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 March 31, 2008
[ ] 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
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
[ ] Yes [X] No
APPLICABLE ONLY TO CORPORATE ISSUERS
The number of shares outstanding of the issuer?s common equity, as of
April 30, 2008 was 25,066,630 shares
________________________________________
Transitional Small Business Disclosure Format (check one): [ ]Yes [X] No
FORM 10-QSB
NEPTUNE INDUSTRIES, INC.
QUARTER ENDED March 31, 2008
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1. FINANCIAL SATEMENTS..............................................F-1
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION......... 1
Item 3.CONTROLS AND PROCEDURES............................................ 9
PART II OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.................................................10
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.......10
Item 3. DEFAULTS UPON SENIOR SECURITIES...................................10
Item 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................10
Item 5. OTHER INFORMATION.................................................10
Item 6. EXHIBITS..........................................................10
Signatures ...............................................................11
Part I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
NEPTUNE INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
March 31, 2008
(unaudited)
---------------
ASSETS
Current Assets
Cash and equivalents $ 197,450
Accounts receivable, less allowance for
doubtful accounts of $ 0 91,484
Inventory 501,912
Prepaid expenses 53,306
Deferred costs 106,484
Deposits 18,914
-------------
Total Current Assets 969,550
Property and equipment, net of
accumulated depreciation of $478,934 654,198
Other assets 29,840
-------------
Total Assets $ 1,653,588
=============
LIABILITIES AND DEFICIENCY IN ASSETS
Liabilities
Current Liabilities
Accounts payable $ 117,951
Accrued and other current liabilities 458,411
Convertible notes payable 815,213
Notes payable-officers 90,378
------------
Total Current Liabilities 1,481,953
Long-term liabilities
Convertible debentures 1,790,000
Deferred compensation-stock options 194,293
------------
Total Long-Term Liabilities 1,984,293
------------
Total Liabilities 3,466,246
============
COMMITMENTS AND CONTINGENCIES -
Stockholders' Equity (Deficiency in assets)
Preferred stock, $.001 par value,
5,000,0000 shares authorized, 482,500 issued
and outstanding 482
Common Stock, $.001 par value 100,000,000 shares
authorized, 24,551,342 shares issued and outstanding 24,551
Additional paid-In capital 6,701,834
Accumulated deficit (8,539,525)
------------
Total Deficiency in assets (1,812,658)
------------
Total Liabilities and Deficiency in assets $ 1,653,588
============
See accompanying notes.
NEPTUNE INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the 3 months ended
March 31,
2008 2007
----------- ------------
Revenues:
Sales $ 158,493 $ 203,379
Cost of sales 183,455 224,742
---------- ----------
Gross loss (24,962) (21,363)
---------- ----------
Expenses:
Advertising and marketing 1,750 44-
Automobile and truck expense 6,783 2,524
Depreciation 122 64
Director fees and expenses 4,695 -
Insurance 9,197 2,711
Office 2,119 2,104
Officers salary, related taxes and benefits 130,380 92,364
Other operating expenses 10,380 225,867
Outside services 56,910 401,912
Professional fees 14,843 4,350
Public relations 14,520 16,100
Research & development 9,296 -
Utilities 4,227 3,343
--------- ---------
Total expenses from operations 265,222 751,339
--------- ---------
Loss before interest, other income,
expenses and income taxes (290,184) (772,702)
Other income 3,290 751
Interest expense (158,670) 81,480)
--------- ---------
Loss before income tax (445,664) (853,431)
Provision for income taxes - -
--------- ---------
Net loss $ (445,664) $ (853,431)
========= =========
Net loss per share(basic and diluted) $ (0.019) $ (0.069)
========= =========
Weighted average number of
common shares outstanding
(basic and diluted) 24,330,315 12,335,936
========== ==========
See accompanying notes.
NEPTUNE INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the 9 months ended
March 31,
2008 2007
----------- ------------
Revenues:
Sales $ 397,840 $ 671,559
Cost of sales 479,839 841,038
---------- ----------
Gross loss (81,999) (169,479)
---------- ----------
Expenses:
Advertising and marketing 3,285 -
Automobile and truck expense 21,293 12,768
Depreciation 346 484
Director fees & expenses 4,695 -
Insurance 42,583 21,714
Office 4,349 4,578
Officers salary, related taxes and benefits 402,401 261,879
Other operating expenses 52,560 277,640
Outside services 114,117 459,692
Professional fees 28,472 20,696
Public relations 82,493 40,473
Repairs 270 -
Research & development 9,296 -
Utilities 9,602 7,437
--------- ---------
Total expenses from operations 775,762 1,301,653
--------- ---------
Loss before interest, other income,
expenses and income taxes (857,761) (1,471,132)
Other income 29,082 78,132
Interest expense (534,695) (223,148)
--------- ---------
Loss before income tax (1,363,374) (1,616,148)
Provision for income taxes - -
--------- ---------
Net loss $(1,363,374) $ (1,616,148)
=========== =========
Net loss per share(basic and diluted) $ (0.056) $ (0.138)
========= =========
Weighted average number of
common shares outstanding
(basic and diluted) 24,330,315 11,678,158
========== ==========
See accompanying notes.
