement to purchase geoduck seed from us
(for additional information see Note 13 - Contingent Liabilities).
Included in accounts payable and accrued liabilities at August 31, 2007 is an
amount of $87,869 payments due and interest accrued in respect to the loan from
the National Research Council of Canada Industrial Research Assistance Program
(see Note 8 - Long Term Debt for additional information).
NOTE 7. SHORT TERM DEBT
Included in short-term debt at August 31, 2007, is estimated royalties of
$62,734 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 3% of revenues from Island Scallops as earned, on a quarterly basis,
throughout the period from December 1, 1992 to November 30, 2002. The third
party holds a first charge (or first lien) over our inventory (including
broodstock) in the amount of $326,909 in support of its royalty entitlement. The
third party has not taken further action to enforce payment of the arrears
liability. To date, we have accrued the entire balance of $62,734 as a current
liability and we plan to pay it with available funds in the near future.
Included in short-term notes payable at August 31, 2007, is an unsecured
non-interest bearing demand loan from an individual with a face value of $47,287
and no specific terms of repayment. However, the lender has informally requested
that the loan be repaid in full by October 6, 2008.
Included in short-term debt is an unsecured bank loan repayable at $490 per
month plus interest calculated at (Canadian) prime plus 3% per annum (9.25% as
of August 31, 2007), and is due October 23, 2007. At August 31, 2007, the
principal due is $779.
These consolidated financial statements formerly included a non-interest bearing
loan to Island Scallops from Industry Science and Technology Canada requiring
repayment equal to 0.5% of Island Scallops' gross scallop sales for each
preceding year. Per the terms of the loan, if we were unable to generate
sufficient revenues to repay the original amount of the loan by January 1, 2007,
the remaining balance would be forgiven. As such, the remaining balance of
approximately $159,000 was forgiven on January 1, 2007.
NOTE 8. LONG TERM DEBT
These consolidated financial statements include a Western Diversification
Program non-interest bearing loan to Island Scallops that requires repayment
equal to 12% of gross revenues from our scallop sales, payable semi-annually,
with no specified due date. In September 2006, we entered into a Settlement
Agreement with the Minister of Western Economic Diversification to amend the
repayment terms of our non-interest bearing loan of $597,103 (to Island
Scallops) with the Western Diversification Program. We agreed to repay the
$170,981 due as of August 31, 2006, in accordance with a payment schedule
beginning with a payment of $62,736 in September 2006 and continuing with
monthly payments of roughly $9,840 until August 15, 2007. The parties agreed
F-17
that the remaining balance of the $426,122 shall be repaid via quarterly
payments equal to the greater of $30,856 or 4% of the gross scallop sales
starting in the quarter beginning on June 1, 2007 and each quarter thereafter
until the balance is repaid. Under the terms of this agreement, the first
quarter payment was due on September 30, 2007. At August 31, 2007, the balance
due is $422,613, of which $131,963 is reflected in the current portion of long
term debt and the remaining balance of $290,650 is reflected as long term 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 revenues of Island Scallops until
the earlier of full repayment or December 1, 2012. The amount repayable is up to
150% of the original advance of $418,212, if repayment is before December 1,
2007. If at December 1, 2012, Island Scallops has not earned sufficient revenues
to be required to repay the original loan amount, the remaining portion of the
loan is to be forgiven. Amounts currently due at August 31, 2007, bear interest
at a rate of 1% per month. At August 31, 2007, Island Scallops is in arrears in
respect to the payment of these amounts. The National Council of Canada
Industrial Research Assistance Program has requested payment of the $87,869 that
they claim is owed under this loan agreement. As such, at August 31, 2007,
$87,869 is included in accounts payable and accrued liabilities and the
remaining full principal balance of $330,343 is reflected in the current portion
of long term debt. We are seeking to renegotiate the repayment terms.
These consolidated financial statements include Island Scallop's mortgage loan
repayable at $2,062 per month (currently interest only) calculated at 10.5%. The
loan is secured by a second charge on the real property of Island Scallops. At
August 31, 2007, the principal due is $235,649.
NOTE 9. SERIES B PREFERRED STOCK FINANCING
We completed a private equity financing of $2,070,000 on January 16, 2007, with
two accredited investors. Net proceeds from the offering are approximately
$1,864,500. We issued 207 shares of our Series B Preferred Stock, par value
$0.001 per share and stated value of $10,000 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 J Warrant, (v) Series D
Warrant, (vi) Series E Warrant, and (vii) Series F Warrant, each to purchase a
number of shares of common stock equal to fifty percent (50%) of the number of
shares of common stock issuable upon conversion of the purchaser's preferred
stock, except for the Series J Warrants, which shall entitle the investor to
purchase a number of shares of our common stock equal to one hundred percent
(100%) of the number of shares of common stock issuable upon conversion of the
purchaser's preferred stock. Each of the Warrants has a term of 6 years, except
for the Series J Warrants, which have a term of 1 year. Each share of the
preferred stock is convertible into a number of fully paid and nonassessable
shares of our common stock equal to the quotient of the liquidation preference
amount per share ($10,000) divided by the conversion price, which initially is
$1.15 per share, subject to certain adjustments, or approximately 8,696 shares
of common for each share of converted preferred stock. We issued a total of
7,200,345 Warrants.
In connection with this financing, we paid cash compensation to a placement
consultant in the amount of $165,600 and issued him placement consultant
warrants, exercisable for a period of three years from the date of issue. The
F-18
placement consultant's warrants allow him to purchase up to (i) 20 shares of
Series B Preferred Stock, and each of the following warrants, which are
identical to the warrants issued to the investors of the financing: (i) Series A
Warrant, (ii) Series B Warrant, (iii) Series C Warrant, (iv) Series D Warrant,
(v) Series J Warrant, (vi) Series E Warrant, and (vii) Series F Warrant, each to
purchase 90,004 shares of common stock, except for the Series J Warrants, which
shall entitle the Consultant to purchase 180,008 shares of common stock. The
placement consultant warrant is exercisable at a price of $1.15, for a period of
three years. The fees were recorded as a cost of capital.
The net proceeds from the January 16, 2007 financing are to be used for capital
expenditures necessary to expand our operations into clam farming in Morocco
(approximately $1.0 million and any remaining proceeds may be used for working
capital and general corporate purposes). We are currently conducting due
diligence on a North African based aquaculture company that farms shellfish
products in Morocco and pending the successful completion of such inquiry, may
acquire a majority ownership interest in the company. At the date of this
filing, we have not entered into any binding agreements for the purchase of such
company and may or may not do so depending on the results of our due diligence
investigation.
