UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
(Mark one)
[x] Quarterly Report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the quarterly period ended December 31, 2005
[ ] Transition Report under Section 13 or 15(d) of the Exchange Act
Commission File Number: 021-64091
NEPTUNE INDUSTRIES, INC.
(Name of Small Business Issuer in its charter)
Florida 65-0838060
(State of Incorporation) (I.R.S. Employer I.D. Number)
21218 St. Andrews Boulevard
Suite 645
Boca Raton, FL 33433
(Address of principal executive offices)
(561)-482-6408)
(Issuer's telephone number)
Securities registered under Section 12(b) of the Act: NONE
Securities registered under Section 12(g) of the Act: COMMON STOCK
Check whether the issuer (1) filed all reports required to be filed by
Sections 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the issuer was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
[x]Yes [ ] No
Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act)
[ ] Yes [X] No
APPLICABLE ONLY TO CORPORATE ISSUERS
The number of shares outstanding of each of the issuer's classes of equity,
as of March 1, 2006 was:
Common Shares 10,864,051 shares
Class A preferred Shares 1,500,000 shares
Class B Preferred Shares 3,500,000 shares
Transitional Small Business Disclosure Format (check one): Yes___; No_X_
FORM 10-QSB
NEPTUNE INDUSTRIES, INC.
PERIOD ENDED December 31, 2005
TABLE OF CONTENTS
PART I
Item 1.
FINANCIAL INFORMATION....................................................F-1
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION................. 4
Item 3.
CONTROLS AND PROCEDURES.................................................. 15
PART II
Item 1.
LEGAL PROCEEDINGS........................................................ 15
Item 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.............. 15
Item 3.
DEFAULTS UPON SENIOR SECURITIES.......................................... 15
Item 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ..................... 15
Item 5.
OTHER INFORMATION ....................................................... 15
Item 6.
EXHIBITS AND REPORTS ON FORM 8-K......................................... 15
Signatures .............................................................. 16
-2-
Part I.
Item 1. FINANCIAL INFORMATION.
NEPTUNE INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, 2005
(unaudited)
---------------
ASSETS
Current Assets
Cash $ 16,707
Accounts Receivable 29,865
Inventory 494,626
Prepaid expenses 7,974
Deposit on Equipment 9,840
Deferred Costs 10,210
Deferred tax asset of $542,413, less
valuation allowance of $542,413 -
-------------
Total Current Assets 569,222
Property and Equipment, net of depreciation of $255,964 535,887
Security Deposits 6,540
-------------
Total Assets $ 1,111,649
=============
LIABILITIES AND STOCKHOLDERS EQUITY
Liabilities
Current Liabilities
Accounts payable $ 216,997
Accrued and Other Current Liabilities 252,343
Current Portion of Long-Term Debt 5,401
Notes Payable 50,000
Notes Payable-Officers 70,000
Convertible Note-Related Party 275,000
------------
Total Current Liabilities 869,741
Total Long-Term Liabilities -
-----------
Total Liabilities 869,741
COMMITMENTS AND CONTINGENCIES
(NOTES 2, 6, 10 AND 13)
F-1
Stockholders' Equity
Preferred Stock, $.001 par value,
5,000,0000 shares authorized
1,500,000 Class A convertible preferred
shares issued and outstanding 1,500
3,500,000 Class B Convertible preferred
shares issued and outstanding 3,500
Common Stock, $.001 par value 15,833,333 shares
authorized, 10,864,051 shares issued and outstanding 10,864
Additional Paid-In Capital 4,246,283
Accumulated Deficit (4,020,239)
------------
Total Stockholders' Equity 241,908
------------
Total Liabilities and Stockholders' Equity $ 1,111,649
============
See accompanying notes.
F-2
NEPTUNE INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the three months For the six months
ended December 31 ended December 31
2005 2004 2005 2004
----------- ---------- --------- ----------
Revenues:
Sales $ 74,372 $ 136,330 $ 170,515 $ 255,656
Cost of Sales 208,160 66,662 360,712 50,365
---------- -------- --------- ---------
Gross profit (loss) (133,788) 202,992 (190,197) 205,291
---------- -------- --------- ---------
Expenses:
Advertising and marketing 1,064 35,415 (60) 36,750
Automobile and truck expense 8,831 8,636 16,946 17,190
Depreciation 1,265 - 2,529 -
Insurance 9,917 2,262 21,373 18,860
Leasehold expenses - 15,262 - 31,392
Office 1,559 2,950 2,417 4,867
Officers salary, related
taxes and benefits 93,816 84,907 202,897 152,529
Other operating expenses 35,109 17,988 46,052 17,009
Outside services 673 4,755 1,610 6,835
Professional fees 10,180 11,103 27,536 13,413
Public relations 6,577 - 14,702 -
Rent 511 840 1,536 1,019
Repairs - 542 259 542
Utilities 2,574 2,255 4,410 4,184
--------- -------- -------- ---------
Total expenses from operations 171,449 186,826 342,206 304,590
--------- -------- -------- ---------
Income (loss) before interest
Other income, and income taxes $ (305,237) $ 16,166 $(532,403) (99,299)
Interest Expense (14,975) (12,118) (22,437) (14,723)
Other income 4,000 - 4,106 525
--------- -------- -------- ---------
Profit (loss) before income tax (316,106) (128,197) (550,735) (113,497)
Provision for income taxes - - - -
--------- --------- -------- ---------
Net income (loss) $ (316,106) $ 4,048 $(550,735) (113,497)
========= ========= ======== =========
Net income (loss) per share
(basic and diluted) $ (0.03) $ - $ (0.05) $ (0.02)
========= =========
Weighted average number of
Common shares outstanding
(basic and diluted) 10,532,633 6,485,938 10,355,261 6,321,455
========== ========== ========== ==========
See accompanying notes.
F-3
NEPTUNE INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the six months ended
December 31,
2005 2004
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (316,106) $ (113,497)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization 19,236 17,558
(Increase) decrease in assets:
Accounts receivable (19,877) (27,945)
Inventory (15,235) (311,109)
Increase (decrease) in liabilities:
Accounts payable 85,162 (35,116)
Accrued and other current liabilities 72,576 -
----------- ----------
Net cash used by operating activities (174,244) (470,109)
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Notes receivable 5,000 -
Acquisition of property and equipment 5,527 (62,769)
Current portion-Long term debt (796) 43,500
Note payable-current 50,000 -
Deposits - (500)
---------- ----------
Net cash provided (used) by investing activities 59,731 (19,769)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Sale of common stock 1,534 694,972
Retained earnings - 6,473
---------- ----------
Net Cash provided by financing activities 1,534 701,445
---------- ----------
Net Increase (Decrease) in
cash and equivalents (112,979) 211,567
Cash and equivalents-beginning 129,686 37,958
---------- ----------
Cash and equivalents-ending $ 16,707 $ 249,525
========== ==========
See accompanying notes
F-4
SUPPLEMENTAL DISCLOSURES
Cash paid during the quarter for:
Interest $ 14,975 $ 12,118
Income taxes $ - $ -
========== ==========
See accompanying notes.