NEPTUNE INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the 9 months ended
March 31,
2008 2007
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(1,363,374) $(1,616,148)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization 22,735 51,095
Deferred compensation-stock options - 194,293
Common stock issued for services 54,038 370,000
(Increase) decrease in assets:
Accounts receivable (21,301) (7,533)
Deferred and direct costs (62,001) (1,624)
Inventory (279,453) (94,556)
Deposits 19,283 (15,814)
Prepaid expenses (50,088) (7,552)
Increase (decrease) in liabilities:
Accounts payable 27,604 (81,124)
Accrued and other current liabilities 676,805 367,404
------------- ----------
Net cash used by operating activities (975,752) (652,447)
------------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Equipment purchased (289,888) (5,810)
------------- ----------
Net cash used in investing activities (289,888) (5,810)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from debenture bonds - 1,888,000
Pay-off of notes (17,500) (35,000)
------------ ----------
Net cash provided by financing activities (17,500) 1,853,000
------------ ----------
Net increase (decrease) in cash and equivalents (1,283,140) 1,194,743
Cash and equivalents-beginning 1,480,590 275,938
------------ ----------
Cash and equivalents-ending $ 197,450 $1,470,681
============ ==========
SUPPLEMENTAL DISCLOSURES
Cash paid for:
Interest $ 4,492 $ 44,604
Income taxes $ - $ -
=========== ==========
Non-cash financing activities:
Preferred stock issued for accrued compensation $ 482,500 $ -
Common stock issued on debt conversion and for
accrued interest $ 957,073 $ -
Common stock issued for lease acquisition $ 29,840 $ -
See accompanying notes.
NEPTUNE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDING MARCH 31, 2008
(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. The activities of the Company
are conducted through subsidiary operations, and can be divided into two
principal line of operation: (1) aquaculture and related farming operations,
and (2) research, development and commercialization of new aquaculture industry
technologies.
Effective January 1, 2008, the Company reorganized its subsidiary operating
structure to reflect its two major lines of business. BHA Holdings, Inc. was
incorporated as a wholly-owned subsidiary. Blue Heron Aquaculture, Inc. was
incorporated to take over the operations of the Blue Heron Aqua Farms from Blue
Heron Aqua Farms, LLC, which now continues as a non-operating entity. Florida
Aquaponics Corp. was incorporated to manage and operate the hydroponics and
aquaponics operations in Florida. Both companies are wholly-owned subsidiaries
of BHA Holdings, Inc. The Company also acquired a controlling interest in
South Florida Aquaculture, Inc., the tenant of the land on which the Blue Heron
Aqua Farms is operated, on January 1, 2008.
Through its wholly-owned subsidiary, Aqua Biologics, Inc., the Company has
continued research and development initiated in 2000 by our two founders,
Ernie Papadoyianis and Sal Cherch, into more environmentally friendly
aquaculture methods and devices. As a result of that continuing research,
Aqua Biologics has completed installation and testing of the AquaSphere?
closed containment farming (aquaculture) system, and also has completed
initial tests of its revolutionary Ento-Protein?, a next generation protein
designed to replace fish meal as the primary source of protein in fish feed.
This research is being conducted jointly with Mississippi State University.
Since June 2001, the Company has operated a striped bass farming operation as
manager of a 48 acre established fish farm in Florida City, Florida. This farm
had been managed by Blue Heron Aqua Farms, LLC, a Florida limited liability
company in which the Company holds a 99+ percent interest. The leasehold
interest on the farm property is held by South Florida Aquaculture, Inc., and
Blue Heron has acted as manager of the farm. On January 1, 2008, Blue Heron
acquired a controlling interest (85+%)of South Florida Aquaculture, Inc., and
as of that date, transferred the management agreement and operations to a newly
formed Florida corporation, Blue Heron Aquaculture, Inc., a wholly-owned
subsidiary of the Company. The farm maintains a 41,000,000 gallon per day water
usage permit and a twenty year lease from South Florida Water Management
District, with a remaining term of 7 years.
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.
NEPTUNE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDING MARCH 31, 2008
(Unaudited)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (continued)
Basis of Financial Statement Presentation
The consolidated financial statements include the accounts of Neptune
Industries, Inc. and its wholly-owned subsidiaries, Aqua Biologics, Inc.
and BHA Holdings, Inc., which in turn owns Blue Heron Aquaculture, Inc.(Blue
Heron)and Florida Aquaponics Corp. The consolidation also includes the
accounts of Blue Heron Aqua Farms, LLC for the period from July 1, 2007
through December 31, 2007, when it ceased further operations. The accounts
of South Florida Aquaculture, Inc., in which the Company acquired a
controlling interest as of January 1, 2008, also are not included in the
consolidation because it had no activities, and only serves as a pass-through
holder of the leasehold interest in the farm property. The investment of the
Company in South Florida Aquaculture, Inc. is reported as a purchase. The
Company issued 124,000 shares of its common stock valued at $29,840 in
exchange for a controlling interest in the rights to the leasehold which was
capitalized and include in other assets in the accompanying balance sheets
and is being amortized over its remaining lease term of 7 years. 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,
2007 with the Securities and Exchange Commission.
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 when realized. Expenditures related to the research and
development activities of Aqua Biologics, representing patent filing costs,
have been capitalized as Deferred Costs, and will be recovered on grant of
NEPTUNE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDING MARCH 31, 2008
(Unaudited)
NOTE 1. SUMMARY OF SIGNIFCANT ACCOUNTING PRINCIPLES (continued)
the patents and commencement of use of the patented technology, which is
anticipated to be during 2008. Continued costs of testing the Aqua Sphere,
including costs of manufacture and installation of the tanks at the current
Lake Linda test site, are capitalized as Fixed Assets, but no depreciation is
claimed until commercial production, at which time capital costs will be
recovered against related income. Land clearing and site preparation costs
to open the south portion of the Blue Heron Aqua Farm for production, and to
set up the infrastructure for aquaponics farming at the south farm, have also
been capitalized, and will be depreciated when the south farm begins actual
operations.
