UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A
(Mark one)
[x] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934.
For the quarterly period ended September 30, 2006
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE EXCHANGE ACT
Commission File Number: 021-64091
NEPTUNE INDUSTRIES, INC.
(Exact name of small business issuer in its charter)
Florida 65-0838060
(State or other jurisdiction of (IRS Employer Identification Number)
Incorporation or Organization)
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 registrant was required to file such reports),
and(2) has been subject to such filing requirements for the past 90 days.
[x]Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS
The number of shares outstanding of each of the issuer's class of common
equity, as of November 1, 2006 was 11,349,269 shares
Transitional Small Business Disclosure Format (check one): Yes___; No_X_
FORM 10-QSB
NEPTUNE INDUSTRIES, INC.
PERIOD ENDED SEPTEMBER 30, 2006
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1.
FINANCIAL STATEMENTS.....................................................F-1
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION................. 3
Item 3.
CONTROLS AND PROCEDURES................................................... 6
PART II OTHER INFORMATION
Item 1.
LEGAL PROCEEDINGS......................................................... 6
Item 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS............... 7
Item 3.
DEFAULTS UPON SENIOR SECURITIES........................................... 7
Item 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ...................... 7
Item 5.
OTHER INFORMATION ........................................................ 7
Item 6.
EXHIBITS .................................................................15
Signatures ...............................................................15
-2-
Part I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
NEPTUNE INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
September 30, 2006
(unaudited)
---------------
ASSETS
Current Assets
Cash $ 163,567
Accounts receivable, less allowance for
doubtful accounts of $ 0 69,958
Inventory 434,817
Prepaid expenses 553
Deposit on equipment 5,000
Deferred costs 30,735
Security deposits 13,880
Deferred tax asset of $530,410
valuation allowance of $530,410 -
-------------
Total Current Assets 718,510
Property and equipment, net of
Accumulated depreciation of $373,344 416,142
-------------
Total Assets $ 1,134,652
=============
LIABILITIES AND DEFICIENCY IN ASSETS
Liabilities
Current Liabilities
Accounts payable $ 95,713
Accrued and other current liabilities 521,812
Payroll liabilities 12,058
Current portion of long-term debt 2,924
Convertible notes payable 520,000
Notes payable-officers 89,888
Convertible Notes-Officers 17,500
------------
Total Current Liabilities 1,259,895
Long-term liabilities
Convertible debentures $ 500,000
Deferred compensation-stock options 194,292
------------
Total Long-Term Liabilities 694,292
Total Liabilities 1,954,187
COMMITMENTS AND CONTINGENCIES
(NOTES 2, 4, 5, 7 AND 8)
F-1
Stockholders' Equity (Deficiency in assets)
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 100,000,000 shares
authorized, 11,349,269 shares issued and outstanding 11,349
Additional paid-In capital 4,433,900
Accumulated deficit (5,269,784)
------------
Total Deficiency in assets (819,535)
------------
Total Liabilities and Deficiency in assets $ 1,134,652
============
See accompanying notes.
F-2
NEPTUNE INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the three months ended
September 30,
2006 2005
----------- ------------
Revenues:
Sales $ 255,877 $ 96,143
Cost of Sales 332,400 152,552
---------- ----------
Gross loss (76,523) (54,409)
---------- ----------
Expenses:
Advertising and marketing - 151
Automobile and truck expense 6,154 8,115
Depreciation 357 1,265
Insurance 7,811 6,556
Office 824 1,208
Officers salary, related taxes and benefits 79,844 114,573
Other operating expenses 6,403 9,774
Outside services 34,909 937
Professional fees 5,695 17,335
Public relations 10,873 6,850
Rent - 1,025
Repairs - 259
Stock-based compensation 194,292 -
Utilities 2,113 1,835
--------- ---------
Total expenses from operations 349,275 169,903
--------- ---------
Loss before interest, other income,
expenses and income taxes (425,798) (224,512)
Interest income 1,785 -
Interest Expense (59,185) (9,023)
--------- ---------
Loss before income tax (483,198) (233,535)
Provision for income taxes - -
--------- ---------
Net loss $ (483,198) $ (233,535)
========= =========
Net loss per share(basic and diluted) $ (0.043) $ (0.022)
========= =========
Weighted average number of
common shares outstanding
(basic and diluted) 11,349,269 10,532,633
========== ==========
See accompanying notes.
F-3
NEPTUNE INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the three months ended
September 30,
2006 2005
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (483,198) $ (233,535)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization 17,227 8,301
Common stock issued for interest - 13,203
Deferred compensation-stock options 194,292 -
(Increase) decrease in assets:
Accounts receivable (1,538) 57,346
Deferred costs (1,624)
Inventory 63,670 (71,557)
Deposits (2,500) (2,500)
Prepaid expenses 553 -
Increase (decrease) in liabilities:
Accounts payable (42,610) 27,434
Accrued and other current liabilities 120,793 56,691
Current portion of long-term debt 734 -
Payroll liabilities 12,058 -
----------- ----------
Net cash used by operating activities (122,141) (144,617)
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Notes receivable - 5,000
---------- ----------
Net cash provided (used) by investing activities - 5,000
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from convertible notes - 125,000
Other 9,770 -
---------- ----------
Net cash provided by financing activities 9,770 125,000
---------- ----------
Net increase (decrease) in
cash and equivalents (112,371) (14,617)
Cash and equivalents-beginning 275,938 144,004
---------- ----------
Cash and equivalents-ending $ 163,567 $ 129,387
========== ==========
See accompanying notes
F-4
SUPPLEMENTAL DISCLOSURES
Cash paid during the quarter for:
Interest $ 59,185 $ 8,978
Income taxes $ - $ -
========== ==========
See accompanying notes.
F-5
NEPTUNE INDUSTRIES INC.
AND SUBSIDIARIES
STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIENCY IN ASSETS)
QUARTER ENDED SEPTEMBER 30, 2006 (Unaudited)
Total Stockholders
Equity
Common Stock Preferred Stock Paid-In Accumulated (Deficiency)
Shares Amount Shares Amount Capital Deficit in Assets
---------- -------- ------- --------- --------- ------------ -----------
Balance, June 30,2003 4,771,960 $ 4,772 - $ - $ 1,870,908 $(1,889,141) (13,461)
==============================================================================
Shares issued in
connection with
note payable 33,333 33 - - 5,967 - 6,000
Shares issued for cash 794,103 794 - - 379,206 - 380,000
Net loss for the
year ended - - - - - (778,253) (778,253)
------------------------------------------------------------------------------
Balance, June 30,2004 5,599,396 5,599 - - 2,256,081 (2,667,394) (405,714)
Shares issued for
Cash 1,666,667 1,667 - - 748,333 - 750,000
Shares issued in
exchange for
services 85,756 86 - - 25,641 - 25,727
Shares issued for
interest expense 4,167 4 - - 1,246 - 1,250
Shares issued in
relation to
convertible notes 207,064 207 - - 128,293 - 128,500
Shares issued to
officers for accrued
compensation and
interest 2,500,000 2,500 5,000,000 5,000 956,243 - 963,743
Shares issued in
connection with
merger 469,583 470 - - (470) - -
Net loss for the
year ended - - - - - (819,279) 819,279)
------------------------------------------------------------------------------
Balance 6/30/2005 10,532,633 $10,533 5,000,000 $5,000 $ 4,115,367 $ (3,486,673)$644,227
Shares issued for
conversion of
debt 236,406 236 - - 157,967 - 158,203
Shares issued for
services 400,000 400 - - 42,600 - 43,000
Shares issued as
Incentive 180,000 180 - - - - 180
Shares issued for
rounding on reverse 230 - - - - - -
Net loss for the
year ended - - - - - (1,044,421)(1,044,421)
------------------------------------------------------------------------------
Balance 6/30/2006 11,349,269 $11,349 5,000,000 $5,000 $ 4,433,899 $(4,786,586)$ (336,337)
Net loss for the
Quarter ended - - - - - (483,198) (483,198)
------------------------------------------------------------------------------
Balance 9/30/2006 11,349,269 $11,349 5,000,000 $5,000 $ 4,433,899 $(5,269,784)$ (819,535)
==============================================================================
See accompanying notes
F-6
NEPTUNE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR
THE THREE MONTHS ENDING SEPTEMBER 30, 2006 and 2005
(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 then, 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;
developing, testing and patenting (pending) the Aqua-Sphere and Aqua-Cell
(formerly known as S.A.F.E. ) technologies; and completing the food science
bio-technology research to discover a suitable protein substitute for fish meal
in animal diets.