F-5
NEPTUNE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR
THE SIX MONTHS ENDING DECEMBER 31, 2005 AND 2004 (Unaudited)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
Organization and nature of operations
Neptune Industries, Inc. (the Company) is a Florida corporation which conducts
business from its headquarters in Boca Raton, Florida. The Company was
incorporated on May 8, 1998 and in February 2004 changed its name from Neptune
Aquaculture, Inc. to Neptune Industries, Inc. Since that time, the main
activities of the Company have been devoted to raising capital, implementing
its business plan, commencing operations through its subsidiary, Blue Heron
Aqua Farms, LLC, and developing, testing and patenting (pending) S.A.F.E.
(Solar-powered, Aquaculture, Finfish Environment) technology.
On June 9, 2005 the Company completed a statutory merger with Move Films, Inc.
a Texas corporation. Move Films was a non-trading, fully reporting public
company. The surviving entity remained Neptune Industries, Inc. which assumed
the obligation as a full reporting company for SEC purposes as successor to
Move Films, Inc. This transaction was accounted for as a reverse merger.
For all periods prior to June 30, 2005, periodic reports filed with the SEC
were filed as Move Films, Inc., including the Form 10-QSB for the quarterly
period ended December 31, 2004. Since Move Films, Inc., was not an active
operating company and had no assets or income as of December 31, 2004,
comparison of the activity of the Company for the period December 31, 2005
with the reported activities of Move Films, Inc., its predecessor, for the
reporting period ended December 31, 2004, is not meaningful and is omitted.
The comparative information provided in this report for the period ended
December 31, 2004, is for Neptune Industries, Inc. for that period, prior
to the merger with Move Films, Inc.
Common shares of the Company, continue to be dually listed on the OTC
Bulletin Board and on The Pink Sheets under the trading symbol NPDI.
Basis of Presentation
The consolidated financial statements include the accounts of Neptune
Industries, Inc. and its wholly-owned subsidiaries, Aquaculture Specialties,
Inc. and Exotic Reef Technologies, Inc., and its majority owned subsidiary,
Blue Heron Aqua Farm, LLC (Blue Heron). All inter-company balances and
transactions have been eliminated at consolidation.
Interim Financial Statements
The accompanying unaudited financial statements of the Company have been
prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form
10-QSB and Regulation S-B. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments considered necessary for a fair presentation (consisting of
normal recurring accruals) have been included. The preparation of financial
F-6
NEPTUNE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR
THE SIX MONTHS ENDING DECEMBER 31, 2005 AND 2004 (Unaudited)
statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates. Operating results expected for the
six months ended December 31, 2005 are not necessarily indicative of the
results that may be expected for the year ending June 30, 2006. For further
information, refer to the financial statements and footnotes thereto included
in the Company Annual Report on Form 10-KSB for the year ended June 30, 2005.
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (Continued)
Cash and Cash Equivalents
The company considers all highly liquid investments with a maturity date of
three months or less at the time of purchase to be cash equivalents.
Property and Equipment
Property and equipment consists of equipment, leasehold improvements, office
furniture and vehicles which are stated at cost. Depreciation is based on the
estimated useful lives of the assets, ranging from five years to fifteen years
using the straight-line method. Expenditures for maintenance and repairs are
charged to expense as incurred. Major improvements are capitalized. Gains and
losses on disposition of property and equipment are included in income as
realized.
Revenue Recognition
Sales revenue is recognized upon the shipment of merchandise to customers or
the pick up of merchandise by the customer. Allowances for sales returns are
recorded as a component of net sales in the period the allowances are claimed.
Income Taxes
Income taxes are computed under the provisions of the Financial Accounting
Standards Board (FASB) Statement No. 109 (SFAS 109), Accounting for Income
Taxes. SFAS 109 is an asset and liability approach that requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of the difference in events that have been recognized in the
Company financial statements compared to the tax returns.
Fair Value of Financial Instruments
Financial instruments, including cash, receivables, accounts payable, and
notes payable are carried at amounts which reasonably approximate their fair
value due to the short-term nature of these amounts or due to variable rates
of interest which are consistent with market rates.
F-7
NEPTUNE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR
THE SIX MONTHS ENDING DECEMBER 31, 2005 AND 2004 (Unaudited)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (Continued)
Concentrations of Credit Risk and Economic Dependence
Financial instruments, which potentially subject the Company to concentration
of credit risk, are cash and cash equivalents and accounts receivable. The
Company currently maintains its day-to-day operating cash balances at a single
financial institution. At times, cash balances may be in excess of the FDIC
insurance limits. At December 31, 2005, the Company did not have cash on
deposit exceeding the insured limit. The Company operates domestically and
internationally. Consequently, the ability of the Company to collect the
amounts due from customers may be affected by economic fluctuations in each
of the geographic locations of the customers.
Net Loss Per Share
Basic net loss per share is computed by dividing net loss attributable to
common stockholders by the weighted average number of shares of common stock
outstanding during the period. Diluted net loss per share takes into
consideration shares of common stock outstanding (computed under basic loss per
share) and potentially dilutive shares of common stock. In periods where losses
are reported, the weighted average number of common shares outstanding excludes
common stock equivalents, because their inclusion would be anti-dilutive.
Inventory
Inventory is stated at the lower of cost (first-in first-out method) or market.
The inventory consists of seafood, feed, chemicals, and overhead costs, such as
utilities. Overhead is allocated to inventory based on the number of pounds of
fish included in ending inventory. Inventory on December 31, 2005 and 2004
consisted of the following:
December 31,
2005 2004
(Unaudited) (Unaudited)
---------------- -----------------
Seafood $ 471,935 $ 183,212
Feed 14,212 183,308
Chemicals & Supplies 22,691 126,623
Overhead 108,314 102,945
---------- -----------
$ 494,626 $ 596,088
========== ===========
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect reported amounts in
the financial statements. Actual results could differ from those estimates and
assumptions.
F-8
NEPTUNE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR
THE SIX MONTHS ENDING DECEMBER 31, 2005 AND 2004 (Unaudited)
NOTE 2. GOING CONCERN
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. The financial position and
operating results of the Company raise substantial doubt about its ability to
continue as a going concern, as reflected by the accumulated deficit of
$4,020,239 as of December 31, 2005, and recurring gross and net losses. The
ability of the Company to continue as a going concern is dependent upon
expanding operations, increasing sales and obtaining additional capital and
financing. Managements plan in this regard is to secure additional funds
through future equity financings. It is anticipated that the Company will be
able to achieve break even operations during the fiscal year ended June 30,
2006. The financial statements do not include any adjustments that might be
necessary if the Company is unable to continue as a going concern.
NOTE 3. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
December 31,
2005 2004
------------- ------------
Vehicles $ 17,578 $ 17,578
Computer and office equipment 7,712 6,434
Equipment 629,518 625,263
Leasehold improvements 137,043 126,657
------------- ------------
791,851 775,932
Accumulated depreciation (255,964) (165,971)
------------- -------------
Property and equipment,
less accumulated depreciation $ 535,887 $ 609,961
============= =============
Total depreciation expense for the quarters ended December 31, 2005 and 2004,
amounted to $19,441 and $17,558, respectively. Of these amounts, $18,176 and
$17,220 are included in cost of sales and $1,265 and $338 are included in
expenses for the quarters ended December 31, 2005 and 2004, respectively.