Revenue Recognition
Sales revenue is recognized upon the shipment of merchandise to customers or
When customers pick up the product at the farm facility. 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.
As of March 31, 2008, the Company has more than $8 million of net
operating loss carry-forwards available to affect taxable income and has
established a valuation allowance equal to the tax benefit of the net
operating loss carry-forwards as realization of the asset is not assured.
The net operating loss carry-forwards may be limited under the change of
control provisions of the Internal Revenue Code, Section 382.
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
NEPTUNE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDING MARCH 31, 2008
(Unaudited)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (continued)
financial institution. At times, cash balances may be in excess of the FDIC
insurance limits. The Company has not experienced any 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 employees and
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 raw materials, such as salt, oxygen and
feed, and work in process, represented by the pounds of fish growing in
the separate tanks and raceways on the farm property. All of the direct costs
of production, including farm wages, feed, and related costs, are allocated on
a monthly basis to each tank and raceway in which growing fish are present,
based upon estimated pounds of fish in each tank or raceway. As fish are
harvested, the proportionate costs of the fish in the harvest are then
transferred from work in process to finished goods and cost of sales.
Effective January 1, 2008, the operations of the Blue Heron Farm were
transferred from Blue Heron Aqua Farms, LLC to Blue Heron Aquaculture, Inc. as
NEPTUNE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDING MARCH 31, 2008
(Unaudited)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (continued)
part of a restructuring of the Company?s operations and to allow the Company
to file consolidated tax returns for federal tax purposes. All of the assets
of Blue Heron Aqua Farms, LLC were transferred at cost, and all of the then
outstanding liabilities also were transferred to Blue Heron Aquaculture, Inc.
Inventory transferred to Blue Heron Aquaculture, Inc. consisted of the
following:
Raw materials $ 24,271
Work in Process 370,011
Total $ 394,282
Inventory at March 31, 2008 consisted of the following:
Work in process $ 490,514
Raw materials 11,398
Total $ 501,912
This work in process inventory balance was represented by an estimated 132,053
pounds of fish, at various stages of growth, or an average cost of $ 3.71 per
pound.
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 are inventory valuation,
recognition and measurement of income tax assets and liabilities, and
accounting for stock=based compensation.
Recent Accounting Pronouncement
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 2009 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.
In June 2007, the FASB approved the issuance of Emerging Issues Task Force
NEPTUNE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDING MARCH 31, 2008
(Unaudited)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (continued)
Issue No. 06-11 ?Accounting for Income Tax Benefits of Dividends on Share-Based
Payment Awards?. EITF 06-11 requires that tax benefits from dividends paid on
unvested restricted shares be charged directly to stockholders? equity instead
of benefiting income tax expense. This EITF is effective for financial
statements issued for fiscal years beginning after September 15, 2007. The
Company is currently evaluating the impact of EITF 06-11 but does not expect
that it will have a material effect on our financial statements.
In December, 2007, the FASB issued FAS No. 141(R), Business Combinations, and
SFAS No. 160, Accounting and Reporting of Non-controlling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51. FAS No. 141(R)
is required to be adopted concurrently with FAS No. 160. These standards
are effective for fiscal years beginning after December 15, 2008 and will
apply prospectively to business combinations completed on or after that date.
Early adoption is prohibited. FAS 141(R) requires changes in accounting for
acquisitions and FAS 160 will change the accounting for minority interests.
The Company is evaluating the impact of these statements on its financial
statements.
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
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 $8,539,525 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 current liabilities consisted of the following at March 31,
2008:
Accrued payroll - officers $ 117,356
Accrued interest - officers 124,105
Accrued interest - others 170,448
Accrued consulting 46,502
------------
$ 458,411
This total included $140,674 in accrued interest on debenture notes which was
paid on April 15, 2008 by the issue of common shares to the note holders.
NEPTUNE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDING MARCH 31, 2008
(Unaudited)
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
$117,356 through the quarter ended March 31, 2008. Cash compensation
actually paid was $77,040 for the quarter ended March 31, 2008. As of
December 31, 2007, a total of $400,000 of previously accrued salaries was
paid by the issuance of 400,000 shares of Series A Convertible Preferred
stock.
The Company contracted with CF Consulting LLC to provide Chief Financial
Officer services effective October 1, 2007, under which CF Consulting has
provided CFO and General Counsel services to the Company in return for monthly
compensation of $16,667. A total of $46,502 has been accrued as due under the
agreements with CF Consulting, LLC as of March 31, 2008. A total of $82,500 of
previously accrued amount was converted into 82,500 shares Series A Convertible
preferred stock on December 31, 2007.
NOTE 5. RELATED PARTY TRANSACTIONS
Notes Payable Officers
During the fiscal year ended June 30, 2002, the Company entered into an
agreement to retire then 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%. On February 7, 2006, the Board of Directors resolved to repay the notes
outstanding to Messrs. 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 $15,170 interest
has been accrued on each of these notes as of March 31, 2008 and is
included in accrued current liabilities.
NOTE 6. NOTES PAYABLE
Beginning in May, 2006 and continuing through the end of March, 2007, the
Company issued a total of $2,713,000 in face amount of subordinated convertible
debenture bonds, with a two year maturity. A total of $500,000 in face
value of these bonds is due as of June 1, 2008; however, the holders of those
bonds have agreed to extend the maturity date for a period of one year, to
June 1, 2009. In addition, a total of $362,000 in face value of the bonds have
NEPTUNE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDING MARCH 31, 2008
(Unaudited)
NOTE 6. NOTES PAYABLE (Continued)
converted into common stock of the Company, and the holder of another $30,000
in principal amount has requested conversion, which is in process.
The holders of another $229,213 in principal notes also have agreed to convert
into common stock of the Company.