NOTE 10. SERIES A PREFERRED STOCK WARRANT LIABILITIES
The warrants that each investor received as a result of our April 12, May 30,
June 30 and July 11 Preferred Stock Financing contained a cashless exercise
provision that becomes effective one year after the original issuance date of
such warrants if our registration statement (that we are required to file under
the Series A Preferred Stock Financing's corresponding registration rights
agreement) is not then in effect by the date such registration statement was
required to be effective pursuant to the Registration Rights Agreement of the
Preferred Stock Financing or not effective at any time during the Effectiveness
Period (as defined in the Registration Rights Agreement) in accordance with the
terms of the Registration Rights Agreement. As such and in accordance with the
accounting guidelines under SFAS No. 133, we valued the warrants as a derivative
financial instrument and the corresponding liabilities were entered onto our
consolidated balance sheet, measured at fair value. We determined the fair value
of the warrants as follows as of April 12, 2006, May 30, 2006, June 30, 2006 and
July 11, 2006 (the issuance dates).
We used the Black Scholes option-pricing model with the following assumptions:
an expected life equal to the contractual term of the warrants (one, three or
five), underlying stock price of $1.10 (at April 12), $1.40 (at May 30), $1.35
(at June 30) and $1.40 (July 11) no dividends; a risk free rate of 4.91%, 4.90%
and 4.91%, which equals the one, three and five-year yield on Treasury bonds at
constant (or fixed) maturity (for those warrants issued on April 12), a risk
free rate of 4.99%, which equals three and five-year yield on Treasury bonds at
constant (or fixed) maturity (for those warrants issued on May 30), a risk free
rate of 4.71% and 4.70%, which equals the three and five-year yield on Treasury
bonds at constant (or fixed) maturity (for those warrants issued on June 30) and
a risk free rate of 4.71% and 4.70%, which equals the three and five-year yield
on Treasury bonds at constant (or fixed) maturity (for those warrants issued on
July 11); and volatility of 93%. Under the assumptions, the Black-Scholes option
pricing model yielded an aggregate value of approximately $19,494,000. We
performed the same calculations as of August 31, 2006, to revalue the warrants
as of that date. In using the Black Scholes option-pricing model, we used an
underlying stock price of $1.40 per share; no dividends; a risk free rate of
5.01%, 4.71% and 4.70%, which equals the one, three and five-year yield on
F-19
Treasury bonds at constant (or fixed); and maturity volatility of 93%. The
resulting aggregate allocated value of the warrants as of August 31, 2006
equaled approximately $22,160,000. The change in fair value of approximately
$2,666,000 was recorded for the period ended August 31, 2006.
We performed the same calculations as of November 30, 2006, to revalue the
warrants as of that date. In using the Black Scholes option-pricing model, we
used an underlying stock price of $1.50 per share; no dividends; a risk free
rate of 4.94%, 4.52% and 4.45%, which equals the one, three and five-year yield
on Treasury bonds at constant (or fixed); and maturity volatility of 100%. The
resulting aggregate allocated value of the warrants as of November 30, 2006
equaled approximately $24,928,000. The change in fair value of approximately
$2,768,000 was recorded for the period ended November 30, 2006.
We performed the same calculations as of February 21, 2007 (date of
reclassification of warrant liability, see Note 12 for additional information),
to revalue the warrants as of that date. In using the Black Scholes
option-pricing model, we used an underlying stock price of $1.15 per share; no
dividends; a risk free rate of 5.05%, 4.74% and 4.68%, which equals the one,
three and five-year yield on Treasury bonds at constant (or fixed); and maturity
volatility of 96%. The resulting aggregate allocated value of the warrants as of
February 21, 2007, equaled approximately $17,365,000. The change in fair value
(gain) of approximately $7,563,000 was recorded for the period ended February
21, 2007.
Upon the earlier of the warrant exercise or the expiration date, the warrant
liability will be reclassified into shareholders' equity. Until that time, the
warrant liability will be recorded at fair value based on the methodology
described above. Liquidated damages under the registration rights agreement will
be expensed as incurred and will be included in operating expenses.
NOTE 11. SERIES B PREFERRED STOCK WARRANT LIABILITIES
The warrants that each investor received as a result of our January 16, 2007
Series B Preferred Stock Financing contained a cashless exercise provision that
becomes effective one year after the original issuance date of such warrants if
our registration statement (that we are required to file under the Series B
Preferred Stock Financing's corresponding registration rights agreement) is not
then in effect by the required date or not effective at any time during the
Effectiveness Period (as defined in the Registration Rights Agreement). As such
and in accordance with the accounting guidelines under SFAS No. 133, we valued
the warrants as a derivative financial instrument and the corresponding
liabilities were entered onto our consolidated balance sheet, measured at fair
value. We determined the fair value of the warrants as follows as of January 16,
2007 (the issuance date):
We used the Black Scholes option-pricing model with the following assumptions:
an expected life equal to the contractual term of the warrants (one, three or
six), underlying stock price of $1.40 (at January 16), no dividends; a risk free
rate of 5.06%, 4.79% and 4.74%, which equals the one, three and six-year yield
on Treasury bonds at constant (or fixed) maturity and volatility of 93%. Under
the assumptions, the Black-Scholes option-pricing model yielded an aggregate
value of approximately $4,117,000.
We performed the same calculations as of February 2, 2007 (date of
reclassification of warrant liability, see Note 12 for additional information),
to revalue the warrants as of that date. In using the Black Scholes
option-pricing model, we used an underlying stock price of $1.15 per share; no
dividends; a risk free rate of 5.05%, 4.74% and 4.68%, which equals the one,
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three and six-year yield on Treasury bonds at constant (or fixed); and maturity
volatility of 96%. The resulting aggregate allocated value of the warrants as of
February 21, 2007, equaled approximately $3,085,000. The change in fair value
(gain) of approximately $1,033,000 was recorded for the period ended February
21, 2007.
Upon the earlier of the warrant exercise or the expiration date, the warrant
liability will be reclassified into shareholders' equity. Until that time, the
warrant liability will be recorded at fair value based on the methodology
described above. Liquidated damages under the registration rights agreement will
be expensed as incurred and will be included in operating expenses.