NOTE 4. ACCRUED AND OTHER CURRENT LIABILITIES
Accrued and other liabilities consisted of the following:
F-9
NEPTUNE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR
THE SIX MONTHS ENDING DECEMBER 31, 2005 AND 2004 (Unaudited)
NOTE 4. ACCRUED AND OTHER CURRENT LIABILITIES (Continued)
DECEMBER 31,
2005 2004
------------ ------------
Accrued payroll - officers $ 201,862 $ 727,475
Accrued interest - officers 28,216 147,970
Accrued interest - others 22,265 -
------------ ------------
$ 252,343 $ 880,445
============ ============
NOTE 5. ACCRUED OFFICERS COMPENSATION AND INTEREST
Effective February 8, 2000, the Company entered into five-year employment
Agreements (the Agreements) with two key members of management. The Agreements
provide for annual compensation of ninety-thousand dollars ($90,000) in year
one; one-hundred-ten-thousand dollars ($110,000) in year two; one-hundred-
twenty-five thousand dollars ($125,000) in year three; one hundred-fifty-
thousand dollars ($150,000) in year four; and one-hundred seventy-five
thousand dollars ($175,000) in year five. These agreements have been
renewed automatically for additional five year terms.
The Agreements also state that the two key members of management shall be
entitled to and shall automatically receive a cost of living adjustment
calculated in proportion to the upward change in the consumer price index U.S.
Average All Items (1967=100), published by the U.S. Department of Labor.
Pursuant to these employment agreements, the Company has accrued a total of
$113,837 and $727,430 through the quarters ended December 31, 2005 and 2004,
respectively. Cash compensation actually paid was $93,186 and $45,201 for the
quarters ended December 31, 2005 and 2004, respectively. During the year ended
June 30, 2005, the Board of Directors approved the issuance of convertible
preferred stock for payment of accrued compensation and interest.
The Agreements also provide for accrued interest of ten percent (10%) per
annum until the employees salary, bonuses and benefits are paid in full.
Accrued interest on the above salaries and bonuses are $15,416 and $147,970 as
of December 31, 2005 and 2004, respectively. Additional salary and interest
due under these agreements were paid through the issuance of additional
convertible preferred stock.
The Company contracted with CF Consulting LLC to provide Chief Financial
Officer services beginning in February 2005 at a monthly fee of $2,000 for an
initial six month period and thereafter at $2,500 per month. CF Consulting
also is entitled to receive 100,000 restricted shares of common stock for prior
services due of $5,000. An agreement to continue these services with CF
Consulting is being negotiated by senior management. The Company?s Chief
Financial Officer, Robert Hipple, is also a managing director of CF Consulting.
F-10
NEPTUNE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR
THE SIX MONTHS ENDING DECEMBER 31, 2005 AND 2004 (Unaudited)
NOTE 6. RELATED PARTY TRANSACTIONS
Convertible Notes
On June 21, 2005, the Company executed a $100,000 Subordinated Convertible
Bridge Note payable to an existing shareholder of the Company, due on
October 21, 2005, with interest accrued at a rate of 10% per annum. This note
included 50,000 warrants to purchase shares of common stock at an exercise
price of $0.50 per share for a period of three years from the date of the note.
Additionally, the holder has the right to convert the note to shares of common
stock under the same terms and conditions to be set forth in the Company
planned Private Offering anticipated for mid- 2006. This note
was extended in October, 2005 for an additional 180 days continuing the 10%
interest per annum. The lender was issued 50,000 warrants as an incentive for
the extension. Each warrant to purchase one share of common stock is at an
exercise price of $0.30 per share for a period of three years from the date of
the extension, October 21, 2005.
On November 14, 2005, the Company executed a $25,000 Subordinated Convertible
Bridge Note payable to an existing shareholder in the Company, due on March 12,
2006, with interest accrued at a rate of 10% per annum. This note included
12,500 warrants to purchase shares of Common stock at an exercise price of
$0.50 per share for a period of three years from the date of the note. As
further incentive for entering the note, the lender received 25,000 shares of
restricted common stock. Additionally, the holder has the right to convert the
note to shares of Common Stock under the same terms and conditions.
Notes Payable Officers
During the fiscal year ended June 30, 2002, the Company entered into an
agreement to retire the outstanding preferred stock with Messrs Papadoyianis
and Cherch in exchange for $100,000. The Company has paid $30,000 and the
$70,000 was converted to a note payable accruing interest at a rate of 8%.
Accrued interest on this note was later converted to preferred stock. On
February 7, 2006, the Board of Directors resolved to repay the notes
outstanding to Messers. Papadoyianis and Cherch through the issuance of a new
note reflecting the same terms and conditions of current notes that have been
issued by the Company since January, 2006. The new notes are retroactive to
January 1, 2006, bear interest at the rate of 15% per annum, and include one
warrant for every dollar outstanding, or 70,000 total warrants. Each warrant
to purchase one share of common stock is at a price of $0.30 per share for a
period of three years.
NOTE 7. NOTES PAYABLE
In December 2003, the Company executed two promissory notes payable, each for
$50,000, to two unrelated third parties. Each note was due on December 12, 2005
and includes interest payable at a rate of 10% per annum. Upon signing of the
notes, each lender received one hundred thousand (100,000) restricted common
shares of the Company. In August, 2005, the $50,000 outstanding principal
balance on one of these notes, plus accrued interest of $8,333, was converted
F-11
NEPTUNE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR
THE SIX MONTHS ENDING DECEMBER 31, 2005 AND 2004 (Unaudited)
NOTE 7. NOTES PAYABLE (Continued)
into 116,666 shares of common stock plus a warrant to purchase 58,333 shares of
common stock for three years at a price of $0.50 per share. On December 18,
2005, the remaining note holder agreed to convert the expired note and accrued
interest into a new 180 day Subordinated Convertible Note in the amount of
$60,000, with 15% interest per annum, and 60,000 warrants. The note may be
converted into common stock at $0.50 per Unit. Each unit consisted of one share
of common stock and one-half warrant. Each full warrant to purchase one share
of common stock is at a price of $0.75 per share for a period of three years.
NOTE 8. COMMITMENTS
The Company previously entered into an employment agreement, with its
aquaculture facilities manager, through October 31, 2005, that provided for a
minimum annual salary of $35,000. In July 2005, the employment agreement was
renewed, effective November 1, 2005, for another four years through
October 31, 2009, and provides for a minimum annual salary of $42,500.
In March 2005, the Company retained the services of David Weinstein, an
investment banking and financial consultant. The six month agreement for
services provides for payment of 150,000 shares (25,000 shares post-
reduction) of restricted common stock for a total value of $7,500. This
agreement was extended on December 22, 2005 for an additional six months
for payment of 50,000 shares of restricted common stock.
Also in March 2005, the Company retained the services of The Eversull Group,
Inc. an investor relations company. The one year agreement beginning April 1,
2005, for services provides for payment of $2,000 per month, and 250,000 shares
(41,667 shares post-reduction) of restricted common stock, for a total value of
$12,500. The accrued amount of $18,000 as of December 31, 2005, is included in
accounts payable.