NOTE 7. STOCKHOLDERS' EQUITY
During the quarter ended March 31, 2008, 1,520,674 shares of common stock
were issued. This total included 539,174 shares issued in payment of
interest of $145,902 on debenture bonds accrued at March 31, 2008; 124,000
shares issued for the acquisition of a controlling interest in South Florida
Aquaculture, Inc.; and 857,500 shares issued as compensation to officers,
directors and outside consultants for services rendered, as follows:
Ernest Papadoyianis 300,000
Xavier T. Cherch 300,000
James M. Harvey 12,500
Gregory A. Lewbart 12,500
Donald Tewksbury 12,500
CF Consulting, LLC 200,000
---------
857,500
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.
THE COMPANY
Neptune Industries, Inc. was 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 OTC Bulletin Board under the symbol NPDI. Since our inception, we have
been engaged in aquaculture (fish farming)and in the development of new
technologies, systems and products that directly address some the key
challenges faced by the aquaculture industry today.
Neptune Industries is a technology company which, from inception, has been
committed to achieving sustainable, eco-friendly aquaculture by innovating and
pioneering a total and comprehensive integrated systems solution approach to
the mission critical challenges facing the aquaculture industry today.
Dwindling supplies of wild caught stocks used for fishmeal, and the continued
environmental damage, escapism, and disease caused by self-polluting net pen
systems, have severely restricted industry growth on a global basis.
Our mission is to utilize our expanding production operations base of all-
natural, sustainable farm raised seafood products, as the working platform for
the development of innovative, next-generation technologies to eliminate
current industry bottlenecks. Further, our commitment is one of systems
integration that targets ?zero waste?. Fish, organic produce, and waste-to-
energy systems synergize to form a production model with multi-revenue
streams.
Thus far, the Company has applied for U.S. and European patents and has made
significant progress in the development of three technology platforms, ?Ento-
Protein?, ?Aqua-Sphere?, and ?Aquaponics?. Taken together as components of
a whole - this totally integrated system solution approach addresses what the
Company believes to be the three critical problems stymieing the growth of
the aquaculture industry and which will invariably cause it to fall
increasingly short of growing world-wide demand.
Aqua-Sphere? is a state-of-the-art, scalable, modular, floating closed
containment system that is capable of concentrating and removing solid waste,
eliminating predation and escapement, utilizing alternative energy for remote
applications, and isolating crops from the environment.
Ento-Protein? is a truly revolutionary development pioneered by Neptune to be
a high quality, sustainable protein derived from insects which is intended to
be a replacement for the rapidly depleting fishmeal made from wild caught
feedstock species, which is currently a $7 billion global market.
Aquaponics is the existing practice of integrating fish and plant production
through soil-less culture (hydroponics) using the fish waste effluent as
fertilizer. Neptune has advanced this methodology through the use of the Aqua-
Sphere. The hydroponic system provides a revenue stream from the waste
component of the fish production through the growth and sale of very high
quality organic herbs and vegetables. In addition, as another part of the
water treatment and aquaponics system, a derivative product of algae is grown
in floating socks, which is the 30x more productive than corn on a per acre
basis, for the production of bio-diesel.
Finally to validate and test Neptune's solutions and technologies, the
Company?s wholly-owned subsidiary, Blue Heron Aquaculture, Inc., operates a
sustainable fish farming facility in Florida City, Florida called Blue Heron
Aqua Farms. Blue Heron Aqua Farms currently is one of the leading producers
of hybrid striped bass, which it markets nationally and internationally as
Everglades Striped Bass??
Our business model also contemplates a number of acquisitions, both of other
farming and hydroponics operations and also of processing and distribution
facilities, so we can vertically expand, and, more importantly, can control
all aspects of the integrated process, to insure that the resulting products
are as close to all-natural, sustainable seafood products as it is currently
possible to achieve, and so that we can seek organic certification of the
entire process. These potential acquisitions will allow us the opportunity
to use our own technology in actual production settings so that we are able
to continually improve and refine the technologies.
TECHNOLOGY
We have applied for patents and made significant progress in the development of
two technology platforms, one of which we have trademarked Ento-Protein?, and
the second of which we have trademarked Aqua-Sphere?. Each of these disruptive
technologies addresses what the Company believes to be the two, mission
critical, challenges facing the aquaculture industry today
Closed Containment Farming
The core technology driving our business model is the patent-pending
AquaSphere?, which provides a highly efficient, environmentally friendly
solution to the multiple problems with existing seafood production methods,
while opening up new areas of the world to commercial scale aquaponics (fish
farming and hydroponic farming integrated into a single operation). 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 expand and enhance our business model.
Sustainable Fish Feed
Our second major technology development is our Ento-Protein? sustainable,
high protein meal derived from insects, as a substitute for and replacement of
fish meal. This research is being conducted under a cooperative research
agreement with Mississippi State University.
I Aqua-Sphere
A) Background
In October 1996, prior to the formation of Neptune, the Company?s founders,
Papadoyianis and Cherch, pioneered what they believe to be the first quarry
lake aqua-farm in South Florida. The pilot scale farm was conceived,
constructed and financed by Papadoyianis and Cherch, in a 60 acre lake in
Hallandale FL. The operation was a test site to determine (1) the feasibility
of raising fish in large inland bodies of water utilizing cages/net pens; (2)
to accumulate preliminary data regarding production costs and future pricing,
and (3) to determine the marketability and desirability of specific selected
species.
Operations consisted of six, 4-foot x 8-foot x 6-foot deep cages.