NOTE 12. RECLASSIFICATION OF WARRANT LIABILITIES ASSOCIATED WITH SERIES A AND
SERIES B PREFERRED FINANCINGS
The warrants that each investor received as a result of our April 12, May 30,
June 30 and July 11, 2006, Series A Preferred Stock Financing and our January
16, 2007 Series B Preferred Stock Financing contained a cashless exercise
provision that becomes effective one year after the original issuance date of
such warrants if our registration statements (that we are required to file under
the registration rights agreement for both financings) are not then in effect by
the date such registration statement was required to be effective pursuant to
the each Registration Rights Agreement of the Preferred Stock Financings or not
effective at any time during the Effectiveness Period (as defined in each of the
Registration Rights Agreements) in accordance with the terms of each of the
Registration Rights Agreement. As such and in accordance with the accounting
guidelines under SFAS No. 133 and ETIF Issue No. 00-19 (Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in a,
Company's Own Stock), we classified the warrants as a liability because the
cashless exercise provision did not specify whether the contract could be
settled via the delivery of unregistered shares of our common stock. As such and
per the terms of paragraph 14 of ETIF 00-19 (see below), we assumed net-cash
settlement and the warrants were classified as a derivative financial instrument
and the corresponding liabilities were entered onto our consolidated balance
sheet, measured at fair value. We determined the fair value of the warrants as
follows as of April 12, 2006, May 30, 2006, June 30, 2006, July 11, 2006 and
January 16, 2007 (the issuance dates) and we preformed the same calculation as
of May 31, August 31, November 30 and February 28 to revalue the warrants at the
end of each period (as described above in Notes 9 and 10). The change in fair
value was then recorded for each period.
On February 21, 2007, the cashless exercise provision for all warrants issued in
conjunction with both the Series A and Series B Preferred Stock financings was
modified to clarify that any shares issued in connection with the cashless
exercise will be "restricted." As a result, we determined that (per the
accounting guidelines under SFAS No. 133 and ETIF Issue No. 00-19) we are now
able to net-share settle the contract by delivery of unregistered shares and
that the warrant liability should be reclassified as permanent equity.
The initial fair value of the Series A warrant liability was determined to be
approximately $19,494,000 (with a current portion of approximately $1,225,000).
Since this value exceeded our additional paid in capital ("APIC") balance,
approximately $9,021,000 of the liability was allocated to APIC and the
remaining $10,472,000 was allocated to retained deficit. We made this decision
because the changes in the fair value of the warrants are marked through our
profit and loss.
F-21
The initial fair value of the Series B warrant liability was determined to be
approximately $4,117,000 (with a current portion of approximately $1,058,000).
Since this value exceeded our additional paid in capital ("APIC"), approximately
$2,099,000 of the liability was allocated to APIC and the remaining $2,018,000
was allocated to retained deficit. We made this decision because the changes in
the fair value of the warrants are marked through our profit and loss.
As described above, a portion of the fair value of the warrant liability was
allocated to APIC and the remaining balance was allocated to retained deficit.
Subsequent changes in the fair value of the warrants (at May 31, August 28,
November 30, and February 21) were marked through our profit and loss. Since the
terms of the cashless provision have been clarified and the warrants were
reclassified as equity, we reversed the liabilities and allocated approximately
$20,450,000 to APIC ($17,365,000 from the Series A financing warrants and
$3,085,000 from the Series B financing warrants).
NOTE 13. CONTINGENT LIABILITIES
Our wholly owned subsidiary, Island Scallops, entered into an agreement in 1998
with two parties, under which Island Scallops was to produce and sell geoduck
seed to the two parties. Island Scallops received advance payments from each of
the two parties in the 2002 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 $124,290, is
included in accounts payable and accrued liabilities.
Management's position is that the two parties violated the terms of the
agreement and we are therefore entitled to retain the balance of the deposits.
Per the terms of the original agreement, Island Scallops was entitled to make up
any shortfall in the product produced in the following year. Although product
was available and offered by Island Scallops in the following year, the two
parties refused to honor the terms of the agreement and would not accept the
product (to make up the shortfall) in the following year.
As of August 31, 2004, one of the two parties made claims that Island Scallops
owed it an amount totaling $88,925. This particular party believed that the
agreement required Island Scallops to deliver the product in year one and did
not allow Island Scallops to make up any shortfall with product produced in the
following year. The balance included in accounts payable and accrued liabilities
related to this party is $36,332.
Any additional liability to us, or any reduction of the currently recognized
liability, in respect to these deposits will be recorded at the time a
conclusion to this matter can be determined.
Neither we nor our wholly owned subsidiary maintain insurance covering the
replacement of our inventory. Consequently, we are exposed to financial losses
or failure as a result of this risk.
NOTE 14. INCOME TAXES
We did not provide any current or deferred United States federal, state or
foreign income tax provision or benefit for the period presented because we have
experienced operation losses since inception. We have provided a full valuation
F-22
allowance on the deferred tax asset, consisting primarily of unclaimed research
and development expenditures, because of uncertainty regarding our 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, 2007 are as follows:
August 31,
2007
---------------
Deferred tax asset attributable to:
Net operating loss carryover $ 1,967,312
Less, valuation allowance (1,967,312)
---------------
Total net deferred tax asset $ -
===============
We follow Statement of Financial Accounting Standards Number 109 (SFAS 109),
"Accounting for Income Taxes." SFAS No. 109 requires a valuation allowance, if
any, to reduce the deferred tax assets reported if, based on the weight of the
evidence, it is more likely than not that some portion or all of the deferred
tax assets will not be realized. Management has determined that a valuation
allowance of approximately $2,416,000 at August 31, 2007 is necessary to reduce
the deferred tax assets to the amount that will more than likely than not be
realized. The change in valuation allowance for 2007 and 2006 was approximately
$1,083,000 and $439,000 respectively.
At August 31, 2007, we had net operating loss carryforwards amounting to
approximately $2,491,000 for U.S. and Canadian tax purposes, respectively, that
expires in various amounts beginning in 2009 and 2009 in the U.S. and Canada,
respectively.
The federal statutory tax rate reconciled to the effective tax rate for 2006 is
as follows:
2007 2006
----------- -----------
Tax at U.S. statutory rate 34.0% 34%
State tax rate, net of federal benefits 0.0 0.0
Foreign tax rate in excess of U.S. statutory rate 17.6% 17.6%
Change in valuation allowance (51.6%) (51.6%)
----------- -----------
Effective tax rate 0.0% 0.0%
=========== ===========
NOTE 15. STOCK-COMPENSATION EXPENSE
On December 31, 2006, we issued 138,565 shares of common stock to the Series A
Convertible Preferred Stock holders. The number of shares issued was based on
the Dividend Payment at a rate of 8% per annum (subject to a pro rata
adjustment) of the Liquidation Preference Amount ($1,416,000 for the April 12
financing, $1,500,000 for the May 30 financing, $1,550,000 for the June 30
financing and $1,450,000 for the July 11 financing) payable in shares equal to
90% of the quotient of (i) the Dividend Payment divided by (ii) the average of
F-23
the VWAP for the twenty (20) trading days immediately preceding the date the
Dividend Payment is due, but in no event less than $0.65. As such, the shares
were valued at approximately $234,000 and the total aggregate value of the
transaction was recorded as a preferred stock dividend.