In July 2005 the Company retained the services of Douglas Toth, as a financial
and corporate advisor, for a six month period. The agreed compensation for his
services was $5,000 and 33,333 shares of restricted common stock per month.
This agreement was cancelled by the Company on September 28, 2005, effective
October 28, 2005. Accrued fees of $10,000 are included in accounts payable. No
shares were issued to Mr. Toth under the agreement.
Also in July 2005, the Company entered into a Letter of Intent with Westcap
Securities, Inc., a NASD licensed broker dealer, to be the Placement Agent on a
$2,500,000 private equity offering. The offering is contingent upon the
approval of the 211 application for listing on the OTC-Bulletin Board. Westcap
has agreed to use its best efforts to complete the offering in a timely manner.
As the Placement Agent, Westcap will receive a 10% commission and a 3% non-
accountable expense allowance. In addition, for each ten shares sold in the
ffering. Westcap will receive one warrant exercisable at a price equal to 120%
of the Private Placement offering price per share for a period of five years,
with demand and piggyback registration rights.
F-12
NEPTUNE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR
THE SIX MONTHS ENDING DECEMBER 31, 2005 AND 2004 (Unaudited)
NOTE COMMITMENTS (continued)
In January, 2006, the Company retained the services of H.L. Lanzet, Inc., a
financial public relations company. The six month agreement for services
provided for payment of $6,000 per month and warrants to purchase 600,000
shares of common stock at $0.20 per share for a period of three years.
NOTE 9. STOCKHOLDERS' EQUITY
On June 6, 2005 the Board of Directors approved a 2005 Class A Preferred Stock
Award of 1,500,000 shares to Messrs Papadoyianis and Cherch (750,000 shares
each) in exchange for the retirement of $408,121 in long-term liabilities of
the Company for accrued salaries and interest owed to them. Pursuant to the
certificate of designations establishing the Series A preferred stock, each
share of the 1,500,000 shares of currently issued and outstanding Series A
preferred stock may be converted into 1.6667 fully paid and non-assessable
shares of our common stock, or a total of 2,500,000 common shares. On all
matters submitted to a vote of the holders of the common stock, including the
election of directors, a holder of shares of the preferred stock is entitled
to the number of votes on such matters equal to the number of shares of the
preferred stock into which the preferred shares may then be converted.
Therefore, the holders of the Class A preferred shares have the power to vote
2,500,000 shares on a par with the common stock.
Also on June 6, 2005 the Board of Directors approved a 2005 Class B
Preferred Stock Award of 3,500,000 shares to Messrs Papadoyianis and Cherch
(1,750,000 shares each) for the retirement of $175,444 in liabilities
of the Company, representing accrued salaries and interest. Pursuant to the
certificate of designations establishing Series B preferred stock, each share
of the 3,500,000 shares of currently issued and outstanding Series B preferred
stock may be converted into 3,500,000 fully paid and non-assessable shares of
our common stock. On all matters submitted to a vote of the holders of the
common stock, including the election of directors, a holder of shares of the
preferred stock is entitled to the number of votes on such matters equal to
the number of shares of the preferred stock held by such holder. Therefore,
the holders of the Class B preferred shares will have the power to vote
3,500,000 shares on a par with the common stock.
During the quarterly period ending December 31, 2005, the Company issued
a total of 75,000 common shares, increasing the total number of common shares
outstanding from 10,789,051 shares outstanding at September 30, 2005 to
10,864,051 at December 31, 2005. Of these additional common shares, 25,000
shares were issued as incentive for entering short-term notes, and 50,000
shares were issued to David H. Weinstein, in connection with a six month
renewal of his consulting contract.
NOTE 10. MAJOR CUSTOMERS
Revenues from two customers comprised approximately 83 percent of revenues
during the period ended December 31, 2005, compared to the two customers
comprising 68 percent for the prior period ending September 30, 2004.
F-13
Item 2. Management Discussion and Analysis or Plan of Operation.
FORWARD LOOKING STATEMENTS
In connection with, and because we desire to take advantage of, the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995, we caution
readers regarding certain forward looking statements in the previous discussion
and elsewhere in this report and in any other statement made by, or on behalf
of our Company, whether or not in future filings with the Securities and
Exchange Commission. Forward looking statements are statements not based on
Historical information and which relate to future operations, strategies,
financial results or other developments. Forward looking statements are
necessarily based upon estimates and assumptions that are inherently subject to
significant business, economic and competitive uncertainties and contingencies,
many of which are beyond our control and many of which, with respect to future
business decisions, are subject to change. These uncertainties and
contingencies can affect actual results and could cause actual results to
differ materially from those expressed in any forward looking statements made
by, or on behalf of, our Company. We disclaim any obligation to update forward
looking statements.
Neptune Industries, Inc., was incorporated in the State of Florida
on May 8, 1998. We operate on a June 30, 2005 fiscal year. Our common shares
are traded on the Pink Sheets and on the OTC Bulletin Board under the symbol
NPDI. Since our inception, we have been engaged in aquaculture (fish farming)
through our subsidiary, Blue Heron Aqua Farms, LLC, in Florida City, Florida
and in the development of new technologies for aquaculture and related marine
uses. On June 9, 2005, we merged with Move Films, Inc., a Texas corporation,
with the Company as the surviving entity. As a result of that merger, we
succeeded to the filing and reporting obligations of Move Films, Inc. under
Section 12(g) of the Securities Exchange Act of 1934.
Our mission is to become a leading supplier of sustainable seafood products
through the development of a vertically integrated production and distribution
enterprise, encompassing fish farms, processing facilities, wholesale
distribution, and value-added product lines. The catalyst to our business model
is the patent-pending S.A.F.E.(Solar-powered, Aquaculture, Finfish Environment)
technology. S.A.F.E. provides a highly efficient, environmentally friendly
solution to current seafood production requirements, while opening up new areas
of the world to commercial farming. The Company has already received interest
from around the world to license, purchase, and distribute the technology.
Licensing, sales and joint venture activities will further expedite and enhance
our business model. The final strategic phase of our mission involves the
utilization of our publicly traded vehicle to conduct a roll-up of the highly
fragmented aquaculture and distribution industries. The acquisition of other
seafood related businesses should allow us to expand, diversify, and integrate
our technology in the most efficient manner.
The founders of the Company, Messrs. Ernest D. Papadoyianis and X.T. (Sal)
Cherch began designing and testing what today is known as the S.A.F.E. System
more than 8 years ago. The S.A.F.E. system is designed to address and resolve
the concerns of environmentalists. Today, through a contractual arrangement,
Neptune has spent over 6 years and more than $3 million in completing the
development of the S.A.F.E. system, perfecting production methods, performing
market analyses, acquiring lease sites, and creating a cornerstone production
facility through our subsidiary, Blue Heron Aqua Farms, LLC.
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Blue Heron operates a forty-eight acre fish farm in Florida City, Florida that
incorporates a one-of-a-kind, flow-through environment which is virtually
extinct in the U.S. today. In October, 2004, we completed a state of the art
nursery expansion in order to increase production capacity of our sashimi
quality hybrid striped bass (branded as Everglades Striped Bass) by over 25
percent. The market for all seafood, particularly fresh farm-raised product,
has grown to tremendous proportions, warranting immediate and extensive
expansion of production and diversification to other popular species. With
only four acres of the forty-eight acre site under production at this time, we
will be able to substantially increase production as additional acreage is
added to the production capability.