In June 2001, the Company acquired the operating rights to a 48 acre
established fish farm in Florida City, Florida to be operated as Blue Heron
Aqua Farms, LLC. The farm maintains a 47,000,000 gallon per day water usage
permit and a twenty year lease from South Florida Water Management District.
This site has become the cornerstone of the South Florida operations of the
Company with its extensive infrastructure and future potential for hatchery
facilities for fingerling production.
Common shares of the Company, are listed on the OTC Bulletin Board and continue
to be listed on the OTC 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, Aqua Biologics, Inc.
(corporate name changed from Aquaculture Specialties, Inc. in June, 2006) 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.
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.
F-7
NEPTUNE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR
THE THREE MONTHS ENDING SEPTEMBER 30, 2006 and 2005
(Unaudited)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (continued)
Revenue Recognition
Sales revenue is recognized upon the shipment of merchandise to customers.
Allowances for sales returns are recorded as a component of net sales in the
period the allowances are recognized.
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
financial statements of the Company compared to the tax returns.
Advertising and marketing costs
Advertising and marketing costs are expensed as incurred. Advertising and
marketing expense was $0 and $151 for the quarters ending September 30,
2006 and 2005 respectively.
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.
Concentrations of Credit Risk and Economic Dependence
Financial instruments, which potentially subject the Company to a 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 September 30, 2006, the Company had
no 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 geographic location of the customers of the Company.
Recently Issued Accounting Pronouncements
In November 2004, the FASB issued Statement No. 151, Inventory Costs, (SFAS
151) to amend the guidance in Chapter 4, Inventory Pricing, of FASB
Accounting Research Bulletin (ARB) No. 43, Restatement and Revision of
Accounting Research Bulletins, which will become effective for the Company
in fiscal year 2006. Statement 151 clarifies the accounting for abnormal
amounts of idle facility expense, freight, handling costs, and wasted
F-8
NEPTUNE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR
THE THREE MONTHS ENDING SEPTEMBER 30, 2006 and 2005
(Unaudited)
NOTE 1. SUMMARY OF SIGNIFCANT ACCOUNTING PRINCIPLES(continued)
material (spoilage). The Statement requires that those items be recognized
as current-period charges. Additionally, Statement 151 requires that
allocation of fixed production overhead to the costs of conversion be based on
the normal capacity of the production facilities. Management believes that the
adoption of SFAS 151 will not affect the financial position or results of
operations of the Company.
In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary
Assets (SFAS 153), an amendment to Opinion No. 29 Accounting for Nonmonetary
Transactions. Statement No. 153 eliminates certain differences in the
Guidance in Opinion No. 29 as compared to the guidance contained in standards
issued by the International Accounting Standards Board. The amendment to
Opinion No. 29 eliminates the fair value exception for nonmonetary exchanges
of similar productive assets and replaces it with a general exception for
exchanges of nonmonetary assets that do not have commercial substance. Such an
exchange has commercial substance if the future cash flows of the entity are
expected to change significantly as a result of the exchange. SFAS No. 153 is
effective for nonmonetary asset exchanges occurring in periods beginning after
June 15, 2005. Earlier application is permitted for nonmonetary asset
exchanges occurring in periods beginning after December 16, 2004. Management
does not expect adoption of SFAS No. 153 to have a material impact on the
financial statements of the Company.
In December 2004, the FASB issued SFAS No. 123 (revised 2004) Share-Based
Payments (SFAS No. 123R), which is a revision of SFAS No. 123, Accounting
for Stock-Based Compensation. SFAS No. 123(R) supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees and amends SFAS No. 95, Statement of
Cash Flows. Generally, the approach in SFAS No. 123(R) is similar to the
approach described in SFAS No. 123. However, SFAS No. 123(R) requires all
share-based payments to employees, including grants of employee stock options,
to be recognized in the income statement based on their fair values. Pro forma
disclosure is no longer an alternative. The new standard will be effective for
the Company in the first interim or annual reporting period beginning after
December 15, 2005. The Company has adopted this standard effective July 1. 2006
and has reported $194,292.50 in stock option compensation for stock options
granted effective July 1. 2006.
In July, 2006, the Financial Accounting Standards Board issued FASB
Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxes-
An Interpretation of FASB Statement No, 109. (FIN 48). Fin 48 clarifies
the accounting for uncertainty in income taxes recognized in an
enterprise s financial statements in accordance with FASB Statement No.
109-Accounting for Income Taxes. FIN 48 also prescribes a recognition
threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken
in a tax return. FIN 48 also provides guidance on de-recognition,
classification, interest and penalties, accounting in interim periods,
disclosure and transition. The provisions of FIN 48 are effective for fiscal
F-9
NEPTUNE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR
THE THREE MONTHS ENDING SEPTEMBER 30, 2006 and 2005
(Unaudited)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (continued)
years beginning after December 15, 2006. We will adopt FIN 48 in the first
quarter of 2007. We do not believe the effect of adopting FIN 48 will have a
material impact on our financial statements.
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.
Long-Lived and Disposal of Assets
The Company follows FASB Statement No. 144 (SFAS 144), Accounting for the
Impairment of Long-Lived Assets. SFAS 144 requires that long-lived assets
to be held and used be reviewed for impairment whenever events or changes in
circumstances indicate that the related carrying amount may not be
recoverable. When required, impairment losses on assets to be held and used
are recognized based on the fair value of the asset. Long-lived assets to be
disposed of, if any, are reported at the lower of carrying amount or fair
value less cost to sell.
Stock Compensation for Services Rendered
The Company has issued restricted shares of common stock to non-employees in
exchange for services rendered. Common stock issued to non-employees for
services received are based upon the fair value of the services or equity
instruments issued, whichever is more reliably determined.
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.