In June 2007, our wholly owned subsidiary, Island Scallops, Ltd. entered into a
Consulting Agreement with Pacific Crab Co., pursuant to which ISL will issue a
total of 100,000 shares of our common stock in exchange for consulting and
marketing services Pacific will provide to ISL. Pursuant to the agreement, ISL
issued 40,000 of such shares to Pacific when the Agreement was signed; the
remaining 60,000 shares will vest ratably (5,000 shares per month) at the
beginning of each month for each month during the term of the agreement, which
initially is twelve months. ISL also agreed that if certain goals are met within
the agreed upon timeframe, it will issue 15,000 shares to Pacific at such time
as the goals are reached, in which case the remaining 45,000 shares will
continue to vest as described above. The 40,000 shares issued were valued at
$1.55 per share, the closing bid of our common stock on the date of issue.
Therefore, total aggregate value of the transaction recognized by the company in
2007 was $62,000. Going forward the cost of these shares will be expense at
current market price as they are issued.
On June 30, 2007, we issued 137,685 shares of common stock to the investors of
our April 12, May 30, June 30 and July 11, 2006 financings as payment of the
semi-annual dividend (8% per annum) per the terms of the Certificate of
Designation of the Relative Rights and Preferences of the Series A Convertible
Preferred Stock. The number of shares issued was based on the dividend payment
at a rate of 8% per annum (subject to a pro rata adjustment) of the Liquidation
Preference Amount ($1,416,000 for the April 12 financing, $1,500,000 for the May
30 financing, $1,550,000 for the June 30 financing and $1,450,000 for the July
11 financing) payable in shares equal to 90% of the quotient of (i) the dividend
payment divided by (ii) the average of the VWAP for the 20 trading days
immediately preceding the date the dividend payment is due, but in no event less
than $0.65. As such, the shares were valued at approximately $228,000 and the
total aggregate value of the transaction was recorded as a preferred stock
dividend.
On June 30, 2007, we issued 33,589 shares of common stock to the investors of
our January 16, 2007 financing as payment of the semi-annual dividend (6% per
annum) per the terms of the Certificate of Designation of the Relative Rights
and Preferences of the Series B Convertible Preferred Stock (see Note 9 - Series
B Preferred Shares Financing for additional information on the Series B
Convertible Preferred Stock). The number of shares issued was based on the
dividend payment at a rate of 6% per annum (subject to a pro rata adjustment) of
the Liquidation Preference Amount ($1,416,000) payable in shares equal to 90% of
the quotient of (i) the dividend payment divided by (ii) the average of the VWAP
for the 20 trading days immediately preceding the date the dividend payment is
due, but in no event less than $0.65. As such, the shares were valued at
approximately $56,000 and the total aggregate value of the transaction was
recorded as a preferred stock dividend.
Stock Options
In August 2005, our Board of Directors approved the "Edgewater Foods
International 2005 Equity Incentive Plan." The Board of Directors reserved
5,000,000 shares of our common stock to be issued in the form of incentive
F-24
and/or non-qualified stock options for employees, directors and consultants to
Edgewater. As of August 31, 2006, our Board of Directors had authorized the
issuance of 282,000 options to employees.
In September 2006, we engaged PR Global Concept GBR to provide international
investor relations services. The initial term of the agreement was for two
years. Pursuant to the consulting agreement, we were to pay PR Global $5,000 per
month for the term of the agreement. As additional compensation, we originally
agreed to issue a total of 500,000 options to purchase our common stock in
quarter installments, the first 125,000 of which was to vest immediately upon
signing of the agreement and the remainder of which was to vest in three equal
amounts of 125,000 after 3 months, 12 months and the final installment, 15
months after the date of signing; the options are exercisable at strike prices
ranging from $1.40 to $2.25. The options were to be exercisable for a period of
three years from the date of the vesting.
In December 2006, we entered into an Amended and Restated Agreement with PR
Global Concept GBR. Under the terms of the amended agreement, PR Global was only
eligible to receive a total of 350,000 (as opposed to 500,000 in the original
agreement) options to purchase our common stock in the following installments:
25,000 options every 3 months after the date of the Amended Agreement for a
total of four installments; one installment of 125,000 options 18 months from
the date of the Amended Agreement; and, one installment of 125,000 options 24
months from the date of the Amended Agreement. The options issued in the first
four installments were to be exercisable at a strike price of $1.52 and the last
two installments were to be exercisable at a strike price of $2.25. The options
were to be exercisable for a period of three years from the date of the vesting.
Additionally, PR Global would no longer receive the $5,000 monthly payment; we
did, however, pay the one month owed to PR Global under the original agreement
when the Amended Agreement was signed. The Amended Agreement was otherwise
unchanged from the originally entered into agreement with PR Global. On January
12, 2007, however, we terminated our Amended and Restated Agreement with PR
Global and ended our relationship with the firm. As such, we rescinded the
350,000 options that were to be issued under the amended agreement and PR Global
is to receive no additional compensation.
On February 1, 2007, we issued Kitsilano Capital Corp. four 100,000 options to
purchase our common stock, pursuant to our Consulting Agreement with them. The
first option vests on May 1, 2007, the second on August 1, 2007, the third on
February 1, 2008, and the fourth on June 1, 2008, so long as Kitsilano continues
to provide services to us under the Consulting Agreement. Each option is
exercisable for a period of three years from the vesting date and has an
exercise price of $1.20, $1.40, $1.60 and $1.80 respectively. The shares
underlying the options have piggy-back registration rights that required us to
register the shares in our last registration statement. The options and the
shares underlying were issued in accordance with the exemption from the
registration provisions of the Securities Act of 1933, as amended, provided by
Section 4(2) of such Act for issuances not involving any public offering. To
date, we have incurred stock option expense of approximately $267,000 and will
incur an approximately an additional $84,000 through May 31, 2008. We used the
Black Scholes option-pricing model with the following assumptions: an expected
life equal to the contractual term of the options (one, three or six),
underlying stock price of $1.30 per share, no dividends; a risk free rate of
4.88%, which equals the one, three and six-year yield on Treasury bonds at
constant (or fixed) maturity and volatility of 100%.