Approximately 5,000 pounds of catfish, tilapia, and hybrid striped bass
were raised in the first year and given to local wholesale and retail
purveyors at no charge, as a grass-roots marketing effort to determine
the quality perception and demand. Each purveyor was interviewed and
completed a market survey aimed at determining their potential product
needs and establishing pricing guidelines. From 30 original customers, all
but two remain today on the Company?s existing customer list.
During this period, the first rudimentary ?Eco-tank? was developed, as the
precursor to the Aqua-Sphere?. Papadoyianis and Cherch used large pre-
formed black polyethylene planters (used in the landscaping industry) for
a solid walled tank. Foam cylinders were attached to act as floating collars
around the top of the tanks, and a wood frame top with plastic netting served
as the top. Modified airlifts with PVC plastic pipe were added to the
sides for circulation. The systems were initially used as prototype models
of what the founders conceived would become the Eco-Tank. Later, since the
system performed far better than anticipated, it was used to hold and
isolate 50 to 100 fish overnight in preparation for orders. The system
worked quite well in keeping the fish calm and free from predation.
The conclusion reached by Papadoyianis and Cherch from these early efforts was
that conventional technology, in the form of cages and net pens, had such
overwhelming deficiencies that a new production system was necessary for the
aquaculture industry as a whole to be able to raise fish in closed bodies of
water on a profitable, and environmentally sustainable basis. Over the next
three years, and two additional pilot operations, Neptune?s founders,
Papadoyianis and Cherch, conceptualized and developed the key elements of a
new production system, which today is called the Aqua-Sphere?.
In May, 1998, Neptune Industries was founded by Papadoyianis and Cherch
with the vision of developing sustainable fish farms, and further developing
and deploying sustainable, eco-friendly technologies for and in the quarry
lakes of South Florida. Following the formation of Neptune, Papadoyianis and
Cherch granted Neptune the exclusive right to develop and use this new system
in North America, and a right of first refusal to use it the rest of the world,
in return for Neptune paying for the costs of further development and for the
patent application costs for them. This arrangement was reduced to an
agreement incorporating the agreed terms dated June 1, 1998.
The Aqua-Sphere? System, which is the result of this cooperative agreement, is
designed to address and resolve the objections of environmentalists to the
common methods of aquaculture used today, and for thousands of years in the
past, which result in significant pollution, escapism, and other environmental
problems.
In January, 1999, a joint venture operation was initiated by Neptune and
Ryan Inc. of Deerfield, Florida under the name Aquaculture Specialties, Inc.
The joint venture bought cages, floating docks and equipment from an existing
Farm operation in northern Florida, and installed it in a 20 acre quarry lake
in Fort Lauderdale Florida, and included a 200 foot floating dock and 32
floating cages, many of which were three times larger than the original cages.
Using the original design created by Papadoyianis and Cherch, the Company
installed several of the first components of the Eco-Tank on that farm. One of
these was a solar-powered, automatic feeding system that allowed all 32 cages
to be fed on predetermined schedules throughout the day, to maximize growth and
minimize labor costs. Another was an automated, pressurized water system which
could be used to clean equipment and wash docks and cages to maintain bio-
security. The founders also created and used a revolutionary concept which they
called ?the cage sleeve? which also was used at the site. This device was
designed to encapsulate an entire cage, thereby isolating the fish inside the
cage from the surrounding waters for medication purposes. This allowed for
treatment of disease. The development and testing of the feeding system, the
pressurized water and, more importantly, the ?cage sleeve? were the first
steps in the nine year development of what has resulted in today?s Aqua-
Sphere?. This operation ran for two years and produced multiple crops of hybrid
striped bass, tilapia, catfish, and koi.
Although this pilot was successful in many aspects, major production
issues were experienced with stocking, harvesting, predation, pollution,
escarpment, disease, and low oxygen conditions. At this stage, it became
obvious to Papadoyianis and Cherch, that in order to utilize the abundant
quarry lake resources in Florida and throughout the US, new system technology
would have to be developed. The completion of the ?Eco-tank? would be critical.
In early 2000, through an affiliation already begun by Papadoyianis and Cherch,
the State of Florida?s Port Manatee hatchery began offering excess redfish
fingerlings to Aquaculture Specialties, Neptune?s joint venture operation, for
experimentation in quarry lakes. Experimentation at the Fort Lauderdale site
proved unsuccessful in rearing redfish, because the groundwater lacked
sufficient calcium, sodium and hardness. In October 2000, the Company made
arrangements to use a different quarry site in Fort Lauderdale that had
brackish water, higher salinity, and was used as a cooling discharge for
Florida Power & Light Company. Redfish fingerlings were stocked into four,
4-foot x 8-foot x 6-foot deep cages, and raised to market in six and a half
months. Although the production was successful this time, bio-fouling and
escapement were major problems. Further refinements were made, however, to
the engineering models for the future solar powered automatic feeding system.
In December, 2001, management determined that the 20 acre site had
provided all the data and opportunity it could. The joint venture partners
amicably agreed to end operations, although William Ryan, President of the
Ryan Group, still serves as a member of Neptune?s Board of Directors.
In November, 2004, Neptune retained the law firm of Malin, Haley and
DiMaggio, PA to begin the patent process and trademark for SAFE (the original
Name for the Aqua-Sphere? system). As a result, in January, 2005, a provisional
patent application was filed in the names of Papadoyianis and Cherch, as
provided in their agreement with the Company, for the ?Aquatic Habitat and
Ecological Tank?, originally called the Eco-tank, but which is today known as
Aqua-Sphere?. In January, 2006, the full patent application was filed.