F-10
NEPTUNE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR
THE THREE MONTHS ENDING SEPTEMBER 30, 2006 and 2005 (Unaudited)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (Continued)
Inventory at September 30, 2006 and 2005 consisted of the following:
2006 2005
Seafood $ 95,198 $ 108,446
Feed 129,835 154,344
Chemicals 90,981 98,711
Overhead 118,803 118,490
----------- -----------
$ 434,817 $ 479,991
=========== ===========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. Management believes that all necessary adjustments have been
made to the financial statements to make the financial statements accurate and
in conformity with generally accepted accounting principles.
NOTE 2. GOING CONCERN
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. The Company financial
position and operating results raise substantial doubt about the Company
ability to continue as a going concern, as reflected by the accumulated
deficit of $5,269,784 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. 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:
September 30,
2006 2005
------------- ------------
Vehicles $ 17,578 $ 17,578
Computer and office equipment 7,713 7,713
Equipment 629,518 628,018
Leasehold improvements 139,734 126,657
------------- ------------
794,543 779,966
Accumulated depreciation (373,344) (218,643)
------------- -------------
Property and equipment, net $ 416,142 $ 561,323
============= =============
F-11
NEPTUNE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR
THE THREE MONTHS ENDING SEPTEMBER 30, 2006 and 2005
(Unaudited)
NOTE 3. PROPERTY AND EQUIPMENT (continued)
Total depreciation expense for the quarters ended September 30, 2006 and 2005,
amounted to $17,227 and $8,301, respectively. Of these amounts, $16,870
and $7,036 are included in cost of sales and $357 and $1,265 are
included in expenses for the periods ended September 30, 2006 and 2005,
respectively.
NOTE 4. ACCRUED AND OTHER CURRENT LIABILITIES
Accrued and other liabilities consisted of the following:
September 30.
2006 2005
------------ ------------
Accrued payroll - officers $ 319,172 $ 113,837
Accrued interest - officers 43,788 19,836
Accrued interest - others 100,352 14,452
Accrued consulting 58,500 -
------------ ------------
$ 521,812 $ 168,125
============ ============
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. These
agreements have been renewed automatically for additional five year terms.
The Agreements also state that the two key members of management are entitled
to and 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 accrued a total of
$319,672 and $113,837 through the quarters ended September 30, 2006 and 2005,
respectively. Cash compensation actually paid was $88,553 and $93,186 for the
quarters ended September 30, 2006 and 2005, respectively.
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 received 100,000 (pre 1 for 6 reverse split) restricted shares of common
stock for prior services due of $5,000. A new agreement was entered into with
CF Consulting LLC effective March 31, 2006, under which CF Consulting will
provide CFO and General Counsel services to the Company in return for monthly
compensation of $5,500 for six months commencing April 1, 2006, $6,000 for
F-12
NEPTUNE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR
THE THREE MONTHS ENDING SEPTEMBER 30, 2006 and 2005
(Unaudited)
NOTE 5. ACCRUED OFFICERS COMPENSATION AND INTEREST (Continued)
the next six months and $6,500 for the next six months of the 18 month term
of the agreement. CF Consulting also received 250,000 shares of stock, valued
at $15,000 based on the lack of tradability of the shares and other factors.
A total of $58,500 has been accrued as due under the agreements with CF
Consulting, LLC as of September 30, 2006. Our Chief Financial Officer,
Robert Hipple, is also a managing director of CF Consulting.
NOTE 6. RELATED PARTY TRANSACTIONS
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 paid $30,000 and the
remaining $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 new
notes, which were made 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. The new notes
are in the amount of $44,944 each, and included repayment of principal of
$35,000 and accrued interest of $9,944 each.
NOTE 7. NOTES PAYABLE
On June 21, 2005, the Company executed a $100,000 Subordinated Convertible
Bridge Note payable to an existing shareholder in 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. The
principal and interest may be converted to units at any time during the note
at a price of $0.50 per unit, each unit consisting of one share of stock and
a half warrant. Each full warrant is redeemable for one share of common stock
at a price of $0.75 for a period of three years. On October 21,
2005, this note was extended for an additional five months until March 31,
2006 with interest accrued at a rate of 10% per annum. This extension
included 50,000 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
extension. Extension, conversion or repayment of this note is currently under
negotiation and the note, while past maturity, has not been declared in
default. The Company has been waiting for the results of its currently
pending offering of convertible debenture note commenced in April, 2006 to
complete these negotiations.
F-13
NEPTUNE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR
THE THREE MONTHS ENDING SEPTEMBER 30, 2006 and 2005 (Unaudited)
NOTE 7. NOTES PAYABLE (Continued)
On September 12, 2005, the Company executed a $40,000 Subordinated
Convertible Bridge Note payable to an existing shareholder in the Company,
due on January 12, 2006, with interest accrued at a rate of 10% per annum.
This note included 20,000 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. The principal and interest may be converted to units at any time
during the note, at a price of $0.50 per unit, each unit consisting of one
share of common stock and half warrant. Each full warrant is redeemable for
one share of common stock at a price of $0.75 for a period of three years.
Extension, conversion or repayment of this note is currently under
negotiation and the note, while past maturity, has not been declared in
default. The Company has been waiting for the results of its currently
pending offering of convertible debenture note commenced in April 2006 to
complete these negotiations.
On September 23, 2005, the Company executed a $10,000 Subordinated
Convertible Bridge Note payable to an existing shareholder in the Company,
due on December 23, 2005, with interest accrued at a rate of 10% per annum.
This note has subsequently been extended until it can be repaid, and
repayment is expected to be made from the proceeds of the pending offering of
convertible debenture notes commenced in April 2006. This note included 5,000
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. The principal
and interest may be converted to units at any time during the note, at a
price of $0.50 per unit, each unit consisting of one share of common stock
and a half warrant. Each full warrant is redeemable for one share of common
stock at a price of $0.75 for a period of three years.
On September 23, 2005, the Company executed a $50,000 Subordinated
Convertible Bridge Note payable to an existing shareholder in the Company,
due on March 23, 2006, with interest accrued at a rate of 10% per annum. This
note included 25,000 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. As further incentive for entering the note, the lender received
20,000 shares of restricted common stock. The principal and interest may be
converted to units at any time during the note, at a price of $0.50 per unit,
each unit consisting of one share of common stock and a half warrant. Each
full warrant is redeemable for one share of common stock at a price of $0.75
for a period of three years. Extension, conversion or repayment of this note
is currently under negotiation and the note, while past maturity, has not
been declared in default. The Company has been waiting for the results of
its currently pending offering of convertible debenture note commenced in
April 2006 to complete these negotiations.
On September 30, 2005, the Company executed a $25,000 Subordinated
Convertible Bridge Note payable to an existing shareholder in the Company,
due on January 30, 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
F-14
NEPTUNE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR
THE THREE MONTHS ENDING SEPTEMBER 30, 2006 and 2005
(Unaudited)
NOTE 7. NOTES PAYABLE (Continued)
of the note. The principal and interest may be converted to units at any time
during the note, at a price of $0.50 per unit, each unit consisting of one
share of common stock and a half warrant. Each full warrant is redeemable for
one share of common stock at a price of $0.75 for a period of three years.
Extension, conversion or repayment of this note is currently under
negotiation and the note, while past maturity, has not been declared in
default. The Company has been waiting for the results of its currently
pending offering of convertible debenture note commenced in April 2006 to
complete these negotiations.
