U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A INFORMATION
INFORMATION REQUIRED IN PROXY STATEMENT
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement [_] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material under Rule 14a-12
Edgewater Foods International, Inc.
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies: Common Stock
(2) Aggregate number of securities to which transaction applies: 13,557,366
(3) Per unit price or other underlying value of transaction computed pursuant to
Exchange Act Rule 0-11 (set forth the amount on which the filing fee is
calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
EDGEWATER FOODS INTERNATIONAL, INC.
5552 West Island Highway
Qualicum Beach, British Columbia
Canada V9K 2C8
(250) 757-9811
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
Edgewater Foods International, Inc. will hold its Annual Meeting of Stockholders
at 3811 Point Grey Road, Vancouver, British Columbia, Canada V6R 1B3 on February
12, 2007. We are holding the meeting for the following purposes:
1) To elect members of the Board of Directors, whose terms are described in
the proxy statement; and,
2) To transact such other business as may properly come before the meeting
and any postponement or adjournment thereof.
Holders of record of Edgewater common stock at the close of business on January
12, 2007, are entitled to vote at the meeting. The Board urges Stockholders to
vote "FOR" Item 1 and solicits your vote.
In addition to the proxy statement, proxy card and voting instructions, a copy
of Edgewater's annual report on Form 10-KSB, which is not part of the proxy
soliciting material is enclosed.
It is important that your shares be represented and voted at the meeting. We
hope you will be able to attend the Annual Meeting. Whether or not you expect to
attend the meeting, please vote your shares using the enclosed proxy card.
Simply sign the return card where required, note the number of shares you own
and if you will attend the meeting in person, and return the card in the
envelope provided to us at the address first written above. Of course, you may
also vote your shares in person at the Annual Meeting.
By Order of the Board of Directors,
Robert Saunders
Chief Executive Officer
January 12, 2007
PROXY STATEMENT
We are providing these proxy materials in connection with the solicitation by
the Board of Directors of Edgewater of proxies to be voted at our Annual Meeting
of Stockholders, to be held on February 12, 2007, and at any meeting following
postponement or adjournment of the Annual Meeting.
You are cordially invited to attend the Annual Meeting, which will begin at 2:00
PM. The meeting will be held at 3811 Point Grey Road, Vancouver, B.C. V6R 1B3.
Stockholders will be admitted beginning at 1:30 PM. The location is accessible
to handicapped persons, and we will provide wireless headsets for hearing
amplification upon request.
You will need an admission ticket to enter the meeting. If you are a stockholder
of record, you will find an admission ticket attached to the proxy card sent to
you. If you plan to attend the Annual Meeting, please retain the admission
ticket. Directions to the Annual Meeting are printed on the admission ticket.
If your shares are held in the name of a bank, broker, or other nominee and you
plan to attend the Annual Meeting, you can obtain an admission ticket in advance
by sending a written request, along with proof of ownership, such as a recent
bank or brokerage account statement, to our transfer agent, Empire Stock
Transfer Inc. at 2470 Saint Rose Pkwy, Suite 304, Henderson, NV 89074,
702.818.5898, Fax 702.974.1444. If you arrive at the Annual Meeting without an
admission ticket, we will admit you if we are able to verify that you are an
Edgewater stockholder.
We are first mailing this proxy statement, the proxy card and voting
instructions on January 19, 2007, to persons who were stockholders at the close
of business on January 12, 2007 the record date for the meeting.
IMPORTANT--PLEASE READ
Whether or not you expect to attend the Annual Meeting in person, we urge you to
vote your proxy at your earliest convenience by mail using the enclosed
envelope. This will ensure the presence of a quorum at the Annual Meeting and
will save us the expense of additional solicitation. Sending in your proxy card
and voting will not prevent you from voting your shares at the Annual Meeting,
or changing your vote, if you desire to do so. It will also help us provide
adequate seating if you note that you will attend. Your proxy is revocable at
your option in the manner described in the Proxy Statement.
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PROXIES AND VOTING PROCEDURES
You can vote your shares by completing and returning a proxy card or, if you
hold your shares in "street name," a voting instruction form.
If your shares are held in "street name," you must obtain a proxy, executed in
your favor, from your broker or other holder of record, to be able to vote at
the meeting.
You can revoke your proxy at any time before it is exercised by timely delivery
of a properly executed, later-dated proxy or by voting in person at the meeting.