In April, 2006, the Company entered into an agreement with Coastal Tech
Fiberglass to build the first, prototype sized [15 foot] Aqua-Sphere? with
full functionality. This tank was used to test and confirm all aspects of
the Aqua-Sphere? concept before making second generation design
improvements. The prototype was not self-supporting as it did not include
any built in floatation. This initial tank was manufactured using fiberglass
to conserve capital and fiberglass was not intended to be the final material.
In May, 2007, the first pilot scale Aqua-Sphere? was installed in a 30 acre
quarry lake in Florida City, FL. The pilot system was fully integrated
with a solid waste recovery system, land-based methane digestion, and
hydroponics greenhouse. The system was stocked with 1,000 juvenile hybrid
striped bass. All of the solid waste is then trapped, and pumped to shore
into an anaerobic digester. One by-product of the digested waste is bio-gas
(methane) which, in the future, will be used to augment energy requirements
for the air-powered Aqua-Sphere? system. The digested waste then is
diverted to fertilizer sumps for use in the hydroponic greenhouse, where
organic lettuce, basil, thyme, and dill are grown.
In early 2007, the Company also was contacted by Discovery Channel Canada,
which proposed a filming opportunity for a fisheries related series, called,
?What?s That About?. The producers were interested in documenting a diversity
of venues in the seafood, commercial fisheries, aquaculture, and future
technology areas of the industry. Discovery Channel had read about the
Aqua-Sphere technology, and our farming operations, and wanted to film what
they believed could be the next generation eco-friendly aquaculture
technology for the show. In June, 2007, Discovery Channel Canada visited our
Blue Heron farm site and the nearby Lake Linda site, where they spent the day
filming both of our land-based operations, and the fully integrated Aqua-
Sphere system with waste collection, methane digestion, and hydroponic
vegetable production. The show, which is titled, ?HOOK, LINE AND SINKER?
aired on February 23, 2008 at 7PM in Canada. The rights to the
show have also been syndicated to National Geographic Explorer, which will air
the show sometime in the Fall of 2008. The recorded show as broadcast in
Canada is available for viewing on our website, www.neptuneindustries.net.
In July, 2007, Neptune incorporated Aqua Biologics of Canada, Ltd., as a
Wholly-owned Canadian subsidiary of Aqua Biologics, Inc., to act as the
technology development entity for Aqua Biologics in Canada. AB Canada is a
Canadian national company based in British Columbia. In June, 2007, John
Holder, of JLH Consulting in Vancouver, British Columbia, agreed to join
the Board of AB Canada. Mr. Holder has been a been an active figure as a
consultant, engineer and systems designer in the salmon industry in Canada
and worldwide for over 30 years
In August, 2007, federal trademarks were granted for ?Aqua-Sphere? and
Aqua-Cell?. Also in August, 2007, a Patent Cooperative Treaty application was
submitted, as the precursor to filing international patents for the
Aqua-Sphere? system. In December, 2007, the Company filed European patents,
again in the names of Papadoyianis and Cherch, as agreed.
On October 30, 2007, the Company entered an agreement with one of the top
plastics engineers in the country to assist in the design, engineering and
material analysis of our next generation Aqua-Sphere?.
On December 12, 2007 the Company signed an agreement with a large plastics
design and fabrication company to manufacture Aqua-Sphere?.
In March, 2008, Aqua Biologics took delivery of the second generation Aqua-
Sphere?, a 30 foot diameter tank, and is in the process of setting up the
tank and related infrastructure at the Lake Linda test site. It is
expected that this new tank will be operational and ready for stocking before
the end of the fiscal year on June 30, 2008.
In 2008, after more than 12 years of serious and committed development, both
by our founders initially, and thereafter in the Company, Neptune expects to
deploy itself, and to have ready for distribution and sale, the first
commercial production models of Aqua-Sphere?. Based on the already enormous
interest in these systems communicated to the Company from potential customers,
not only in North American and Europe, but also from around the globe, the
Company anticipates that commercial operations for its Aqua-Sphere? division
can begin in early 2009.
II Ento-Protein
In June 2006, during a strategic planning meeting, discussions arose
regarding the tremendous bottleneck facing the aquaculture industry with
finding suitable replacements for fishmeal in aquaculture feeds. Then existing
research had concentrated on vegetable proteins, which were not proving very
successful for carnivorous species. Fishmeal and fish feed were rapidly
escalating in price due to supply constraints, and industry observers
agreed that this $7 billion market was ripe for technology innovation.
In the weeks that followed, several suggestions arose as alternative sources
for fish meal, including rats, insects, snails, worms and fish processing
waste, and extensive research was conducted. The team quickly concluded
that insects appeared to offer the greatest commercial potential. The fact
that freshwater fish consume insects continuously was one of several key
factors in our initial thinking. For example, some species such as trout,
thrive almost exclusively on microscopic insects living and hatching from the
riverbed.
Following the decision to pursue insect protein as a fish meal substitute,
management began further development of the concept and also began due
diligence on the top entomology programs in the country in order to identify
a cooperative research partner to conduct future research and development,
with the goal of bringing a breakthrough product to market in a two to three
year period.
As a result of the preliminary work done by the Company, in July, 2006, we
retained Robert M. Downey, PA to begin a patent search and to file a
provisional patent for the Company. In September, 2006, a provisional patent
was filed by Neptune Industries (in its own name) for ?Production and
Processing of Insects for Transformation into Protein Meal for Fish and Animal
Diets.? In April, 2007, a trademark application was filed for ?Ento-Protein?
as an intent to use filing.
In December, 2006, after extensive due diligence on various university
entomology departments, management contacted Dr. Frank Davis, Professor
Emeritus in the Entomology Department at Mississippi State University (MSU).