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. The principal and interest may be
converted to units at any time during the note, at a price of $0.50 per unit,
each unit consisting of one share of common stock and a half warrant. Each full
warrant is redeemable for one share of common stock at a price of $0.75
for a period of three years. Extension, conversion or repayment of this note
is currently under negotiation and the note, while past maturity, has not
been declared in default. The Company has been waiting for the results of
its currently pending offering of convertible debenture note commenced in
April 2006 to complete these negotiations.
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. The principal and interest may be converted to units
at any time during the note, at a price of $0.50 per unit, each unit
consisting of one share of common stock and a half warrant. Each full warrant
is redeemable for one share of common stock at a price of $0.75 for a period
of three years. Extension, conversion or repayment of this note is currently
under negotiation and the note, while past maturity, has not been declared in
default. The Company has been waiting for the results of its currently
pending offering of convertible debenture note commenced in April 2006 to
complete these negotiations.
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. The principal and interest may be
F-15
NEPTUNE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR
THE THREE MONTHS ENDING SEPTEMBER 30, 2006 and 2005
(Unaudited)
NOTE 7. NOTES PAYABLE (Continued)
converted to units at any time during the note, at a price of $0.50 per unit,
each unit consisting of one share of common stock and a half warrant. Each
full warrant is redeemable for one share of common stock at a price of $0.75
for a period of three years.
On February 26, 2006, the Company executed a $50,000 Subordinated Convertible
Bridge Note payable to an existing shareholder in the Company, due on August
26, 2006, with interest accrued at a rate of 15% per annum. This note
included 50,000 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. The principal and interest may be converted to units at any time during
the note, at a price of $0.50 per unit, each unit consisting of one share of
common stock and a half warrant. Each full warrant is redeemable for one
share of common stock at a price of $0.75 for a period of three years of
common stock is at a price of $0.75 per share for a period of three years.
On April 5, 2006, the Company executed a $10,000 Subordinated Convertible Note
payable to our to our COO, Sal Cherch, and due on the first monies received
from the proceeds of the current Offering, with interest accrued at a rate of
15% per annum. The note includes 10,000 warrants. Each warrant is redeemable
for one share of common stock at a price of $0.30 share for a period of three
years. The principal and interest may be converted to units at any time
during the note, at a price of $0.50 per unit, each unit consisting of one
share of common stock and a half warrant. Each full warrant is redeemable for
one share of common stock at a price of $0.75 for a period of three years.
On April 20, 2006, the Company executed a $7,500 Subordinated Convertible Note
payable to our to our COO, Sal Cherch, and due on the first monies received
from the proceeds of the current Offering, with interest accrued at a rate of
15% per annum. The note includes 7,500 warrants. Each warrant is redeemable for
one share of common stock at a price of $0.30 share for a period of three
years. The principal and interest may be converted to units at any time
during the note, at a price of $0.50 per unit, each unit consisting of one
share of common stock and a half warrant. Each full warrant is redeemable for
one share of common stock at a price of $0.75 for a period of three years.
In May, 2006, the Company issued a total of $500,000 in two year debenture
bonds as part of the private offering of up to $2,000,000 in debentures
bonds commenced in April 2006. See, Note 11, Private Offering.
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
F-16
NEPTUNE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR
THE THREE MONTHS ENDING SEPTEMBER 30, 2006 and 2005
(Unaudited)
NOTE 8. COMMITMENTS (Continued)
31, 2009, and provides for a minimum annual salary of $42,500. At that time,
Mr. Joubert was also promoted to Vice President of Operations.
In January, 2006, the Company entered into a financial public relations
agreement with H.L. Lanzet, Inc. to provide services to the Company for a
period of six months. In March 2006, the Company advised Lanzet that it was not
satisfied with the services provided and that the Company was terminating the
agreement. On August 29, 2006, the Company and Lanzet entered into an agreement
to resolve any claimed compensation due under the agreement by issuing warrants
to purchase 300,000 shares of common stock of the Company for a period of three
years from August 29, 2006 at a warrant exercise price of $0.60 per share. One
half of the warrants are immediately exercisable and the other one-half may be
exercised beginning one year after the date of issue. The warrants also carry
a piggy-back registration provision, in the event that the Company undertakes a
registration of its common shares.
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, provided for payment of $2,000 per month, and 250,000 shares (41,667
shares post-reduction) of restricted common stock, valued at $12,500.
This agreement has been terminated, and an accrued amount of $18,000 as of
December 31, 2005, previously included in accounts payable has been eliminated.
On March 31, 2006, the Company entered into a new consulting agreement with CF
Consulting, Inc. for contractual Chief Financial Officer and corporate counsel
services at an annual remuneration of $66,000 per annum in the first year and
$78,000 in the second year of the contract, plus 250,000 restricted common
shares, valued at $15,000.
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.
F-17
NEPTUNE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR
THE THREE MONTHS ENDING SEPTEMBER 30, 2006 and 2005
(Unaudited)
NOTE 9. STOCKHOLDERS' EQUITY (continued)
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 long-term
liabilities to 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.
No common shares of the Company were issued during the quarter ended
September 30, 2006.
Stock Options.
On March 31, 2006, the Board of Directors approved the grant of non-qualified
stock options under the Neptune Industries, Inc. 2004 Long-Term Incentive Plan
for officers, directors, employees of the Company and its subsidiary, effective
July 1, 2006, as follows:
To each independent (non-management) director: 5,000 shares for each
full year of service at the end of each fiscal year (June 30), as
follows:
James M. Harvey 17,500 shares
Don Tewksbury 40,000 shares
Gregory A. Lewbart 40,000 shares
To the following officers and employees:
Ernest Papadoyianis 500,000 shares
Xavier T. Cherch 500,000 shares
Robert Hipple (to CF Consulting) 250,000 shares
Michael Joubert 15,000 shares
-----------
1,362,500 shares
All of the stock options are for a period of ten years and carry an exercise
price of $0.3133 per share, based on the average closing price of the Company
common stock for the 20 trading days prior to the grant of the option. The
options became effective at July 1, 2006, at which time, the trading price of
the common shares was $0.30.
F-18
NEPTUNE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR
THE THREE MONTHS ENDING SEPTEMBER 30, 2006 and 2005
(Unaudited)
NOTE 9. STOCKHOLDERS' EQUITY (continued)
The Company applied the reporting requirements of SFAS No. 123, Accounting
for Stock-Based Compensation using the Black-Scholes Model for valuing stock
options. We applied a stock price of $0.30 per share, the market price on the
date the options became effective, an option strike price of $0.3133 per share,
a 10 year maturity for the options, a risk free interest rate of 5 percent, and
a volatility factor of 20 percent. This resulted in a valuation for each
option at $0.1426 per share, or a total value of $194,292.50 for the 1,362,500
options granted.
NOTE 10. MAJOR CUSTOMERS
Revenues from two customers comprised approximately 86 percent of revenues
during the period ended September 30, 2006, compared to the same two customers
comprising 69 percent for the prior period ending September 30, 2005.