F-25
On April 18, 2007, our board of directors authorized the issuance of 190,000
options to purchase our common stock to 19 employees, directors and consultants
pursuant to the "Edgewater Foods International 2005 Equity Incentive Plan." The
options vest on April 18, 2008. Each option is exercisable for a period of five
years from the vesting date and has an exercise price of $1.25 respectively. To
date, we have incurred stock option expense of approximately $76,000 and will
incur an approximately an additional $105,000 through May 31, 2008. We used the
Black Scholes option-pricing model with the following assumptions: an expected
life equal to the contractual term of the options (one, three or six),
underlying stock price of $1.25 per share, no dividends; a risk free rate of
4.65%, which equals the one, three and six-year yield on Treasury bonds at
constant (or fixed) maturity and volatility of 100%.
In August 17, 2007, our board of directors authorized the issuance of an
aggregate of 2,090,000 options to purchase our common stock to 19 of our
directors, employees and consultants pursuant to the "Edgewater Foods
International 2005 Equity Incentive Plan." The options vest on August 17, 2008.
Each option is exercisable for a period of five years from the vesting date and
has an exercise price of $1.21 respectively. To date, we have incurred stock
option expense of approximately $144,000 and will incur an approximately an
additional $1,582,000 through August 31, 2008. We used the Black Scholes
option-pricing model with the following assumptions: an expected life equal to
the contractual term of the options (one, three or six), underlying stock price
of $1.10 per share, no dividends; a risk free rate of 4.55%, which equals the
one, three and six-year yield on Treasury bonds at constant (or fixed) maturity
and volatility of 100%.
Stock option activity during the period ending August 31, 2007 was as follows:
Weighted Average
Number of Exercise Price
Shares
----------------------------------
Outstanding, August 31, 2005 282,000 $ 1.50
Granted -- --
Exercised -- --
Forfeited -- --
Expired -- --
----------------------------------
Outstanding, August 31, 2006 282,000 1.50
Granted 2,680,000 1.25
Exercised -- --
Forfeited -- --
Expired -- --
----------------------------------
Outstanding, August 31, 2007 2,962,000 $ 1.26
==================================
Exercisable, August 31, 2007 482,000 $ 1.42
==================================
F-26
At August 31, 2007, 200,000 of the exercisable options expire in May 2010,
62,000 of the exercisable options expire in August 2010 with the remaining
balance of 220,000 having an expiration date of August 2015. Warrant activity
during the period ending August 31, 2007 was as follows:
Weighted Average
Number of Exercise Price
Warrants
----------------------------------
Outstanding, August 31, 2005 -- --
Granted 22,207,487 $ 1.52
Exercised -- --
Forfeited -- --
Expired -- --
----------------------------------
Outstanding, August 31, 2006 22,207,487 1.52
Granted 8,144,365 1.87
Exercised 2,265,600 0.56
Forfeited -- --
Expired -- --
----------------------------------
Outstanding, August 31, 2007 28,086,252 $ 1.75
==================================
Exercisable, August 31, 2007 28,086,252 $ 1.75
==================================
NOTE 16. SERIES A PREFERRED STOCK CONVERSION AND WARRANT EXERCISE
On November 7, 2006, a holder of our series A preferred stock exercised their
right to convert 66,666 shares of our series A preferred stock into 66,666 share
of common stock. As such, we issued 66,666 shares of common stock and canceled
66,666 shares of our series A.
On May 8, 2007, a holder of our series A preferred stock exercised their right
to convert 30,000 shares of our series A preferred stock into 30,000 shares of
common stock. As such, we issued 30,000 shares of common stock and canceled
30,000 shares of our series A.
On May 10, 2007, a holder of our series A preferred stock exercised their right
to convert 500,000 shares of our series A preferred stock into 500,000 shares of
common stock. As such, we issued 500,000 shares of common stock and canceled
500,000 shares of our series A.
On May 12, 2007, a holder of our series A preferred stock exercised their right
to convert 70,800 shares of our series A preferred stock into 70,800 shares of
common stock. As such, we issued 70,800 shares of common stock and canceled
70,800 shares of our series A.
F-27
On April 12, 2007, we issued 1,354,667 shares of common stock to the investors
of our April 12, 2006 financing in connection with the exercise of 1,354,667
Series J warrants received by investor as part of the financing. We also issued
188,800 series A preferred shares and 188,800 shares of common stock to the
placement consultant from the April 12, 2006 financing in conjunction with the
exercise of 188,880 placement agent warrants and 188,800 series J warrants. We
received net proceeds of approximately $913,000 pursuant to the exercise of
these warrants.
On August 20, 2007, a holder of our series A preferred stock exercised their
right to convert 65,335 shares of our series A preferred stock into 65,335
shares of common stock. As such, we issued 65,335 shares of common stock and
canceled 65,335 shares of our series A.
On August 31, 2007, a holder of our series A preferred stock rescinded their
right to converting of 430,000 shares of our series A preferred stock into
430,000 shares of common stock. As such, we issued 500,000 shares of our series
A and canceled 430,000 shares of our common stock.
NOTE 17. COMMITMENTS AND CONTINGENCIES
Corporate Offices
For the fiscal year ended August 31, 2007, our U.S. corporate office was located
at 400 Professional Drive, Suite 310, Gaithersburg, Maryland 20878. This space
was provided on a rent free basis by one of our shareholders. As a result, the
Company did not recognize rental expense in the fiscal year.
Employment Agreements
We entered into an employment agreement with Mr. Robert Saunders as our Chairman
and President effective on June 29, 2005. Subsequently in August 2005, Mr.
Saunders was appointed CEO by our Board of Directors. Mr. Saunders will serve at
the pleasure of the Board of Director's. For serving as President, Mr. Saunders'
compensation will be US $60,000 per annum. Additionally, we agreed to grant Mr.
Saunders a signing bonus of US $150,000 to be paid on closing of at least US
$3,500,000 in third party financing and increase his compensation to $120,000
per annum if we receive at least US $5,000,000 in outside funding. After the
completion of our Preferred Stock Financing (see Note 13 - Preferred Shares
Financing for additional information on the Series A Convertible Preferred
Stock), Mr. Saunders was due the signing bonus of $150,000 and a monthly salary
of $10,000 per month beginning in August 2006. However, Mr. Saunders agreed to
reduce his monthly salary to $5,000 per month until such time that we become
significantly cash flow positive for its operations. As of August 31, 2007 we
had paid Mr. Saunders $75,000 of the $150,000 bonus that was due under the terms
of the agreement. Additionally, we are currently discussing possible
restructuring/payment terms of the accrued salary of $130,000 as of August 31,
2007 until such time that we become significantly cash flow positive for its
operations.