In January, 2007, Papadoyianis and Cherch visited Mississippi State and met
with Dr. Davis who has over 30 years experience in rearing a variety of
insect species for agricultural research. He has traveled internationally and
assisted other governments in insect rearing programs to eradicate pest
species. Dr. Davis also began the first insect rearing course ever in 2000 at
MSU to teach students how to raise quality insects. Dr. Davis also has agreed
to serve as a member of Neptune?s Advisory Board.
In April, 2007, Neptune executed its first memorandum of understanding with
MSU to officially begin its research relationship and to start its initial
(Stage 1a) research experiments. Stage 1a involved the cooperative efforts
of MSU and Neptune to develop a comprehensive listing of optimal production
qualifications and parameters in order to qualify, or narrow down, the list
of insect species.
Once the list was created, a complete literature search was conducted to
carefully review species characteristics, nutritional analyses, etc. The
literature search proved to be extensive. This information was reviewed and
summarized by MSU data tables were created, where applicable, to indicate
nutritional profiles where they were available.
Four insect species emerged as the most promising mass production candidates.
These four species were then acquired by MSU, dried, and sent to an
independent laboratory for complete nutritional profiles, including amino acid,
fatty acid, and quantitative analyses. Of the four analyses completed, two
species showed considerably greater nutritional profiles, and were selected as
the two candidates for future research.
In August, 2007, Neptune executed its second memorandum of understanding with
MSU to commence Stage 1b research experiments. Stage 1b involved feed
acceptability and concurrent feed trials for ?off-flavor? analysis. Dried
insect meal from a select species, internally referenced as Species ?A?, was
prepared at MSU and shipped to Zeigler Bros. feed mill in Gardners, PA for
inclusion in an experimental diet, at a rate equal to the normal fishmeal
portion in the control diet, i.e., 100 percent fishmeal replacement.
In September, 2007, a utility (non-provisional) patent application was filed
by Neptune Industries for ?Production and Processing of Insects for
Transformation into Protein Meal for Fish and Animal Diets.? In December,
2007, the trademark filed for ?Ento-Protein?? was approved for registration by
the U.S. Patent and Trademark Office. The official registration is
anticipated to occur in March or April, 2008.
In October, 2007, an 18 day feeding trial on juvenile hybrid striped bass
was conducted at Mississippi State University for diet acceptability and
off-flavor testing. Off flavor is an important consideration for any diet
development, because changes to the taste, texture or smell of the fish
flesh could adversely affect market appeal.
Two treatments, a control (standard fishmeal based) diet and an experimental
(100 percent replacement of fishmeal with insect protein meal) diet were
trialed. Both diets were submitted to the Mississippi State University
Chemical Laboratory for proximate analysis.
On the eighteenth day of the trials, the fish were collected, immersed in an
ice bath and then filleted and the treatment-dependent filets were isolated
and either refrigerated for sensory analysis conducted by the Garrison
Sensory Evaluation Laboratory within three hours of sacrifice, or frozen for
proximate analysis conducted by the Mississippi State Chemical Laboratory.
Sensory analysis was conducted at the Food Science and Technology Department
of MSU. A blind panel evaluated the fish for taste, texture, and smell. The
results indicated that there was no significant differences reported in the
taste of the fish fed the insect meal based diet, versus the fish fed with
the fish meal based diet. Further, the majority of the panel actually
preferred the taste of the fish fed the insect meal based diet, over the
fish fed with the fish meal based diet.
In February 2008, Stage II research trials with MSU?s Entomology Department
and the Wildlife and Fisheries Department began. A 60-day feeding trial,
to assess growth in juvenile hybrid striped bass, was initiated. Five
treatments are being assessed, including a standard control diet (fishmeal-
based as before), and four experimental diets, all replacing 100 percent of
the fishmeal in the diets. At the conclusion of this stage of the experiment,
in April, 2008, all of the fish on all of the diets will be weighed, and a
statistical analysis will compare the growth rates. Feed conversion ratios
(FCR) also will be calculated as the defining parameter for growth and
digestibility of the diets.
In April, 2008, the second stage of research with MSU was completed. On a
preliminary basis, very positive results have been observed with the Ento-
Protein formulations. Certain Ento-Protein formulations generated 85% of the
growth rate of the fishmeal diets, on the juvenile hybrid striped bass. Once a
completed statistical analysis and report are completed, the research will be
evaluated, and the next stage identified.
The Company currently has a high degree of confidence that Ento-Protein? can
become a significant alternative to fishmeal in a rapidly growing $7 billion
worldwide market, and that Neptune is on track to begin entering discussions
in 2008 with Universities, commercial feed mills, and distributors of fish
diets and feed about the potential of integrating Ento-Protein? into various
research diets, specialty feeds, and all-natural/organic diets as an entrance
into the marketplace. The Company also recognizes there is still considerable
work to be done in research, product development, manufacturing, and
merchandizing, and that it is quite possible difficulties will emerge that
could delay or substantially impact the commercialization of this technology.
Farming Operations
Current farming operation are managed by our Blue Heron Aquaculture, Inc.
subsidiary on a 48 acre site at the edge of the Florida Everglades, owned by
the South Florida Water Management District, an agency of the State of
Florida. Blue Heron Aquaculture, Inc., is the successor to Blue Heron Aqua-
Farms, LLC, the previous farm manager, which transferred the management
agreement for the farm property to the new corporation as of January 1, 2008.