NOTE 11. PRIVATE OFFERING
On April 18, 2006, the Company engaged Dawson James Securities, Inc. of Boca
Raton, Florida, to assist in the private placement of up to 2,000 units, made
up of a convertible debenture and a common stock warrant, for a total of $2
million. Dawson James Securities will receive a fee equal to ten percent of
the amount raised in the offering and an unaccountable expense allowance of
three percent of the amount raised. In addition, Dawson James will receive
warrants to acquire common shares on each closing of the sale of the Unites
in the offering equal to twenty percent (20%) of the Units sold in the
Offering. These warrants will be exercisable at any time during the five (5)
years from the date of the closing at an exercise price equal to $.50 per
share for the warrants based on the original sale of unit, and $.30 per share
for the warrants based on conversion of the Debentures to common stock.
Each of the Units to be offered (individually a Unit, and collectively the
Units) consists of (i) a $1,000.00 Convertible Debenture (the Debenture)
with a 24% coupon, payable in kind with common stock, and (ii) one thousand
redeemable common stock purchase warrants ("Warrant"). Each Warrant entitles
the holder to purchase one share of Common Stock at an exercise price of
$0.50 per share over a term of five years from the initial closing date of
the Offering. The Warrants are redeemable by the Company upon 30 days written
notice at a purchase price of $0.01 per Warrant, subject to our common stock
having a closing bid price of at least $1.25 per share for a period of ten
(10) consecutive trading days. The term of each Debenture is for 24 months
from the date of issue. During the term, holders of the Debenture may convert
their note to common stock at a price of $0.30 per share. The 24% PIK (Paid
in Kind) Coupon is to be paid out on a quarterly basis in cash or stock, at
the Company election. If the Company elects to pay in common stock, the
market price valuation will be established by the average closing bid price
of the common stock for the last twenty (20) trading days of the calendar
quarter for which the interest due is being paid in common stock (the
Average Closing Price). The right of the Company to make any interest
F-19
NEPTUNE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR
THE THREE MONTHS ENDING SEPTEMBER 30, 2006 and 2005
(Unaudited)
NOTE 11. PRIVATE OFFERING (Continued)
payment in shares of common stock on a particular date is subject to the
satisfaction (or waiver by the Holder) of the following additional conditions
on such date: (1) there is then an effective registration statement covering
the common shares to be issued on such date, for which no stop order is in
effect; (2) no defined event of default exists on such date; (3) the Average
Closing Price is equal to or greater than $.15 per share (as appropriately
adjusted for any stock split, stock dividend or other similar corporate
action); and (4) the Company has sufficient authorized but un-issued shares
of common stock to provide for the issuance of the interest shares to the
Holders of the Debentures.
The offering is being made only to accredited investors and each investor
will receive a Registration Rights Agreement at closing under which the
Company undertakes to file a registration statement for the conversion shares
and the shares underlying the Warrants within 60 days, and to maintain the
effectiveness of that registration statement thereafter. Any offer or sale
of a Unit, if made, will be made only pursuant to the private offering
memorandum prepared by the Company, and only to accredited investors. There
can be no assurance that the offering will be successful, or that the Company
will be able to raise the additional capital needed to continue and expand
its operations.
Under the terms of the offering, proceeds of the sale of the debenture notes
will be deposited in an escrow account at Sterling Bank, Inc. in Lantana,
Florida under an escrow agreement which provides for the first release of
funds when the offering minimum of $500,000 for 50 units of the offering have
been subscribed, with subsequent releases on a weekly basis. On May 10,
2006, the initial release of funds was made under the terms of the escrow
agreement and the Company has received $437,000 in proceeds from the
offering, net of commissions and expenses, as follows:
Principal amount Commissions Expense allowance Net proceeds Warrants
$ 500,000 $ 50,000 $ 13,000 $ 437,000 50,000
During the quarter ended September 30, 2006, an additional $30,000 in principal
amount of the bonds was subscribed for, and the Company anticipates placing the
remaining $1,470,000 in principal amount of the bonds during the quarter ended
December 31, 2006.
F-20
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.) technology, renamed as the Aqua-Sphere in year
ended June 30, 2006, which 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 Xavier T.
(Sal) Cherch began designing and testing what today is known as the Aqua-Sphere
System over 9 years ago. The Aqua-Sphere System is designed to address and
resolve the concerns of environmentalists. Today, through a contractual
arrangement, Neptune itself has spent over 7 years and more than three
million dollars in completing the development of the Aqua-Sphere System,
perfecting production methods, performing market analyses, acquiring lease
-3-
sites, and creating a cornerstone production facility through its
subsidiary, Blue Heron Aqua Farms, LLC (Blue Heron) 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, the Company completed a state of the art nursery expansion in
order to increase production capacity of its sashimi quality hybrid striped
bass (branded as Everglades Striped Bass)by over 25%. 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 48 acre
site under production at this time, the Company has the capability of producing
close to two million pounds of fish per year from this site alone when the site
is fully developed.
Management focused its efforts on further research and development of the
various components of the Aqua-Sphere system technology, while fine tuning
production methods for use in quarry lake aqua-farms. Among the many
technological developments tested during this period was a solar powered
programmable, automated, feeding system which allows controlled amounts of
feed to be fed at specific times of the day. This insures a more rapid growth
rate, with less waste. Through the development and operation of three previous
pilot farms, Neptune improved its 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 farms purchase
fingerling fish, raise the product to market size(1.25 to 2+ pounds), and then
harvest and distribute 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
through independent wholesalers and distributors allow us to bring our
products to market faster and cheaper than the 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 Aqua-Sphere 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.
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
-4-
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
in South Florida and offer tremendous opportunity for development. Quarry sites
will be developed utilizing the Aqua-Sphere 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.
Technology
The Aqua-Sphere System incorporates many features which make it suitable for
all parts of the world. The Company continues to be deluged with inquiries.
The Aqua-Sphere System is a floating, articulating, patent pending containment
system which utilizes alternative energy to power many of its components. The
system can be utilized as a stand alone single tank (an Aqua-Cell) in a variety
of sizes or several Aqua-Cells can be interconnected into pods to create the
Aqua-Sphere. In a pod configuration, each Aqua-Cell is connected to another via
an underwater conveyance pipe. This allows the operator to move fish from Aqua-
Cell to Aqua-Cell without removing them from the water, or handling. Therefore,
an Aqua-Sphere 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 Aqua-Cell 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.
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 Aqua-Sphere
technology. Whether land or lake based operations, the Company?s
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 Aqua-Sphere 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 it.
-5-
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, caused significant
delays in the availability of both labor and materials for all contractor jobs.
Risk Factors.
The Company has identified certain risk factors connected with its operations
and an investment in the Company, which are listed in detail under Risk Factors
in the Form 10-KSB filed by the Company for the fiscal year ended June 30, 2006.
Comparison of Operating Results
Gross revenues for the quarters ended September 30, 2006 and 2005 were
$255,877 and $96,143, respectively, resulting from the increased capacity of
the farm. Cost of sales for the same periods were $332,400 and $152,552,
resulting in gross loss of $(76,523) and $(54,409), respectively. A major
portion of the increased Gross Loss for the quarter ended September 30, 2006
resulted from reclassifying operating expenses such as depreciation and
certain employee salaries to cost of goods sold. A reallocation of these same
expenses to cost of salaries in the quarter ended September 30, 2005 would have
resulted in a larger gross loss for the earlier quarter.
