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 March 31, 2007
[ ] 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)
(Issuers 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 the issuers common equity, as of
May 1, 2007 was 12,699,269 shares
Transitional Small Business Disclosure Format (check one): Yes___; No_X_
FORM 10-QSB
NEPTUNE INDUSTRIES, INC.
PERIOD ENDED MARCH 31, 2007
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1.
FINANCIAL STATEMENTS.....................................................F-1
Item 2.
MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION................. 3
Item 3.
CONTROLS AND PROCEDURES................................................... 6
PART II OTHER INFORMATION
Item 1.
LEGAL PROCEEDINGS......................................................... 7
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 ................................................................. 7
Signatures ............................................................... 8
-2-
Part I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
NEPTUNE INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
March 31, 2007
(unaudited)
---------------
ASSETS
Current Assets
Cash and equivalents $ 1,470,681
Accounts receivable, less allowance for
doubtful accounts of $ 0 75,953
Inventory 403,932
Prepaid expenses 8,657
Deposit on equipment 15,000
Deferred costs 30,203
Security deposits 17,194
Deferred tax asset of $1,196,832
valuation allowance of $1,196,832 -
-------------
Total Current Assets 2,021,620
Property and equipment, net of
accumulated depreciation of $412,897 388,084
-------------
Total Assets $ 2,409,704
=============
LIABILITIES AND DEFICIENCY IN ASSETS
Liabilities
Current Liabilities
Accounts payable $ 50,595
Accrued and other current liabilities 733,423
Current portion of long-term debt 1,490
Convertible notes payable 285,000
Notes payable-officers 89,888
Convertible notes-officers 17,500
------------
Total Current Liabilities 1,177,896
Long-term liabilities
Convertible notes 229,213
Convertible debentures 2,388,000
Deferred compensation-stock options 194,293
------------
Total Long-Term Liabilities 2,811,506
------------
Total Liabilities 3,989,402
============
COMMITMENTS AND CONTINGENCIES -
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, 12,699,269 shares issued and outstanding 12,699
Additional paid-In capital 4,802,450
Accumulated deficit (6,399,847)
------------
Total Deficiency in assets (1,579,698)
------------
Total Liabilities and Deficiency in assets $ 2,409,704
============
See accompanying notes.
F-2
NEPTUNE INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the three months ended
March 31,
2007 2006
----------- ------------
Revenues:
Sales $ 203,379 $ 124,918
Cost of sales 224,742 275,877
---------- ----------
Gross loss (21,363) (150,959)
---------- ----------
Expenses:
Advertising and marketing - 30
Automobile and truck expense 2,524 9,081
Depreciation 64 943
Insurance 2,711 13,192
Office 2,104 1,811
Officers salary, related taxes and benefits 92,364 80,525
Other operating expenses 225,867 20,572
Outside services 401,912 33,822
Professional fees 4,350 525
Public relations 16,100 -
Rent - 413
Repairs - 393
Utilities 3,343 2,029
--------- ---------
Total expenses from operations 751,339 163,336
--------- ---------
Loss before interest, other income,
expenses and income taxes (772,702) (314,295)
Other income 751 -
Interest expense (81,480) (24,536)
--------- ---------
Loss before income tax (853,431) (338,831)
Provision for income taxes - -
--------- ---------
Net loss $ (853,431) $ (338,831)
========= =========
Net loss per share(basic and diluted) $ (0.069) $ (0.032)
========= =========
Weighted average number of
common shares outstanding
(basic and diluted) 12,335,936 10,532,633
========== ==========
See accompanying notes.