Currently, we distribute our products primarily through wholesale distributors
who pick up the fresh fish at our Florida City, Florida fish farm and
distribute the product nationwide. In addition, some local Florida customers
pick up the product themselves at the farm site. We do not currently
distribute any product ourselves, although our business plan is to expand our
capabilities into processing, distribution and value added products.
Prior to the formation of Blue Heron, our founders continued their prior
efforts toward exploiting a unique and abundant resource in South Florida.
Massive, yet pristine quarry lakes spread throughout the state and provide an
ideal environment for fish production. Management focused its efforts on
further research and development of the various components of the S.A.F.E.
system technology, while fine tuning production methods for use in quarry lake
aqua farms. Among the many technological developments tested during this time
was a solar powered programmable, automated, feeding system which allows
controlled amounts of feed to be distributed at specific times of the day.
This insures a more rapid growth rate, with less waste than other common
productions methods in the industry. Through the development and operation of
three previous pilot farms, we improved our technology, and production
techniques to effectuate the efficient and economical production of seafood in
large, open bodies of water. The applications now extend to an open worldwide
market. In addition, we successfully raised and marketed three commercially
viable species (hybrid striped bass, redfish and tilapia). Our farm purchases
fingerling fish, raises the product to market size (1.25-2+ lbs) then harvests
and distributes it to wholesalers, processors, market chains, etc. throughout
the U.S., Canada, and the Caribbean. Management believes that our unique, low-
cost production strategy, technology, and existing distribution allow us to
bring our products to market faster and cheaper than our competition.
DEVELOPMENT STRATEGY
With a strong distribution network for our fresh farm raised seafood products
throughout the United States, Canada and the Caribbean, we are now focused on a
three phase expansion program at our Florida City site in order to meet market
demand. In addition, we have moved into the final stages of preparation for the
commercial production of the S.A.F.E. System. We also plan to integrate our
operations by locating and attempting to acquire our own distribution network,
as well as processing capabilities and nursery operations to raise and control
our own fingerling production.
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Farming Operations
We are poised to expand our facilities, diversify our production and vertically
integrate our operations. We are planning to increase capacity to produce over
two million pounds of hybrid striped bass, redfish, tilapia, Nile perch and
other species; operate the only hybrid striped bass nursery in South Florida;
and then utilize our effluent wastewater to produce a diversity of hydroponic
vegetables and herbs. The combination of our commercial aquaculture expertise,
management and technology, teamed with the expansive forty-eight acre fish farm
facility, have created one of the premier commercial aquaculture operations on
the East Coast and perhaps the U.S. In addition to the Florida City site, we
have identified and have had preliminary discussions for lease options on a
number of prime quarry lake sites in South Florida. Historically, management
has focused its production and technology on developing these vast man-made
impoundments which are abundant development. Quarry sites will be developed
utilizing S.A.F.E. System technology which was designed and engineered from
years of practical experience in commercial production in South Florida
quarries. Quarry lake development presents an ideal opportunity to establish
multiple farm locations with minimal capital outlay for infrastructure and
lease payments.
The Company has identified three phases for the expansion of its Florida City,
Florida site during the next 12 months. Management proposes to utilize
approximately $600,000 of the proceeds of a planned private offering of its
common stock on physical improvements, equipment, and working capital to expand
the Blue Heron South Farm in the first of the three phases of development.
Approximately two acres of the South Farm site of six acres, have been
designated for a Phase I expansion. Management intends to utilize this area for
hybrid striped bass grow-out production. The successive addition of over thirty
above-ground circular tanks should provide an additional 400,000 pounds per
year of production. Capital investment for this Phase I two acres parcel
development of the South Farm has been estimated at $600,000. Following the
completion of this expansion, management intends to embark on the successive
renovation of the remaining four acres of the South Farm site (Phases II and
III). The capital investment for this expansion has been estimated at
$1,000,000, and would result in an additional 700,000 to 1,000,000 pounds of
production per year. The Company intends to offer common shares and warrants
to acquire additional common shares under a private offering. Although not
finally fixed, the Company expects the offering to be for up to $3.5 million
in additional capital, on a unit basis, with each unit consisting of one share
of common stock and one-half of a warrant to acquire an additional share of
common stock for a period of three years. Any offer or sale of a unit, if
made, will be made only pursuant to a private offering memorandum to be
prepared by the Company, and only to accredited investors. There can be no
assurance that such an offering will be made, or, if made, that such an
offering will be successful, or that the Company will be able to raise the
additional capital needed to continue and expand its operations.
Technology
The S.A.F.E. System incorporates many features which make it suitable for use
in all parts of the world. The Company continues to be deluged with inquiries.
The S.A.F.E. System is a floating, articulating, patent pending containment
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system which utilizes alternative energy to power many of its components. The
system can be utilized as a stand alone single tank (an Eco-Tank) in a variety
of sizes or several tanks can be interconnected into Eco-pods. In an Eco-pod
configuration, each tank is connected to another via an underwater conveyance
pipe. This allows the operator to move fish from tank to tank with out
removing them from the water, or handling. Therefore, an Eco-pod system
actually becomes a self contained nursery and grow-out area. An automated
solar powered feeding system and a revolutionary waste collection system insure
rapid growth without contamination of surrounding waters. Since each tank has
solid sides, predators cannot get in, crops cannot escape, and in the event of
contamination of surrounding waters, the crops can be isolated and protected.
Hurricane Recovery
On August 25, 2005, South Florida was struck by Hurricane Katrina as a
Category 1 storm. Two months later, on October 24th, we were struck again by
Hurricane Wilma as an upper Category 2 storm with winds exceeding 110 mph.
We are extremely pleased with the overall resiliency of our farm in surviving
the severe winds and flooding from these hurricanes. Our entire staff
responded quickly and efficiently both in their preparation for the storms, as
well as to resuming operations following the storms.
Hurricane Katrina glanced the farm with the outer bands which caused a
reasonable amount of damage to the shade house covering the farm. While the
remainder of the production area was not damaged, the storm caused power
outages and flooding, which resulted in the suspension of feeding, harvesting
and shipping of product.
Hurricane Wilma was a much larger and more powerful storm. The farm was
without power from October 24 through November 8, but continued to operate
using our standby generators and oxygen systems. The inventory and primary
production infrastructure sustained minimal damage from the storms, while
secondary structures, such as the shade enclosure and on-site trailers,
suffered to a greater degree.
The most compromising element was the loss of power for two weeks which
resulted in an enormous consumption of diesel fuel, equipment maintenance, and
reduced water flows to the farm. The temporary suspension and reduction in
feeding inevitably compromised growth rates which will impact future harvesting
schedules. Within 48 hours of the 100+ mph winds, operations resumed. All of
our emergency planning, the installation of three sophisticated backup systems
and having qualified staff who live on-site proved extremely beneficial. The
object of our emergency planning has always been geared to minimize inventory
loss, as well as to quickly restore operations.