Marketing Consulting Agreements
F-28
In June 2007, our wholly owned subsidiary, Island Scallops, Ltd. ("ISL") entered
into a Consulting Agreement with Pacific Crab Co. (the "consultant') to develop
new markets and facilitate the sale and distribution of ISL's products. As
compensation for the consultant's marketing services, ISL shall pay the
consultant $12,500 per month for the next twelve months. In addition and
pursuant to the terms of the agreement, the Company will issue a total of
100,000 shares of our common stock (under an agreed upon schedule) in exchange
for consulting and marketing services Pacific will provide to ISL. (for
additional information on the distribution schedule see Note 15 - Stock
Compensation Expense).
NOTE 18. SUBSEQUENT EVENTS (UNAUDITED)
On October 31, we issued 25,000 shares of common stock to Pacific Crab Seafood
Company, Inc. as part of the 100,000 shares of our common stock that our Board
of Directors previously approved for the consulting and marketing services that
they will provide to us. The remaining 35,000 shares will be issued in equal
monthly installments of 5,000 shares during the remaining term of the agreement.
The shares were issued in accordance with the exemption from the registration
provisions of the Securities Act of 1933, as amended, provided by Section 4(2)
of such Act for issuances not involving any public offering.
We completed a private equity financing of $897,444 on November 5, 2007, with
one accredited investor. Net proceeds from the offering are approximately
$801,000. As part of this financing, the investor returned the Series J Warrant,
Series D Warrant, Series E Warrant and Series F Warrant that they received as a
result of our Series B financing completed on January 16, 2007. Pursuant to the
current financing, we issued 747,870 shares of our Series C Preferred Stock, par
value $0.001 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, (iv) Series J Warrant, (v) Series D Warrant, (vi) Series E Warrant, and
(vii) Series F Warrant, each to purchase a number of shares of common stock
equal to fifty percent (50%) of the number of shares of common stock issuable
upon conversion of the purchaser's preferred stock, except for the Series J
Warrants, which shall entitle the investor to purchase a number of shares of our
Series C Preferred Stock equal to one hundred percent (100%) of the number of
Series C Preferred Stock it received in the financing. Each of the Warrants has
a term of 5 years, except for the Series J Warrants, which have a term of 1
year. Each share of the preferred stock is convertible into one fully paid and
nonassessable share of our common stock at an initial conversion price of $1.20,
subject to adjustment. We are obligated to file a registration statement on or
before December 5, 2007 providing for the resale of the shares of common stock
issuable upon conversion of the preferred stock and the shares of common stock
underlying the Warrants and underlying the preferred stock issuable upon
exercise of the Warrants. In connection with the financing, our management
agreed not to sell any of our securities owned by them, their affiliates or
anyone they have influence over until the registration statement has been
effective for six months.
In connection with this financing, we paid cash compensation to a placement
consultant in the amount of approximately $72,000 and issued him placement
consultant warrants, exercisable for a period of three years from the date of
issue. The placement consultant's warrants allow him to purchase up to (i)
74,787 shares of Series C Preferred Stock, and each of the following warrants,
which are identical to the warrants issued to the investors of the financing:
(i) Series A Warrant, (ii) Series B Warrant, (iii) Series C Warrant, (iv) Series
F-29
D Warrant, (v) Series J Warrant, (vi) Series E Warrant, and (vii) Series F
Warrant, each to purchase 37,393 shares of common stock, except for the Series J
Warrants, which shall entitle the Consultant to purchase 74,787 shares of our
Series C Preferred Stock.
The net proceeds from the financing are to be used for working capital and
general corporate purposes.
NOTE 19. GOING CONCERN
Prior to the completion of our Preferred Stock Financing, working capital had
been primarily financed with various forms of debt. We have suffered operating
losses since inception in our efforts to establish and execute our business
strategy. As of August 31, 2007, we had a cash balance of approximately
$1,657,000. Although management believes that we have adequate funds to maintain
our business operations into the next fiscal year and/or until we become cash
flow positive, we continued to suffer operational losses in our 2007 fiscal
year. Until our operations are able to demonstrate and maintain positive cash
flows, we may require additional working capital to fund our ongoing operations
and execute our business strategy of expanding our operations. Based on these
factors, there is substantial doubt about our ability to continue as a going
concern.
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 20. FOREIGN OPERATIONS
The Company's share of net assets held outside the United States totaled
approximately $5,007,000 at August 31, 2007.
F-30
EDGEWATER FOODS INTERNATIONAL, INC.
--------------------------------
PROSPECTUS
--------------------------------
i
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 $1,400.96
Transfer Agent Fees $0.00
Legal Fees $20,000.00
Accounting Fees $3,500.00
Printing and Engraving Costs $0.00
Miscellaneous $5,000.00
-----------------------------
Total $29,900.96
=============================
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 100,000 shares of our restricted common stock
during the term of its agreement (25,000 per quarter), in consideration for
their services. The shares were valued at $1.45 per share, the closing bid price
for shares of our common stock on the date of the contract. 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.
On June 30, 2006 we issued 22,860 shares of common stock to the two
accredited investors of our April 12 and May 30, 2006 financings as payment of
the semi-annual dividend (8% per annum) per the terms of the Certificate of
Designation of the Relative Rights and Preferences of the Series A Convertible
Preferred Stock. The dividend shares were issued to these investors pursuant to
the exemption from registration provided by Section 4(2) of the Securities Act
for issuances not involving any public offering.
On December 31, 2006, we issued 138,565 shares of common stock to the
investors of our April 12, May 30, 2006, June 30, 2006 and July 11, 2006
financings as payment of the semi-annual dividend (8% per annum) per the terms
of the Certificate of Designation of the Relative Rights and Preferences of the
Series A Convertible Preferred Stock. The dividend shares were issued to these
investors pursuant to the exemption from registration provided by Section 4(2)
of the Securities Act for issuances not involving any public offering.
Pursuant to the financing we closed on January 16, 2007, we issued 207
shares of our series B preferred stock. The shares were issued to two accredited
investors pursuant to the exemption from registration provided by Section 4(2)
of the Securities Act for issuances not involving any public offering.
In connection with the January 16, 2007 financing, we issued the
placement consultant a placement consultant warrant, exercisable for a period of
three years from the date of issue with an exercise price of $1.15 per share.