Operating expenses for the quarters ended September 30, 2006 and 2005 were
$154,983 and $ $215,660, respectively, before taking into account the
compensation element of stock options granted in the quarter ended September
30, 2006 valued at $194,292.50, resulting in net losses of $288,906 for the
quarter ended September 30, 2006 compared to $233,535 for the quarter ended
September 30, 2005. Total losses for the quarter ended September 30, 2006
were $483,198.
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.
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The Company did not issue any equity securities during the quarter ended
September 20, 2006.
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
Amended Form 10-QSB/A
On November 20, 2006, the Company filed its Form 10-QSB for the quarter ended
September 30, 2006, pursuant to an extension notice on Form 12b-25 filed on
November 14, 2006. The extension of the filing date was required because the
Company?s accountants, Dohan and Company, CPAs, PA, of Miami, Florida, were
unable to complete their review of the Form 10-QSB in a timely manner. The
Company had previously complained to Dohan & Company regarding its lack of
responsiveness and lack of attention to the Company?s account, which had
resulted in previous extensions and late filings by the Company, including the
Form 10-KSB for the fiscal year ended June 30, 2006, which was filed on the
SEC EDGAR system on October 13, 2006, the extended due date, after the 5:00 PM
filing deadline, due solely to additional, non-material changes first
requested by Dohan & Company late on the afternoon of October 13, 2006, after
previous requests for changes, also received by the Company on October 13, 2006
had been incorporated into the final filing. The review of the Form 10-KSB and
the audit of the Company?s financial statements for the fiscal year had been
delayed for nearly six weeks, because the audit partner on the Company?s
account had taken extended maternity leave, which was concealed from the
Company despite repeated calls and e-mail communications to the audit partner,
with no response. Eventually, the Company was advised that the audit partner
familiar with the Company account would not be available, that the audit would
be managed by a junior accountant with no experience in or knowledge of the
Company account, and that an extension of the time to file the 10-KSB would be
required. After repeated requests for a status report on the audit and review,
the Company finally received its first communication with requested changes to
the Form 10-KSB and the financial statements at the end of the first week of
October, 2006. The Company made all of the requested changes and provided all
of the additional information promptly, but new and different changes were
requested the following week, most of which were non-material changes to
grammar, punctuation, style and formatting. On October 13, 2006, the extended
due date for the Form 10-KSB, the Company received additional non-material
changes, which it made and returned to the auditors with the understanding that
the Form 10-KSB was then ready to be filed. The Company completed the EDGAR
conversion for filing and was ready to file when Dohan & Company send a new
demand for additional non-material changes late on the afternoon of October 13
2006. By the time these changes were incorporated and EDGARized, the Company
was unable to file the Form 10-KSB electronically by the 5:00 PM SEC cut-off.
The Form 10-KSB was filed at 5:06 PM on October 13, 2006, but was reported on
the SEC EDGAR web site as filed on Monday October 16, 2006, which resulted in
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a notice from the NASD OTC Compliance Unit that the Company was not in
compliance with its timely filing obligations.
On November 20, 2006, the Company filed its Form 10-QSB on a timely basis,
again pursuant to a Form 12b-25 extension request by Dohan and Company, because
the auditor again was unable to complete its review on a timely basis. After
completing a number of changes requested by the auditors to the Form 10-QSB,
and providing extensive information and documentation which had already been
reviewed and covered in Dohan and Company?s audit of the June 30, 2006 fiscal
year, filed three weeks earlier, the Company on November 20, 2006, the
extended due date, received one more set of requested changes, which it made
and returned to the auditors for their final review, with the message that the
Company intended to file this final reviewed version of the 10-QSB that day on
a timely basis, unless there were still more, as yet undisclosed, changes that
had not already been communicated on a timely basis. The Company then
filed the Form 10-QSB as indicated on a timely basis on November 20. 2006 after
receiving no further comments from the auditors. Later on November 20, 2006,
after the Form 10-QSB had been filed and after the EDGAR filing deadline had
passed, Dohan and Company sent an e-mail to the Company advising that it might
still have further comments. Approximately two weeks later, the Company
received additional suggested changes to the Form 10-QSB, none of a material
nature and nearly all involving formatting (capitalizing of certain items on
the cover page and revising the entries on the Table of Contents), adding of
commas to certain parts of the text, suggesting style changes to certain text
language, and similar items. The only numerical items involved the change of
several entries by a one dollar amount to reflect rounding differences, and
the change in the number of shares of common stock outstanding from 11,349,051
to 11,349,269, to reflect the issue of 218 shares as a result of rounding in
the reverse split which occurred during the last fiscal year. This difference
of 218 shares had been correctly reported in the Form 10-KSB for June 30,
2006, and no additional shares were issued during the quarter ended September
30, 2006, as already indicated in this report. Many of the items which Dohan
and Company later suggested be changed in the Form 10-QSB had, in fact, already
been changed as a result of the earlier review requests, and it appears that
Dohan and Company was reviewing an earlier version of the Form 10-QSB which it
had already reviewed, rather than the last reviewed version as filed.
This Form 10-QSB/A incorporates all of the new, post-filing changes suggested
by Dohan and Company which had not already been included in the original
filing, except for non-material changes in the wording of certain footnotes,
which is neither material nor necessary. For example, Dohan and Company
requested that the language in Note 1 on Page F-9 be changed from: ?We will
adopt FIN 48 in the first quarter of 2007? to: ?FIN 48 will be adopted in the
first quarter of 2007.? All of the requested footnote changes are of the same
level of immateriality and have not been changed.
Disagreement with Auditors
As a result of the continued problems and lack of response from Dohan and
Company; the constant, last minute immaterial changes demanded; the unexplained
several week delay after the original filing date for this Form 10-QSB before
the next set of suggested changes was sent; the continued inability of the
Company to contact the audit partner on the account, despite repeated calls
and e-mails; and the other concerns noted above, the Company began to consider
changing auditors to an audit firm which had experienced personnel available
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to carry out the audit and review work on a timely and responsive basis. On
December 29, 2006, the Company received a letter in the mail from Dohan and
Company dated December 22, 2006, advising that Dohan and Company had
?unexpectedly? found that the Company had filed its Form 10-QSB on a timely
basis on November 20, 2006 without its ?concurrence and final review?, despite
the fact that Dohan and Company had been advised that the Company would be
filing on November 20, 2006 on a timely basis with all of the review changes
communicated by Dohan and Company as of that date. As noted, the Form 10-QSB
as filed contained all of the changes requested in Dohan and Company?s review
which had been communicated as of the filing date. Although there had been no
conversations between Dohan and Company and the Company since the timely filing
of the reviewed Form 10-QSB on November 20, 2006, and the audit partner at
Dohan and Company had failed or refused to return many calls and communications
from the Company after that date, the letter dated December 22, 2006 advised
that Dohan and Company no longer wished to serve as the Company?s auditors and
would be advising the SEC accordingly.
While the Company is quite satisfied with the termination of the relationship,
which it was already in the process of doing itself, for the reasons summarized
above, the termination of the audit relationship is an item required to be
disclosed in a Form 8-K filing, under Item 4.01, Changes in Registrant?s
Certifying Accountant, within four business days of that event. However, since
the Company is disclosing the same information in this Form 10-QSB/A filed
within that same period, a separate Form 8-K filing is not required to be filed
to disclose the same information.