Other Areas of Development
Our future development plans expand far beyond our South Florida production
base. Management has identified several acquisition candidates that would
allow immediate production benefit and secure the hybrid striped bass hatchery
operations. The Company also intends to diversify its operations to include
marine products such as baitfish for the multi-million dollar sport fishing
market; production of hydroponic herbs and vegetables; wholesale distribution
and live delivery (hybrid striped bass and tilapia) to the Asian and Latin
markets; value added products; and franchise/joint venturing of our S.A.F.E.
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System technology. Whether land or lake based operations, the Company
strategic South Florida location with its twelve month growing season,
tremendous local market, and a select niche market for live products, provides
a significant advantage over competitors. A focus on products limited in the
wild, or by seasonality, further increases market value and demand.
In late July, 2005, we entered into an arrangement with The Redland Company,
Inc. of Homestead, Florida to utilize Redlands 38 acre quarry lake site for
testing of the S.A.F.E. System prototype. This site is close to our current
Florida City operations and provides an ideal environment for these final
tests. In addition to testing our own technology, we will also be selecting and
testing several other products which will be used in conjunction with S.A.F.E.
Site preparation is fully underway with excavation, new electricity, fencing,
and storage units nearing completion. The new prototype tank has been
delivered, and will be assembled and launched as soon as the security fencing
has been completed. Hurricane Wilma on October 24, 2005, has caused significant
delays in the availability of both labor and materials for all contractor jobs.
Risk Factors.
Uncertainty of Product Development
The Company is in the development stage and has not realized any material
operating revenues. The Company's targeted products are in various stages of
analyses, development and testing. Most of the products will require further
development and investment before they can be determined to be capable of being
successfully commercialized. During the development stage, significant
technical and practical obstacles may be identified which may need to be
overcome for commercial viability or prior to obtaining necessary regulatory
approvals. Furthermore, some of the Company's proposed products which are
successfully developed might be subject to requisite regulatory approval prior
to their commercial sale, which may not be obtained. No assurance can be given
that the Company will succeed in the development, governmental approval or
marketing of any product.
The Company cannot achieve profitable operations unless its products are
successfully commercialized or licensed. The Company does not expect to
achieve significant revenues to finance its research activities. The
transition from test trials to commercial production will involve distinct
management and technical challenges and will require additional personnel and
capital. There can be no assurance that these development efforts will be
successful or that any given product will be effective, capable of being
manufactured in commercial quantities at an acceptable cost, approved by
appropriate regulatory authorities, successfully marketed or that capital will
be available when needed.
Uncertainty of Future Profitability
The Company has not been profitable since inception and there can be no
assurance that the Company will ever achieve profitability. For the period
from inception to December 31, 2005, the Company incurred losses. The Company
has generated certain material operating revenues however expects operating
losses to increase over the near future. Thus, there can be no assurance that
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the Company will be able to obtain outside financing for its operations that
will be sufficient to meet our operating expenses. Our financial statements
do not include any adjustments that might be necessary should the Company be
unable to continue as a going concern.
The Company's ability to achieve profitability will depend in part on
completing research and development on, and obtaining regulatory approvals
for, its proposed products and successfully licensing or commercializing its
products. Until completion of the sale of the Common Shares, the Company had
depended on modest equity investments and spent minimal amounts on operating
expenses. As a result, the level of the Company's research and development
activities has been lower than such activities would have been with greater
financial resources.
While the Company believes it has nonetheless made significant progress in its
research and development, financial limitations on the Company's activities may
have a material adverse effect on the Company in the future. No assurance can
be given that the Company will be able to complete sales of the Common Shares
offered hereby, or that the Company's product development efforts will be
completed, that required regulatory approvals will be obtained, that any
products will be manufactured or marketed successfully or that profitability
will be achieved.
Negative Gross Margins
The Company currently has negative gross margin on sales due in part to a lack
lack
of needed infrastructure/production facilities to house sufficient inventory
to accommodate the seven to ten month growth cycle for the inventory of fish on
the farm. Our current fish farming operations are relatively small in scope,
at approximately 230,000 lbs of production per year. Our operations have
experienced a higher relative cost of sales due to our inability to purchase in
larger quantities, overall price increases for fingerling stock and operational
size limitations. In order for these conditions to change, our operations must
capitalize on the inherent benefits of economies of scale in significant cost
items such as fingerlings, feed and oxygen. Management has detailed expansion
plans to add further infrastructure to the existing forty-eight acre farm site
to expand our production significantly. This planned expansion depends on our
ability to raise additional capital for expansion and working capital. The
Company intends to undertake a private offering of additional common shares
during the second half of the fiscal year for up to $3.0 million in
additional capital, but there can be no assurance that such an offering will be
made as planned or, if made, that we will be able to raise the additional
working capital needed for this expansion.
Inventory Fluctuations
Our hybrid striped bass is produced under the continuous culture rather than
the batch culture production method. Continuous culture ensures that product
becomes ready for market each week, as opposed to an entire crop being
harvested at a single point in time. Accordingly, certain tanks are emptied
monthly, and subsequently re-stocked with fingerlings (small, juvenile fish).
Due to the very small size of the fingerlings (60 to 300 fish to the pound),
tanks can be stocked with a significantly larger number of fish that can be
grown to maturity in a similar sized tank. As the juvenile fish grow, they are
dispersed to multiple tanks to grow to market size. Therefore at certain times
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during a year, the inventory varies significantly depending upon the ratio of
fingerlings to mature fish in stock. We carry over seven months of inventory
due to the seven to ten month growth period for the fish stock and our practice
of introducing new fingerlings to the production base at regular intervals, so
that we are able to produce mature fish for sale every week. This results in
an average inventory age of about six months.
No Market Research of Potential Demand for Products.
The Company has neither conducted nor have others made available to it results
of market research such that management might have absolute assurance from
which to estimate potential demand for its products. There is no assurance
that sufficient market penetration can be achieved so that planned production
is absorbed by the market in the event such a demand can be identified.
Future Capital Needs; Inability to Access Capital Markets
The Company will continue to expend substantial funds on research and
development and commercialization efforts for its products. As of December 31,
2005, the Company did not have any significant reserves of cash (See Financial
Statements). The Company will require additional funds for these purposes and
will seek funds through equity financing, debt financing, collaborative
arrangements with corporate partners or from other sources. No assurance can
be given that such additional funds will be available to the Company on
acceptable terms, or at all. If adequate funds are not available from
operations or additional sources of financing, the Company's business will be
materially and adversely affected.
Comparison of Operating Results
Gross revenues for the quarter and six months ended December 31, 2005 were
$74,372 and $170,515, respectively, compared to $136,330 and $255,656
respectively for the quarter and six months ended December 31, 2004,
reductions largely the result of the loss of sales due to Hurricane Wilma.