The warrant allows the placement consultant to purchase up to (i) 20 shares of
Series B Preferred Stock, and each of the following warrants, which are
identical to the warrants issued to the investors of the financing: (i) Series A
Warrant, (ii) Series B Warrant, (iii) Series C Warrant, (iv) Series D Warrant,
(v) Series J Warrant, (vi) Series E Warrant, and (vii) Series F Warrant, each to
purchase 90,004 shares of common stock, except for the Series J Warrants, which
shall entitle the consultant to purchase 180,008 shares of common stock. The
iii
shares were issued in accordance with the exemption from the registration
provisions of the Securities Act of 1933, as amended, provided by Section 4(2)
of such Act for issuances not involving any public offering.
On February 1, 2007 we issued Kitsilano Capital Corp. four 100,000
options to purchase our common stock, pursuant to our Consulting Agreement with
them. The first option vests on May 1, 2007, the second on August 1, 2007, the
third on February 1, 2008 and the fourth on June 1, 2008, so long as Kitsilano
continues to provide services to us under the Consulting Agreement. Each option
is exercisable for a period of three years from the vesting date and has an
exercise price of $1.20, $1.40, $1.60 and $1.80 respectively. The shares
underlying the options have piggy-back registration rights that required us to
register the shares in our last registration statement. The options and the
shares underlying were issued in accordance with the exemption from the
registration provisions of the Securities Act of 1933, as amended, provided by
Section 4(2) of such Act for issuances not involving any public offering.
On April 12, 2007, we issued 88,000 shares of common stock to an
investor of our April 12th financing in connection with the exercise of 88,000
Series J warrants received by such investor as part of the financing. We
received net proceeds of approximately $45,600 pursuant to the exercise of these
warrants. The shares were issued pursuant to the exemption from registration
provided by Section 4(2) of the Securities Act for issuances not involving any
public offering.
On April 12, 2007 we issued 1,266,667 shares of common stock to an
investor of our April 12th financing in connection with such investor's exercise
of 1,266,667 Series J warrants he received as part of the April 12th financing.
We received net proceeds of approximately $655,500 pursuant to the exercise of
these warrants. The shares were issued pursuant to the exemption from
registration provided by Section 4(2) of the Securities Act for issuances not
involving any public offering.
On April 12, 2007, we issued 188,800 shares of our Series A Preferred
Stock and the followings warrants: (i) Series A Warrant, (ii) Series B Warrant,
(iii) Series C Warrant, (iv) Series D Warrant, (v) Series J Warrant, (vi) Series
E Warrant, (vii) Series F Warrant, (viii) Series G Warrant, and (ix) Series H
Warrant, each to purchase a number of shares of Common Stock equal to 50% of the
number of shares of Series A Preferred Stock purchased, except for the Series J
Warrants, which entitled the investor to purchase a number of shares of our
common stock equal to 100% of the number of shares of Series A Preferred Stock
purchased. We issued a total of 944,000 Warrants. Each of the Warrants has a
term of 5 years, except for the Series J Warrants, which have a term of 1 year.
Each share of the Series A Preferred Stock is convertible into one fully paid
and nonassessable share of our common stock. These shares and warrants were
issued pursuant to the exercise of 188,800 placement consultant warrants
received as a result of our April 12, 2006 financing. We received net proceeds
of approximately $106,000 pursuant to the exercise of these warrants. The shares
were issued pursuant to the exemption from registration provided by Section 4(2)
of the Securities Act for issuances not involving any public offering.
On April 12, 2007, we issued 188,800 shares of common stock to the
placement consultant of our April 12, 2006 financing in connection with the
exercise of 188,800 Series J warrants, which the placement consultant received
from his exercise of his placement consultant warrant, as described above. We
received net proceeds of approximately $106,000 pursuant to the exercise of
these warrants. The shares were issued pursuant to the exemption from
registration provided by Section 4(2) of the Securities Act for issuances not
involving any public offering.
On May 8, 2007 we issued 30,000 shares of our common stock pursuant to
a shareholders conversion of 30,000 shares of our Series A Preferred Stock that
he owned. We did not receive any proceeds from this conversion. The shares were
issued pursuant to the exemption from registration provided by Section 4(2) of
the Securities Act for issuances not involving any public offering.
On May 10, 2007 we issued 500,000 shares of our common stock pursuant
to a shareholders conversion of 500,000 shares of our Series A Preferred Stock
that he owned. We did not receive any proceeds from this conversion. The shares
were issued pursuant to the exemption from registration provided by Section 4(2)
of the Securities Act for issuances not involving any public offering.
iv
On May 12, 2007 we issued 70,800 shares of our common stock pursuant to
a shareholders conversion of 70,800 shares of our Series A Preferred Stock that
he owned. We did not receive any proceeds from this conversion. The shares were
issued pursuant to the exemption from registration provided by Section 4(2) of
the Securities Act for issuances not involving any public offering.
On June 14, 2007, our board approved issuing a total of 100,000 shares
of our common stock to Pacific Crab Seafood Company, Inc. for the consulting and
marketing services that they will provide to us. We issued 40,000 shares upon
execution of our agreement with Pacific Crab and the remaining 60,000 will be
issued in twelve (12) equal installments during the term of the agreement. The
shares were issued in accordance with the exemption from the registration
provisions of the Securities Act of 1933, as amended, provided by Section 4(2)
of such Act for issuances not involving any public offering.
On June 30, 2007, we issued 171,274 shares of common stock to the
investors of our 2006 and 2007 financings as payment of the semi-annual dividend
per the terms of the Certificate of Designation of the Relative Rights and
Preferences of the Series A Convertible Preferred Stock and Certificate of
Designation of the Relative Rights and Preferences of the Series B Convertible
Preferred Stock. The dividend shares were issued to these investors pursuant to
the exemption from registration provided by Section 4(2) of the Securities Act
for issuances not involving any public offering.
On August 20, 2007, a holder of our series A preferred stock exercised
their right to convert 65,335 shares of our series A preferred stock into 65,335
shares of common stock. As such, we issued 65,335 shares of common stock and
canceled 65,335 shares of our series A. The shares were issued pursuant to the
exemption from registration provided by Section 4(2) of the Securities Act for
issuances not involving any public offering.