Item 4.01(a) of Form 8-K requires the Company to disclose the information
required by Item 304(a)(1) and Item 304(a)(3) of Regulation S-B with regard to
the change of auditor. That information follows:
Item 304(a)(1):
(i) The former accountant, Dohan and Company, resigned as auditors for the
Company by letter dated December 22, 2006, received by mail on December 29,
2006. A copy of the letter dated December 22, 2006 is attached as Exhibit 5.1.
(ii) The former principal auditor?s report on the financial statements for
the past two fiscal years ended June 30 do not contain an adverse opinion or
disclaimer of opinion, and was not modified as to uncertainty, audit scope, or
accounting principles.
(iii) The decision to change auditors was not yet recommended or approved by
the Board of Directors of the Company, but was an item to be included in the
agenda of the next meeting, after the Annual Meeting of Shareholders.
(iv((A) There were no disagreements with the former accountants, whether or
not resolved, on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure, which, if not resolved to
the former accountants? satisfaction, would have caused it to make reference to
the subject matter of the disagreement(s) in connection with its report.
(B) The former accountant has not advised the Company that:
(1) internal controls necessary to develop reliable financial statements
did not exist, or
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(2) information has come to the attention of the former accountant which
made the accountant unwilling to rely on management?s representations
or unwilling to be associated with the financial statements prepared
by management, or
(3) the scope of the audit should be expanded significantly, or
information has come to the accountant?s attention that the
accountant has concluded will, or if further investigated might,
materially impact the fairness or reliability of a previously issued
audit report or the underlying financial statements, or the
financial statements issued or to be issued covering the fiscal
period(s)subsequent to the most recent audited financial statements
(including information that might preclude the issuance of an
unqualified audit report, and the issue was not resolved to the
accountant?s satisfaction prior to its resignation or dismissal.
(C) There are no disagreements or events in Dohan and Company?s letter
dated December 22, 2006 identified above in response to paragraph (a)(1)(iv) of
Item 304 of Regulation S-B. The areas of disagreement indicated in the letter,
and the response of the Company are as follows:
1. The Form 10-QSB for the quarter ended September 30, 2006, was filed
allegedly without the former accountant?s final review and concurrence.
The former accountant fully reviewed and commented extensively on the Form
10-QSB for the indicated quarter, including numerous inquiries for documents
and explanations of matters already fully reviewed and included in the audited
financial statements for the fiscal year ended June 30, 2006, which was
completed by the former accountants on October 13, 2006. When the Company
advised the former accountants of this apparent lapse in the accountant?s
internal controls and procedures, the former accountants had no explanation or
response and instead insisted that the same material be provided again. The
Company received three or more separate revision requests to the draft Form
10-QSB from the former accountants, all of which changes were made. The final
draft of the Form 10-QSB, including the former accountant?s requested changes,
was then returned to the accountants on November 20, 2006 with the advice that
all of the changes requested had been made and that the Company would be filing
the Form 10-QSB by 5:00 PM that day to avoid another late filing. The Form
10-QSB was then filed shortly before 5:00 PM on November 20, 2006 as advised,
the Company having heard nothing further from the former accountants. After
the close of the SEC EDGAR filing period, and after the filing of the Form
10-QSB containing all of the requested review changes of the former
accountants, the Company received an e-mail from the junior accountant at
the former accountants? office on November 20, 2006, advising that the review
partner might have additional comments. No further comments or communications
were received from the former accounts, despite inquiries from the Company,
until December 3, 2006, when a facsimile was received with a number of
additional requested changes to the Form 10-QSB, as filed. On review of these
changes, it appeared that many of the newly requested changes had already been
made as a result of earlier review requests, and that the remaining requested
changes were largely immaterial, unnecessary and unwarranted.
When the Form 10-QSB was filed on November 20, 2006, the Company believed that
all of the review changes requested by the former accountants had been made,
and the accountants were aware that the Company would be filing the final
version returned to the accountants on November 20, 2006, to avoid another
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late filing caused by the former accountants? internal control, performance and
other issues. As to the claim that the Form 10-QSB was filed without their
review, it should be noted that the former accountants sent an invoice along
with their letter dated December 22, 2006, containing the following language:
In connection with Form 10Q, SEC required review
of quarterly report, for the period ended
September 20, 2006.
2. The Form 10-QSB as filed by the Company, contained ?numerous errors
and deficiencies?.
The final Form 10-QSB contained no material errors or deficiencies, and
included all of the changes requested by the former accountants as of the date
of filing. The so-called errors and deficiencies now referred to were all
issues of punctuation, grammar, rounding, and similar matters. Each of the
specific errors listed in the Letter of December 22, 2006 is addressed below.
The Company is not aware of any matters of disagreement other than the specific
items listed in the December 22, 2006 letter and dealt with below.
a. ?The cover page has numerous minor technical errors, but more
importantly, the shares are not in agreement with the financial statements and
the wrong box is checked for current/late reports.?
The alleged ?technical errors? on the cover page are immaterial, since
the Form 10-QSB is merely a guide for the preparation of the report and not a
blank form to be filled out. General Instruction C of Form 10-QSB. Despite
this, this first line of ?errors and deficiencies? included such items as:
?Form 10-QSB? on the cover page should be ?FORM 10-QSB?.
?Mark one? on the cover page should be ?Mark One?.
?State or Jurisdiction of Incorporation or Organization? on the cover page
should be ?State or other jurisdiction of incorporation or organization?
?I.R.S.? on the cover page should be ?IRS?
?issuer? on the cover page should be ?registrant?
The remainder of these ?minor technical errors? on the cover page are of
similar lack of consequence and materiality.
The shares of common stock outstanding shown on the cover page was
11,349,051 shares, while the remainder of the report and the financial
statements reflected the correct number as 11,349,269, a difference of 218
shares. These 218 shares were explained in the Form 10-KSB as issued by the
transfer agent as the resulting of rounding up shares as a result of the
reverse split of the Company common shares in the prior fiscal year. The
correct number outstanding of 11,349,269 was reported on the Form 10-KSB and
the Form 10-QSB for the quarter ended September 30, 2006, as filed on
November 20, 2006, reported that no shares were issued during the quarter.
This minor difference of 218 shares (0.00192 percent) had not yet been
corrected on the Company?s own share records maintained independently of the
transfer agent, and also was not noted by the former accountant?s in their
multiple reviews and comments on the Form 10-QSB, as filed on November 20,
2006. The first note of this minor difference was made on December 3, 2006,
nearly two weeks after the timely filing. This minor difference is not
considered material, but has been corrected on this amended report.
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The wrong box is not checked on the cover page, as the Form 10-QSB was
filed on a current basis on November 20, 2006, despite the former accountant?s
lack of attention to the Company?s account.
b. ?The Table of Contents is incomplete.?
The Table of Contents included in the Form 10-QSB as filed was complete and
accurate. However, in the additional suggested changes first sent two weeks
after the Report was timely filed, the former accountants suggested that the
phrase ?FINANCIAL INFORMATION? be added after PART I, presumably because the
?guide copy? of Form 10-QSB provided by the SEC does so. Similarly, the
December 3, 2006 comments by the former accountants suggest that ?OTHER
INFORMATION? be added after PART II, and that ?AND REPORTS ON FORM 8-K? be
omitted, again presumably because the SEC guide form does so. None of these
suggested changes are material, but all have been included in the Form 10-
QSB/A.
c. ?The balance sheet wording and format (CAPS, etc) require additional
changes.?