F-3
NEPTUNE INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the nine months ended
March 31,
2007 2006
----------- ------------
Revenues:
Sales $ 671,559 $ 295,732
Cost of Sales 841,038 639,707
---------- ----------
Gross loss (169,479) (343,975)
---------- ----------
Expenses:
Advertising and marketing - (30)
Automobile and truck expense 12,768 26,027
Depreciation 484 3,472
Insurance 21,714 34,564
Office 4,578 4,244
Officers salary, related taxes and benefits 261,879 240,830
Other operating expenses 277,640 81,310
Outside services 459,692 3,334
Professional fees 20,696 28,059
Public relations 40,473 14,702
Rent - 1,949
Repairs - 652
Stock-based compensation 194,292 -
Utilities 7,437 6,439
--------- ---------
Total expenses from operations 1,301,653 445,552
--------- ---------
Loss before interest, other income,
expenses and income taxes (1,471,132) (789,527)
Interest income 2,961 -
Insurance reimbursement 75,171 -
Other income - 4,834
Interest expense (223,148) (48,224)
--------- ---------
Loss before income tax (1,616,148) (832,917)
Provision for income taxes - -
--------- ---------
Net loss $(1,616,148) $(832,917)
========= =========
Net loss per share(basic and diluted) $ (0.138) $ (0.080)
========= =========
Weighted average number of
common shares outstanding
(basic and diluted) 11,678,158 10,355,261
========== ==========
See accompanying notes. F-4
NEPTUNE INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the nine months ended
March 31,
2007 2006
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(1,616,148) $ (832,917)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization 51,095 53,162
Deferred compensation-stock options 194,293 -
Issue of common stock for services 370,000 38,847
(Increase) decrease in assets:
Accounts receivable (7,533) 2,060
Deferred costs (1,624) -
Inventory 94,556) (3,055)
Deposits (15,814) (2,500)
Prepaid expenses (7,552) 1,922
Increase (decrease) in liabilities:
Accounts payable (81,124) 102,630
Accrued and other current liabilities 367,404 57,153
----------- ----------
Net cash used by operating activities (652,447) (582,698)
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Equipment (5,810) (14,577)
Notes receivable - 5,000
---------- ----------
Net cash used by investing activities (5,810) (9,577)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from debenture bonds and notes 1,888,000 345,000
Pay-off of notes (35,000) (25,000)
Sale of common stock - 146,382
---------- ----------
Net cash provided by financing activities 1,853,000 466,382
---------- ----------
Net increase (decrease) in
cash and equivalents 1,194,743 (125,893)
Cash and equivalents-beginning 275,938 144,004
---------- ----------
Cash and equivalents-ending $1,470,681 $ 18,111
============ ==========
SUPPLEMENTAL DISCLOSURES
Cash paid for:
Interest $ 44,604 $ 24,536
Income taxes $ - $ -
========== ==========
See accompanying notes.
F-5
NEPTUNE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDING MARCH 31, 2007
(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 Financial Statement 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 (99+%) subsidiary,
Blue Heron Aqua Farm, LLC (Blue Heron). All inter-company balances and
transactions have been eliminated at consolidation.
The accompanying consolidated financial statements are un-audited and have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and the instructions
to Form 10-QSB. Accordingly, certain information and footnote disclosures
normally included in audited financial statements prepared in accordance with
accounting principles generally accepted in the United States of America have
been omitted pursuant to such rules and regulations. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Interim
results are not necessarily indicative of the results that may be expected for
a full year. These interim consolidated financial statements should be read in
conjunction with the audited consolidated financial statements that were
included in the Form 10-KSB filed by the Company for the year ended June 30,
2006, with the Securities and Exchange Commission.
F-6
NEPTUNE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDING MARCH 31, 2007
(Unaudited)
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.
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.
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. The Company has not experienced any
F-7
NEPTUNE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDING MARCH 31, 2007
(Unaudited)
NOTE 1. SUMMARY OF SIGNIFCANT ACCOUNTING PRINCIPLES (continued)
losses on such accounts and does not believe it is exposed to any significant
risk on cash and equivalents. The Company operates both 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.
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 account
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.
Inventory at March 31, 2007 consisted of the following:
Seafood $ 94,083
Feed 113,153
Chemicals 83,049
Overhead 113,167
Boxes 480
-----------
$ 403,932 F-8
NEPTUNE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDING MARCH 31, 2007
(Unaudited)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (continued)
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. For the Company, the accounting estimates requiring the most
difficult and sensitive judgments of management including inventory valuation,
recognition and measurement of income tax assets and liabilities, and
accounting for stock=based compensation.
Recent Accounting Pronouncement
In July 2006, the FASB issued FIN 48, Accounting for Uncertainty in Income
Taxes, an Interpretation of FASB Statement No. 109. FIN 48 prescribes a
comprehensive financial statement model of how a company should recognize,
measure, present, and disclose uncertain tax positions that the company has
taken or expects to take in its income tax returns. FIN 48 requires that only
income tax benefits that meet the more likely than not recognition
threshold be recognized or continue to be recognized on the effective date.