The total loss from operations for the quarter and six months ended
December 31, 2005 were $(233,535) and $ (550,735), respectively compared to a
profit of $4,048 and a loss of $ (113,497)for the quarter and six months ended
December 31, 2004, respectively. This loss was largely attributable to the
reduction in sales revenue as a result of the hurricanes. Operating expenses
decreased from $186,826 to $171,449 for the quarters ended September 30, 2004
and 2005, respectively, but increased from $ 304,590 to $ 342,206 for the six
months ended December 31, 2004 and 2005, respectively. However, this change
was largely the result of reclassifying operating expenses to cost of sales for
the quarter and six months ending December 31, 2005. Cost of sales for the
quarter ended December 31, 2005 was $208,160, compared to $66,662 for the
same period in 2004. The total increase in cost of sales and operating
expenses for the quarter ended December 31, 2005 over the comparable prior
quarter was due primarily to an increase in payroll costs, from $47,210 to
$114,573, to increased inventory costs and utilities, and to increased costs
for investor relations and for professional fees due to our status as a
reporting public company as of June 30, 2005. The increases for the six month
period ended December 31, 2005 over 2004 were attributable to comparable items.
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Material Commitments
Our material commitments are as follows:
Note payable to bank, due June 2007, payable in monthly installments of $302,
including interest at 7.54 percent, secured by a vehicle. The principal
balances on this note as of December 31, 2005 and 2004, were $5,401 and
$9,968, respectively.
Three-year lease contract for a 2004 GMC truck, payable in the amount of $552
per month until March, 2007.
The Company has a supply contract with Air Gas South, Inc. for oxygen tank
rentals. The contract is for a five-year period ending in March, 2007, and
provides for a monthly lease payment of $846.
In December 2003, the Company executed two promissory notes, each in the
principal amount of $50,000, to two unrelated third parties. Each note is due
on December 12, 2005 and includes interest payable at a rate of 10% per annum.
Upon signing of the notes, each lender received one hundred thousand (100,000)
restricted common shares of the Company. Accrued interest on these notes was
$15,000 as of June 30, 2005 and was included in accrued interest. On August
24, 2005, one of these promissory notes, plus accrued interest, was converted
to 116,666 shares of common stock and a warrant to purchase an additional
58,333 common shares at a purchase price of $0.75 per share for a period of
three years. On December 18, 2005, the remaining note holder agreed to convert
the expired note and accrued interest into a new 180 day Subordinated
Convertible Note in the amount of $60,000, with 15% interest per annum, and
60,000 warrants.The note may be converted into common stock at $0.50 per Unit.
Each unit consists of one share of common stock and one-half warrant. Each
full warrant is to purchase one share of common stock at a price of $0.75 per
share for a period of three years.
In July, 2004, the Company executed a Convertible Note for $25,000 to a
shareholder of the Company. The note is due on July 28, 2006. Accrued
interest on this note was $2,292 at December 31, 2005 and was included in
accrued interest.
On June 21, 2005, the Company executed a $100,000 Subordinated Convertible
Bridge Note payable to an existing shareholder of the Company, due on October
21, 2005, with interest accrued at a rate of 10 percent per annum. This note
included 50,000 warrants to purchase shares of common stock at an exercise
price of $0.50 per share for a period of three years from the date of the
note. Additionally, the holder has the right to convert the note to shares of
common stock under the same terms and conditions to be set forth in the
Company planned Private Offering anticipated for 2006. This note was
extended in October, 2005 for an additional 180 days continuing the 10%
interest per annum. The lender was issued 50,000 warrants as an incentive for
the extension. Each warrant to purchase one share of common stock at an
exercise price of $0.30 per share for a period of three years from the date of
the extension, October 21, 2005.
On November 14, 2005, the Company executed a $25,000 Subordinated Convertible
Bridge Note payable to an existing shareholder in the Company, due on March 12,
2006, with interest accrued at a rate of 10% per annum. This note included
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12,500 warrants to purchase shares of Common stock at an exercise price of
$0.50 per share for a period of three years from the date of the note. As
further incentive for entering the note, the lender received 25,000 shares of
restricted common stock. Additionally, the holder has the right to convert the
note to shares of Common Stock under the same terms and conditions.
On January 4, 2006, the Company executed a $35,000 Subordinated Convertible
Bridge Note payable to an existing shareholder in the Company, due on
April 4, 2006, with interest accrued at a rate of 10% per annum. This note
included 17,500 warrants to purchase shares of Common stock at an exercise
price of $0.30 per share for a period of three years from the date of the
note. As further incentive for entering the note, the lender received 35,000
shares of restricted common stock. Additionally, the holder has the right to
convert the note to shares of Common Stock under the same terms and
conditions.
On January 18, 2006, the Company executed a $100,000 Subordinated Convertible
Bridge Note payable to an existing shareholder in the Company, due on July 18,
2006, with interest accrued at a rate of 15% per annum. This note included
100,000 warrants to purchase shares of Common stock at an exercise price of
$0.30 per share for a period of three years from the date of the note. As
further incentive for entering the note, the lender received 100,000 shares
of restricted common stock. Additionally, the holder has the right to convert
the note to shares of Common Stock under the same terms and conditions.
During the fiscal year ended June 30, 2002, the Company entered into an
agreement to retire the outstanding preferred stock held by our officers,
Messrs. Papadoyianis and Cherch, in exchange for $100,000. The Company paid
$30,000 of this amount at that time and the remaining $70,000 was converted to
a note payable accruing interest at a rate of 8 percent per year. Accrued
interest on this note was later converted to preferred stock. On February 7,
2006, the Board of Directors resolved to repay the notes outstanding to
Messers. Papadoyianis and Cherch through the issuance of a new note
reflecting the same terms and conditions of current notes that have been
issued by the Company since January, 2006. The new notes are retroactive
to January 1, 2006, shall bear interest at the rate of 15% per annum, and
include one warrant for every dollar outstanding, or 70,000 total warrants.
Each warrant is to purchase one share of common stock at a price of $0.30 per
share for a period of three years.
The Company previously entered into an employment agreement, with its
aquaculture facilities manager, through October 31, 2005, that provided for a
minimum annual salary of $35,000. In July 2005, the employment agreement was
renewed, effective November 1, 2005, for another four years through October 31,
2009, and provides for a minimum annual salary of $42,000.
Also in March 2005, the Company retained the services of The Eversull Group,
Inc. an investor relations company. The one year agreement beginning April 1,
2005 provides for payment of $2,000 per month, and 41,667 shares of restricted
common stock for a total agreed value of $12,500 for investor relations
services. The accrued monthly payment of $6,000 due as of June 30, 2005, was
included in accounts payable.
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The Company expects to pay for its material commitments listed from
revenues from its current operations as well as from additional capital
expected to be raised by the from a planned private offering of common stock
for up to $3.0 million in the last half of the current fiscal year. There can
be no assurance that the Company will be able to raise the additional capital
as needed or to continue its current operations unless such additional capital
is secured by the Company.
Dependence on Others; Limited Commercial Experience
The Company has not yet commercially introduced any new products. To be
successful, the Company's products must be produced in compliance with
regulatory requirements and at acceptable costs. At present, the Company has
limited commercial production operations. The Company will either need to
provide such operations internally or license or subcontract the production
and/or distribution of its products in order to achieve acceptable production
and/or sales levels. To the extent that the Company determines not to, or is
unable to, enter into joint marketing, distribution or production arrangements
or to arrange third party distribution or production for its products,
significant additional capital expenditures, management resources and time will
be required to develop production capabilities, a sales force and a
distribution network. There can be no assurance that the Company will be able
to establish such capabilities, sales force or network or enter into such joint
marketing, distribution or production arrangements or be successful in gaining
market acceptance for its products. In addition, the introduction of the
Company's products in foreign markets normally requires obtaining foreign
regulatory approvals and particular marketing expertise. There can be no
assurance that the Company will be able to market its products successfully in
the U.S. or overseas.