The only changes to the balance sheets as reported in the Form 10-QSB as
filed on November 20, 2006, suggested by the former accountants and referred
to in the letter dated December 22, 2006 were not material, did not affect the
accuracy of financial statements and were limited to the following:
The phrase ?FINANCIAL INFORMATION? should be added after PART I at the top of
the balance sheet.
The phrase ?FINANCIAL INFORMATION? at the top of the balance sheet after Item 1
should be changed to ?FINANCIAL STATEMENTS?.
The second and later words in a descriptive line in the financial statements
should not be capitalized. For example, ?Accounts Receivable? should be
?Accounts receivable??
The phrase ?less allowance for doubtful accounts of 0? should be added after
?Accounts receivable? in the balance sheet.
The word ?accumulated? should be added to ?net of depreciation? after Property
and equipment on the balance sheet.
Liabilities and Stockholders? Equity on the balance sheet should be changed to
?Liabilities and Deficiency in Assets? in the three places it appears on the
balance sheet.
Although these suggested changes were not included in all of the prior review
changes requested by the former accountants, nor in any of the prior Forms 10-
QSB or Form 10-KSB filings by the Company after review by the former
accountants, and the changes are not material, these changes have been
incorporated into the amended Form 10-QSB/A.
d. ?The statements of operations reports incorrect net loss per share and
weighted shares, along with incorrect wording and minor mathematical error(s).
The net loss per share reported on the Form 10-QSB as filed was $(0.038) as
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a result of earlier corrections by the former accountants. The correct figure
is $0.043), a difference of $(0.005) per share. While not considered material,
the corrected figure is included in this amended Form 10-SB/A. The number of
shares outstanding also has been corrected to 11,349,269, for the reasons
already noted.
The incorrect wording change suggested was to change ?Stock Options? to
?Stock based compensation?, which has been done in this amended Form 10-QSB/A,
although not material and not suggested in the review as of November 20,
2006 by the former accountants.
The only ?minor mathematical errors? on the statement of operations was the
suggested change of $(425,797) to $(425,798), a number resulting from rounding.
e. ?The statement of cash flows incorrectly reports stock options as a
cash item, and contains minor formatting issues?.
The ?minor formatting issues? referred to are the former accountants?
suggestion that the second and later words in a descriptive line in the
should not be capitalized. While not material, these changes have been
incorporated into this amended Form 10-QSB/A.
The statement of cash flows correctly reflects the required adjustment for
the non-cash compensation resulting from the issuance of incentive stock
options by the Company, the current value of which is reflected as a current
expense in the net loss for the quarter, as required. If this item were not
adjusted for in the cash flow statements as the former accountants suggest,
then the cash flows would be incorrect by the amount of this non-cash item.
On inquiry of the reasons for this suggestion when it was first raised by the
former accountants before the timely filing of the Form 10-QSB by the Company,
the former accountants were unable to provide any reasons for their erroneous
suggestions, so the change was not made. This item is also included in the
cash flow analysis in this amended Form 10-QSB/A, but has been moved to
?Adjustments to reconcile net loss to net cash used by operating activities?.
f. ?The footnotes contain sufficient minor formatting issues that we do
not want to be associated with.?
The nature of this alleged dispute is more than a little mystifying, and on
its face, is certainly not a material item. The approximately 10 pages of
footnotes included as part of the Company?s financial statements had a total of
17 suggested changes in the comments made by the former accountants on December
3, 2006, two weeks after the Form 10-QSB had been filed. Of these 17 suggested
changes, three involved adding a dash (-) between associated words; ten
involved the suggested additions of a period or a comma or an apostrophe; one
involved double underlining of a set of final numbers; and the remainder
involved suggested revisions to wording, such as changing ?We will
adopt FIN 48 in the first quarter of 2007? to: ?FIN 48 will be adopted in the
first quarter of 2007.? None of these suggested footnote changes are material
or necessary, and none have been made in this amended Form 10-QSB/A.
g. ?Amounts included in the body of the report do not necessarily agree
with amounts reported in the financial statements?.
The sole number which the former accountants suggested were not ?not
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necessarily? in agreement with the financial statements was the operating
expenses reported for the quarter ended September 30, 2006 under Comparison of
Operating Results on page 6 of the Form 10-QSB as filed on November 20, 2006.
The number reported on that Form 10-QSB was $154,982. The accountant?s
comments of December 3, 2006 suggest that this number should be $154,983, a
difference of $1.00, resulting from rounding. It should be noted, however, that
the former accountants? suggested changes of December 3, 2006 were based on an
earlier version of the final Form 10-QSB as filed, and the reported figure of
$154,982 was a result of earlier changes requested by the former accountants.
Apparently, they are unable to keep track of what they have already done.
h. ?We believe the report date to be incorrect.?
The report date of the Form 10-QSB filed by the Company on November 20,
2006 was November 20, 2006, the date it was signed on behalf of the Company and
the date it was filed. The date is correct.
D. Neither the Board of Directors nor a committee of the Board of Directors
has yet discussed the former accountants? letter, its contents, or their
termination of the audit relationship. The letter was received on December 29,
2006 just before the New Years? holiday weekend.
E. The Company will authorize the former accountant to respond fully to any
inquiries of the Company?s new auditors, when a new auditor has been selected
and approved by the Board of Directors.
Item 304(a)(2).
The Company has not yet engaged a new accountant, and will report the required
information on a timely basis when it has done so.
Item 304(a)(3).
The former accountant has already provided a letter, a copy of which has been
sent to the SEC by the former accountant, and is attached to this Form 10-QSB/A
report as Exhibit 5.1.
Item 304(b).
The items of ?disagreements? with the former accountants, none of which are
within the disagreements or events listed in paragraphs (b)(1) through (b)(3),
have already been summarized and refuted above. None of these claimed
disagreements are material and none have any material affect on the Company?s
financial statements as reported. None of the conditions listed in paragraphs
(b)(1) through (b)(3), exist.
The former accountants also claim in their letter of December 22, 2006, that
the Company had not paid certain past due balances as agreed, which is not
correct. All past due balances had been paid by the Company as agreed, except
for late charges which the senior partners of Dohan and Company waived
completely as part of the former accountants? review.
The Company had already initiated a search for a new accountant prior to the
receipt of the former accountants? letter on December 29, 2006. The Company
expects to make a selection of a new accountant shortly and submit the new
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accountant as well as the former accountants? letter of December 22, 2006 for
review and approval, and will then complete the reports required by Item 3.04
of Regulation S-B. The Company also is reviewing the possibility of filing a
complaint with the Public Company Accounting Oversight Board and with the
Florida CPA Board based on the lack of attention, lack of internal controls
and other inappropriate conduct of the former accountants.
ITEM 6. EXHIBITS
(a) Exhibits required by Item 601 of Regulation S-B
5.1 Letter from Dohan and Company dated December 22, 2006, received December
29, 2006.
1.1 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
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
September 30, 2006.
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, thereunto
duly authorized.
Dated: January 2, 2007
NEPTUNE INDUSTRIES, INC.
By: /s/ Ernest Papadoyianis
- ------------------------------------
Ernest Papadoyianis
CEO, President and Director
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