The actual leasehold interest in the 48 acre farm is held by South Florida
Aquaculture, Inc., a Florida corporation with which Blue Heron Aqua-Farms, LLC
entered into a management agreement in 2000. On January 1, 2008, Blue Heron
Aqua-Farms, LLC acquired a controlling interest (85+ percent) in the common
stock of South Florida Aquaculture, Inc. from two shareholders, James Harvey,
who is also a director of Neptune, and Dan Azeredo, in exchange for 105,000
shares of the common stock of Neptune. At the same time, Mr. Papadoyianis also
transferred shares in South Florida Aquaculture, Inc. which he had acquired
with his own funds several years ago, in exchange for 19,000 shares of Neptune
common stock, using the same exchange ratio. This transaction, and the
interests of Mr. Harvey and Mr. Papadoyianis, were fully disclosed to the
independent members of the Board of Directors of Neptune, and the Board
unanimously approved the transaction with Mr. Harvey and Mr. Papadoyianis
abstaining.
Utilizing a water use permit from the District, Blue Heron draws water from the
limestone aquifer, oxygenates the water, and then pumps the water through a
series of tanks, in which hybrid striped bass in various graduated sizes, are
raised. This unique flow through system insures that the fish at the farm are
raised in constantly flowing, clean water, with all wastes removed on a
continuous basis. The water is then discharged into a settling pond on the
site, and from there flows into a blind canal, also fully on the site, where
the water returns to the aquifer through the natural limestone. No water or
waste is ever discharged from the site. The resulting hybrid striped bass,
which we call Everglades Striped Bass?, have a natural, sweet flavor, and
demand for our product far exceeds our current available supply. We use no
hormones, antibiotics, coloring agents, or other artificial treatments in our
farming operations, and we have begun the process of developing an ?organic
farm plan? as the first step in seeking organic certification for our
Everglades Striped Bass?
Since our current farm operation has used only a small fraction of the 48 acres
available at the site, we implemented a plan to expand the farm. Certain
proceeds from the debenture offering conducted through Dawson James Securities
during fiscal year ending June 30, 2007, have been allocated for that purpose.
Our expansion timetable was delayed by several months due to unexpected
regulatory and licensing issues, as well as the need to complete the
acquisition of South Florida Aquaculture, Inc, closed on January 1, 2008, so
that we control the entire lease property ourselves. The delays included
unexpected obstacles in renewing our existing water permits for the site and
in obtaining consent of the South Florida Water Management District to the
expansion, as a result of water shortages in South Florida and heightened
regulatory scrutiny of water use in the area by all users. In addition, an
anonymous letter from a ?concerned scientist? was received by the South
Florida Water Management District and other state and federal regulatory
agencies claiming that there were environmental, immigration and other
operational issues at the farm by South Florida Aquaculture. This letter
prompted a state review and investigation, and the eventual issuing of a
reporting clearing Blue Heron of any issues at the farm. Blue Heron did,
however, agree to clear certain non-native plant species from the site, as
part of the review process. The Company also filed a John Doe action in the
Circuit Court of Palm Beach County seeking to identify the anonymous writer,
the result of which has been the tentative identification of a disgruntled
former farm employee of South Florida Aquaculture, Inc. These obstacles have
now been overcome, and the expansion is well underway.
The remainder of the site has now been cleared, the water use permit renewal
necessary for the expanded operation has been approved, and we expect to
commence operations this fiscal year. Our current estimates are that the
expanded operations will more than triple our total farm production. Part
of the expanded operation also will incorporate use of the effluent water and
waste for hydroponic growing of vegetables and herbs, a process already begun
on a trial basis at the Lake Linda site near the existing farm. The
hydroponics farming will add a second income stream to the farm operation, and
should produce revenues faster than the fish farming, which will take ten to
twelve months from initial stocking before the fish can be harvested. The
hydroponics operation will be operated and managed by Florida Aquaponics Corp.
Acquisition Plans
We intend to diversify our farming operations to include other marine products;
production of hydroponic herbs and vegetables; wholesale distribution,
processing and live delivery (hybrid striped bass and tilapia) to the Asian and
Latin markets; and value added products. 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 organic 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,
2007.
Comparison of Operating Results
Gross revenues for the quarters ended March 31, 2008 and 2007 were $158,493
and $203,379, respectively. Cost of sales for the same periods were $183,455
and $224,742,respectively, resulting in gross loss of $(24,962) and $(21,363),
respectively. Expansion of the farm, as now planned and in progress, will allow
us to even out periodic shortages in fry as well as to increase production.
Operating expenses for the quarters ended March 31, 2008 and 2007 were
$265,222 and $751,339, respectively, resulting in net losses from operations of
$(290,184) for the quarter ended March 31, 2008 compared to $(772,702) for the
quarter ended March 31, 2007. After interest income and expenses, our net
loss was $(445,664) for the quarter ended March 31, 2008 compared to
$(853,431) for the quarter ended March 31, 2007.
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 December 31,
2007 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 1,520,674 common shares of the Company were issued during the
quarter ended March 31, 2008. This total included the 124,000 common shares
issued on the acquisition of South Florida Aquaculture, Inc.; 539,174 common
shares issued in payment in kind of interest due at December 31, 2007 on
convertible debentures in the amount of $145,902, and 857,500 shares issued
as compensation to officers, directors and outside consultants in payment of
services rendered.
As a result of these changes, a total of 24,551,342 common shares and 482,500
Series A Convertible Preferred shares were outstanding at March 31, 2008. An
additional 515,288 common shares were issued on April 15, 2008 as payment in
kind of interest in the amount of $140,674 accrued at March 31, 2008 on the
outstanding convertible debenture bonds, resulting in a total of 25,066,630
common shares outstanding as of April 30, 2008.
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
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
No reports were filed during the quarter ended March 31, 2008.
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 15, 2008
NEPTUNE INDUSTRIES, INC.
By: /s/ Ernest Papadoyianis
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Ernest Papadoyianis
CEO, President and Director