On November 5 2007, we issued 747,870 shares of our Series C Preferred
Stock and the followings warrants to one accredited investor: (i) Series A
Warrant, (ii) Series B Warrant, (iii) Series C Warrant, (iv) Series J Warrant,
(v) Series D Warrant, (vi) Series E Warrant, and (vii) Series F Warrant, each to
purchase a number of shares of common stock equal to 50% of the number of shares
of common stock issuable upon conversion of the number of preferred stock issued
to the investor, except for the Series J Warrants, which shall entitle the
investor to purchase a number of shares of our Series C Preferred Stock equal to
100% of the number of shares of common stock issuable upon conversion of the
preferred stock issued to the investor; all of these warrants can be exercised,
assuming the preferred stock underlying the Series J Warrants are fully
converted, for an aggregate of 2,991,480 shares of common stock. Each of the
Warrants has a term of 5 years, except for the Series J Warrants, which have a
term of 1 year. Each share of the Series A Preferred Stock is convertible into
one fully paid and nonassessable share of our common stock. The investor that
received these securities returned warrants to purchase an aggregate of
3,739,350 shares of common stock that it received pursuant to our January 16,
2007 financing. The shares were issued pursuant to the exemption from
registration provided by Section 4(2) of the Securities Act for issuances not
involving any public offering.
In connection with the November 5, 2007 financing, we issued the
placement consultant a placement consultant warrant, exercisable for a period of
three years from the date of issue with an exercise price of $1.20 per share.
The warrant allows the placement consultant to purchase up to (i) 74,787, shares
of Series C Preferred Stock, and each of the following warrants, which are
identical to the warrants issued to the investors of the financing: (i) Series A
Warrant, (ii) Series B Warrant, (iii) Series C Warrant, (iv) Series D Warrant,
(v) Series J Warrant, (vi) Series E Warrant, and (vii) Series F Warrant, each to
purchase 37,393 shares of common stock, except for the Series J Warrants, which
shall entitle the consultant to purchase 74,787 shares of common stock. The
placement consultant also returned a portion of the placement consultant warrant
it received pursuant to the January 16, 2007 financing. 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
v
ITEM 27. EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
3.1 Articles of Incorporation, as amended (Incorporated by
reference to Exhibit 3.1 to the Company's Registration
Statement on Form SB-2 filed on April 18, 2007).
3.2 Amended and Restated Bylaws (Incorporated by reference to
Exhibit 3.2 to the Company's Registration Statement on
Form SB-2 filed on April 18, 2007).
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).
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).
4.8 Securities Purchase Agreement dated as of January 16, 2007
(Incorporated by reference to Exhibit 10.0 to the
Company's Current Report on Form 8-K filed on January 17,
2007).
4.9 Registration Rights Agreement dated as of January 16, 2006
(Incorporated by reference to Exhibit 10.2 to the
Company's Current Report on Form 8-K filed on January 17,
2007).
4.10 Designation of Rights and Preferences of Series B
Preferred Stock dated as of January 16, 2006 (Incorporated
by reference to Exhibit 10.3 to the Company's Current
Report on Form 8-K filed on January 17, 2007).
4.11 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 January 17, 2007).
4.12 Form of Series C Convertible Preferred Stock Purchase
Agreement, dated November 5, 2007, by and between the
Company and each of the Purchasers thereto (Incorporated
by reference to Exhibit 10.1 to the Company's Current
Report on Form 8-K filed on November 7, 2007).
vi
4.13 Form of Registration Rights Agreement by and between the
Company and each of the Purchasers thereto (Incorporated
by reference to Exhibit 10.2 to the Company's Current
Report on Form 8-K filed on November 7, 2007).
4.14 Form of Certificate of Designation of Rights and
Preferences of Series C Convertible Preferred Stock
(Incorporated by reference to Exhibit 10.3 to the
Company's Current Report on Form 8-K filed on November 7,
2007).
4.15 Form of Lock-Up Agreement by and between the Company and
each of the shareholders listed therein (Incorporated by
reference to Exhibit 10.4 to the Company's Current Report
on Form 8-K filed on November 7, 2007).
4.16 Form of Warrants (Incorporated by reference to Exhibits
10.5 through 10.11 to the Company's Current Report on Form
8-K filed on November 7, 2007).
5.1 Opinion and Consent of Law Offices of Louis E. Taubman,
P.C.
10.1 Employment Agreement of Robert Saunders (Incorporate by
reference to Exhibits 10.1 to the Company's Registration
Statement on Form SB-2 filed on July 14, 2006).
10.2 Consulting Agreement with TriPoint Capital Advisors, LLC
(Incorporated by reference to Exhibit 10.2 to the
Company's Registration Statement on Form SB-2 filed on
October 16, 2006)
10.5 Consulting Agreement with Aurelius Consulting Group, Inc.
(Incorporate by reference to Exhibits 10.5 Company's
Registration Statement on Form SB-2 filed on July 14,
2006).
10.6 Consulting Agreement with Gallatin Consulting, Inc.
(Incorporate by reference to Exhibits 10.6 Company's
Registration Statement on Form SB-2 filed on July 14,
2006).
10.7 Placement Consultant Agreement with Pai's International
Trade, Inc. dated March 9, 2006 (Incorporated by reference
to Exhibit 10.7 in the Company's Registration Statement on
Form SB-2 filed on October 10, 2006).
10.8 Excerpt from Board of Directors' Meeting summarizing
Robert Saunders' amended employment agreement
(Incorporated by reference to Exhibit 10.8 in the
Company's Registration Statement on Form SB-2 filed on
October 16, 2006).
10.9 Consulting Agreement between Kitsilano Capital Corp. and
the Company dated February 1, 2007(Incorporated by
reference to Exhibit 10.9 in the Company's Registration
Statement on Form SB-2 filed on February 9, 2007).
23.1 Consent of LBB & Associates, Ltd., LLP
vii
ITEM 28. UNDERTAKINGS.
a) The undersigned Registrant hereby undertakes:
1) To file, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933, as amended (the "Securities Act");
(ii) 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 20% change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee"
table in the effective registration statement.
(iii)Include any additional or changed material information on the
plan of distribution. 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:
(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
viii
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 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.
ix
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 Colubmia, on November 29, 2007 and the City of
Gaithersburg, State of Maryland on November 29, 2007.
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 Financial Officer and
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: November 29, 2007
---------------------------
Robert Saunders
President and Chief Executive Officer
/s/ Michael Boswell Dated: November 29, 2007
---------------
Michael Boswell
Director & Acting Chief Financial Officer
& Acting Chief Accounting Officer
/s/ Douglas C. MacLellan Dated: November 29, 2007
--------------------
Douglas C. MacLellan
Vice-chairman of the Board
/s/ Mark H. Elenowitz Dated: November 29, 2007
-----------------
Mark H. Elenowitz
Director
Dated:
----------
Ian Fraser
Director
Dated:
-------------
Victor Bolton
Director
/s/ Darryl Horton Dated: November 29, 2007
-------------
Darryl Horton
Director
/s/ Robert Rooks Dated: November 29, 2007
------------
Robert Rooks
Director
x