Initial de-recognition of amounts would be reported as a cumulative effect
of a change in accounting principle. FIN 48 is effective for fiscal years
beginning after December 15, 2006. The adoption of FIN 48 did not have a
material impact on the financial statements of the Company.
In September 2006, the FASB issued FAS No. 157, Fair Value Measurements,
which establishes a framework for reporting fair value and expands disclosure
about fair value measurements. FAS 157 is effective for the 2008 fiscal year
of the Company. The Company is currently evaluating the impact of this
standard on its financial statements.
In February 2007, the FASB issued FAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities, Including an Amendment of FASB
Statement 115. FAS 159 permits entities to choose to measure many
financial instruments and certain other items at fair value. FAS 159 is
effective for fiscal years beginning after November 15, 2007. The Company is
currently evaluating the impact of adopting FAS 159 on its financial
statements.
Reclassifications.
Certain prior period amounts have been reclassified to conform to the
current period presentation.
NOTE 2. GOING CONCERN
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. The Company?s financial
F-9
NEPTUNE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDING MARCH 31, 2007
(Unaudited)
Note 2 GOING CONCERN (continued)
position and operating results raise substantial doubt about the Company?s
ability to continue as a going concern, as reflected by the accumulated
deficit of $6,399,847 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. Management?s
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. ACCRUED AND OTHER CURRENT LIABILITIES
Accrued and other liabilities consisted of the following at March 31, 2007:
Accrued payroll - officers $ 387,324
Accrued interest - officers 68,485
Accrued interest - others 198,115
Accrued consulting 79,500
------------
$ 733,424
============
NOTE 4 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 $387,324 through the
quarter ended March 31, 2007. Cash compensation actually paid was $57,200 for
the quarter ended March 31, 2007.
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
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 $79,500 has been accrued as due under the agreements with CF
Consulting, LLC as of March 31, 2007. Our 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 THREE MONTHS ENDING MARCH 31, 2007
(Unaudited)
NOTE 5. 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. A total of $8,428 in interest
has been accrued on each of these notes as of March 31, 2007 and is
included in accrued current liabilities.
NOTE 6. NOTES PAYABLE
On March 28, 2007, the Company paid off a convertible promissory note in the
amount of $25,000 issued July 28, 2004, plus accrued interest of $6,664.
Also on March 28, 2007, the Company paid off a second convertible promissory
note in the amount of $10,000 issued September 23, 2005, plus accrued interest
of $1,504.
On March 28, 2007, the Company issued a total of $1,650,000 in two year
debenture bonds as part of the private offering of up to $2,000,000 in
debenture bonds commenced in April 2006. As a result, the total amount raised
in the offering was $2,388,000. See, Note 9, Private Offering.
NOTE 7. 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-11
NEPTUNE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDING MARCH 31, 2007
(Unaudited)
NOTE 7. 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.
A total of 1,450,000 common shares of the Company were issued during the
quarter ended March 31, 2007 and 100,000 shares were cancelled, resulting in a
net new issue of 1,350,000 common shares. This total included 1,200,000 common
shares issued to Dawson James Securities under a one-year consulting agreement
commencing May 1, 2006, issued at the market value of the shares on the issue
dates, and 250,000 shares issued to American Capital Ventures for investor
relations services, also issued at the market price. A total of $280,000 in
consulting expense has been charged in the quarter as a result of the shares
issued to Dawson James, and $90,000 as consulting expense for the shares
issued to American Capital Ventures.
NOTE 8. MAJOR CUSTOMERS
Revenues from two customers comprised approximately 70 percent of revenues
during the period ended March 31, 2007 compared to the same two customers
comprising 69 percent for the annual period ending December 31, 2006.
NOTE 9. 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
F-12
NEPTUNE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDING MARCH 31, 2007
(Unaudited)
NOTE 10. PRIVATE OFFERING (continued)
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
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 proceeds from the offering, net of commissions and expenses, was as
follows:
Principal amount Commissions Expense allowance Net proceeds Warrants
$2,388,000 $238,800 $ 71,640 $2,077,560 238,800
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.
We were incorporated in the State of Florida on May 8, 1998. We operate on a
June 30, 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
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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
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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.