Rapid Technological Advancement; Competition
Aquaculture is a rapidly evolving field in which developments are likely to
continue at a rapid pace. Technological competition from aqua-cultural
companies and others diversifying into the field is intense and expected to
increase. Many of these companies have significantly greater research and
development, marketing, financial and managerial resources than the Company
and, therefore, represent significant competition for the Company. Moreover,
competitors which are able to complete trials, obtain required regulatory
approvals and commence commercial sales of their products before the Company
may enjoy a significant competitive advantage. There can be no assurance
that developments by others will not render the Company's products or
technologies noncompetitive or that the Company will be able to keep pace
with technological developments.
Operating Hazards.
Our operations are subject to the hazards faced by any food production company,
most especially contamination from outside sources. Also, outside agents
introduced into its products may cause personal injury to a consumer. Should
the Company sustain an uninsured loss or liability, its ability to continue
operations would in all likelihood be adversely affected.
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Uncertainty of Aquaculture Business.
The Aquaculture business is subject to many factors outside managements control
which factors may have a proportionately greater impact on small, less
established firms such as the Company. The Seafood and aquaculture industries
are affected by a multitude of factors, including changes in the general market
for such products, weather, disease and other natural phenomena, as well as
national and international economic conditions. The competition among present
suppliers is based on numerous factors, including the type and quality of
available product, as well as other factors, including access to areas
throughout the world where fish and rock are available for commercial purposes.
Given the anticipated small size of the Company even after this offering has
closed and the proceeds have been applied as planned, the business of the
Company will remain fragile and even more vulnerable to these factors than will
businesses generally.
Competition
The Company is an insignificant participant in the seafood industry. Management
believes it may successfully compete due to its proprietary techniques and
managements knowledge and experience. However, the Company is at a significant
competitive disadvantage compared to its competitors which have successfully
commercialized and obtained nation-wide distribution. Such national companies,
as well as some other well-established local brands, have significantly greater
financial resources and marketing strength than does the Company.
Dividends
Since its inception, the Company has not paid any cash dividends on its Common
Stock. The Company intends to retain future earnings, if any, to provide funds
for the operation of its business and accordingly, does not anticipate paying
any cash dividends on its Common Stock in the future.
Conflicts of Interest
The Company relies on certain of its Directors and executive officers who have
experience that is germane to the evaluation and development of our products
and assisting the Company in formulating its product research and development
strategy. Some of the members of the Board of Directors are employed other
than by the Company and may have commitments to or consulting or advisory
contracts with other entities that may limit their availability to the
Company.
Dependence on Key Management
The development of the Company's business and operations has been and will be
materially dependent upon the active participation of Messrs. Papadoyianis and
Cherch. The loss of the services of either of these key personnel or other
key employees of the Company would have a material adverse effect on the
ability to attract and retain qualified employees, particularly management
employees.
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Limited Assets of the Company.
The Company has limited tangible assets. Any business activity that the
Company undertakes will likely require substantial capital. In addition, the
Company may incur substantial costs in connection with its search and
negotiations for business opportunities, which may further deplete the limited
assets of the Company.
Risks Involved in Sales to Developing or Unstable Businesses.
The Company may provide its products to new or developing companies, which
would increase its business risks. There are substantial risks inherent in
doing business with companies which do not possess the financial soundness of
more seasoned companies. These companies have little or no assets and are
financially unstable. The abilities of these companies to pay the Company
fully for its products, and, therefore, the ability of the Company to operate
profitably, may therefore be deemed to be of a high risk dependent upon
numerous factors outside the control of the Company.
Government Regulation.
As with most companies engaged in general business operations, from time to
time, and depending upon the success of its proposed operations, the Company
will be subject to a wide variety of federal, state and local zoning and
building codes, statutes, rules and regulations, including: Anti-Trust Laws;
Labor Relations Laws; Federal and State Labor Laws; Federal Trade Commission
and State Trade Laws; Environmental Protection Laws, the Americans With
Disabilities Act, and the Occupational & Safety Health Administration (OSHA)
and other government regulatory mandates.
Rule 144 Stock Sales.
All of the shares presently issued and outstanding, except for those shares
issued to seed capital investors are restricted securities as defined by Rule
230.144 of the Act. Under the recent amendments to Rule 144, such shares may
be sold in public transactions after a one year holding period, subject to
certain restrictions: I) on the manner of sale; II) the quantity allowed to be
sold in each 90 day period; iii) the availability of 'public' information; and
iv) the filing of a Form 144 Notice with the SEC. After a two year holding
period, non-affiliates may sell Shares under Rule 144(k) without regard to the
stated restrictions. The sale of any of such shares may have a negative and
detrimental effect upon the trading market (assuming such exists) at the time
of sale.
Penny Stock Regulations.
While there is no assurance that a public trading market will be established
and maintained, in the event that such does occur, the Securities and Exchange
Commission has established specific regulations and rules for low priced
securities classified as penny stocks. Subject to certain exemptions,
securities which trade at less than $5.00 per share may be deemed penny stocks
and trading would be subject to regulations requiring the broker/dealers to
comply with specific disclosure and customer qualification standards. Should
the Company's shares trade at less than $5.00 and therefore be regarded as a
penny stock, there may be significant negative and detrimental effects on the
trading market from broker compliance with such regulations and rules.
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Item 3. Controls and Procedures.
Our Chief Executive Officer and Chief Financial Officer (the Certifying
Officers) are responsible for establishing and maintaining disclosure controls
and procedures and internal controls and procedures for financial reporting for
the Company. The Certifying Officers have designed such disclosure controls and
procedures and internal controls and procedures for financial reporting to
ensure that material information is made known to them, particularly during the
period in which this report was prepared. The Certifying Officers have
evaluated the effectiveness of our disclosure controls and procedures and
internal controls and procedures for financial reporting as of June 30, 2005,
and believe that our disclosure controls and procedures and internal controls
and procedures for financial reporting are effective based on the required
evaluation. There have been no significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of their evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no legal proceedings against the Company and the Company is
unaware of such proceedings contemplated against it.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the quarterly period ending December 31, 2005, the Company
issued a total of 75,000 common shares, increasing the total number of common
shares outstanding from 10,789,051 shares outstanding at September 30, 2005 to
10,864,051 at December 31, 2005. Of these additional common shares, 25,000
shares were issued as incentive for entering short-term notes, and 50,000
shares were issued to David H. Weinstein, in connection with a six month
renewal of his consulting contract.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by Item 601 of Regulation S-B
31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act
31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act
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32.1 Certification of Chief Executive Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act
32.2 Certification of Chief Financial Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act
(b) Reports on Form 8-K
No reports on Form 8-K were made during the quarter ending
December 31, 2005.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned, hereunto
duly authorized.
Dated: March 16, 2006
NEPTUNE INDUSTRIES, INC.
By: /s/ Ernest Papadoyianis
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Ernest Papadoyianis
CEO, President and Director
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