In late July, 2005, we entered into an arrangement with The Redland Company,
Inc. of Homestead, Florida to utilize a 38 acre quarry lake site for testing of
the Aqua-Sphere prototype. This site is close to our current 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.
Site preparation is fully underway with excavation, new electricity, fencing,
and storage units nearing completed. The new prototype tank has been
delivered, assembled and launched and tests of the prototype are well underway.
On September 27, 2006, the Company filed a Provisional Process Patent on the
Production and Processing of Select Insects into Protein Meal for Fish and
Animal Diets. This patent and research was born out of the tremendous need for
replacement of fish meal in fish and other livestock diets worldwide. Fish meal
has gone up in price considerably over the last year and the wild species
targeted for fish meal production are growing scarcer over time. In January,
CEO, Ernest Papadoyianis, and COO, Sal Cherch, were invited to Mississippi
State University to meet with members of its Entomology Department to discuss
research activities for the Company. Mississippi State is a world leader in
insect rearing methodology and has been instrumental in developing facilities,
diets, and rearing methods for facilities worldwide. The Company commenced
its first phase of research and testing with Mississippi State in the third
quarter of 2007, ending March 31, 2007.
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Acquisition Plans
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 a hybrid striped bass hatchery
operation. 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.
The Company also has identified and has begun acquisition discussions with a
number of acquisition candidates which will allow the Company to expand its
business plan to develop an operating model which utilizes waste and by-
products from one operation as fuel or feed for other parts of the business
model, with the goal of minimizing or eliminating all adverse environmental
impacts from the Company?s operations. These targets include hatchery
operations, processing and distribution operations, larger aqua-farms, and
operations in other natural and organic food products. The goal of the Company
is to grow to become a manufacturer, processor and distributor of organic and
natural seafood and other food and nutritional products using processes that
eliminate or at least minimize any adverse effect on the environment by
controlling waste and discharge from its operations.
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 March 31, 2007 and 2006 were
$203,379 and $124,918, respectively, resulting from the increased capacity of
the farm. Cost of sales for the same periods were $224,742 and $275,877,
resulting in gross loss of $(21,363) and $(150,959), respectively.
Operating expenses for the quarters ended March 31, 2007 and 2006 were
$772,702 and $163,336, resulting in net losses of $(853,431) for the
quarter ended March 31, 2007 compared to $(338,831) for the quarter ended
March 31, 2006. Total losses for the year to date ended March 31, 2007
were $(1,616,148) compared to a loss for the nine months ended March 31,
2006 of $(832,917). However, the loss for the nine months ended March 31,
2006 included the one-time expense charge of $194,292 as the present value of
stock options granted effective July 1, 2006, under current accounting rules,
non-recurring expenses relating to the private offering of $525,528 and
investor relations fees paid in stock of $80,000.
Item 3. Controls and Procedures.
Our Chief Executive Officer and Chief Financial Officer (the Certifying
Officers) are responsible for establishing and maintaining disclosure controls
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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, 2006
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
A total of 1,450,000 common shares of the Company were issued during the
quarter ended March 31, 2007. This total included 1,200,000 common shares
issued to Dawson James Securities under a one-year consulting agreement
commencing May 1, 2006, issued at the market value of the shares on the issue
dates, and 250,000 shares issued to American Capital Ventures for investor
relations services, also issued at the market price. A total of $280,000 in
consulting expense has been charged in the quarter as a result of the shares
issued to Dawson James, and $90,000 as consulting expense for the shares
issued to American Capital Ventures.
In addition, 100,000 shares of common stock which had been issued as partial
compensation under a consulting agreement with JANA Corporation were
cancelled as a result of the termination of the consulting agreement.
As a result of these changes, a total of 12,699,269 common shares were
outstanding at the end of the quarter ended March 31, 2007.
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
(a) Exhibits required by Item 601 of Regulation S-B
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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
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
On February 6, 2007, the Company filed a report on Form 8-K disclosing that
Berman, Hopkins, Wright & Laham CPAs and Associates, LLC had been retained as
the independent certifying auditors for the Company.
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: May 14, 2007
NEPTUNE INDUSTRIES, INC.
By: /s/ Ernest Papadoyianis
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Ernest Papadoyianis
CEO, President and Director
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