All shares entitled to vote and represented by properly completed proxies
received prior to the meeting and not revoked will be voted at the meeting in
accordance with your instructions.
If you hold your shares through a broker, your shares may be voted even if you
do not attend the Annual Meeting.
Abstentions and broker non-votes do not have the effect of votes in opposition
to a director. Abstentions are also counted towards determining a quorum.
If any other matters are properly presented at the Annual Meeting for
consideration, including, among other things, consideration of a motion to
adjourn the meeting to another time or place, the individuals named as proxies
and acting thereunder will have discretion to vote on those matters according to
their best judgment to the same extent as the person delivering the proxy would
be entitled to vote. If the Annual Meeting is postponed or adjourned, your proxy
will remain valid and may be voted at the postponed or adjourned meeting. You
will still be able to revoke your proxy until it is voted. At the date this
proxy statement went to press, we did not anticipate that any other matters
would be raised at the Annual Meeting.
STOCKHOLDERS ENTITLED TO VOTE
You are entitled to vote at the Annual Meeting all shares of our common stock
that you held as of the close of business on the record date. Each share of our
common stock is entitled to one vote with respect to each matter properly
brought before the meeting.
On January 12, 2007, the record date, there were 21,188,491 shares of common
stock outstanding.
A list of stockholders entitled to vote at the meeting will be available at the
meeting, and for 10 days prior to the meeting, at 5552 West Island Highway,
Qualicum Beach, British Columbia, Canada V9K 2C8 between the hours of 9:00 a.m.
and 4:00 p.m. local time.
REQUIRED VOTE
The presence, in person or by proxy, of the holders a majority of the voting
power at the Annual Meeting shall constitute a quorum, which is required in
order to transact business at the meeting.
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COST OF PROXY DISTRIBUTION AND SOLICITATION
Edgewater will pay the expenses of the preparation of the proxy materials and
the solicitation by the Board of Directors of proxies. Proxies may be solicited
on behalf of Edgewater in person or by telephone, e-mail, facsimile or other
electronic means by directors, officers or employees of Edgewater, who will
receive no additional compensation for soliciting. In accordance with the rules
of the Securities and Exchange Commission, we will reimburse brokerage firms and
other custodians, nominees and fiduciaries for their expenses incurred in
sending proxies and proxy materials to beneficial owners of Edgewater stock.
PROPOSAL 1
Proposal for the Election of Directors
The Board of Directors is comprised of only one class. All of the directors will
serve until the next annual meeting of shareholders and until their successors
are elected and qualified, or until their earlier death, retirement, resignation
or removal. To date we have not had an annual meeting. Dr. Kristina Miller, our
Chief Scientific Advisor is the wife of Robert Saunders, our Chairman, CEO and
President, but there are no other family relationships among our directors and
executive officers. Provided below are brief descriptions of the business
experience of each director during the past five years and an indication of
directorships held by each director in other companies subject to the reporting
requirements under the Federal securities laws.
Information with Respect to Director Nominees
ROBERT SAUNDERS, CHAIRMAN. Mr. Saunders is our CEO and President. Mr. Saunders
has directed all research and development efforts at Island Scallops since its
establishment. After studying for his B.Sc. at the University of British
Columbia in the early 1970's, Mr. Saunders has worked exclusively in the
aquaculture research and development field. His efforts have primarily involved
designing and implementing innovative culture technology and methods for new
aquaculture species in British Columbia. Mr. Saunders has direct experience with
managing projects similar to the type proposed, such as developing the hatchery
technology for producing the Japanese scallop and the development of sablefish
aquaculture.
DOUGLAS C. MACLELLAN, VICE-CHAIRMAN. Since May 1992, Mr. MacLellan has been
President and Chief Executive Officer of the MacLellan Group, Inc., a privately
held business incubator and financial advisory firm. Mr. MacLellan is currently
a member of the board of directors and chairman of the audit committee of AMDL,
Inc. (AMEX: ADL), a publicly held biotechnology firm. From 2002 until September
2005, Mr. MacLellan was Vice Chairman and a Director of AXM Pharma, Inc. (AMEX;
AXJ). From March 1998 through October 2000, Mr. MacLellan was the co-founder and
a significant shareholder of Wireless Electronique, Ltd., a China-based
telecommunications company having joint venture operations with China Unicom
(NASDAQ: CHU) in Yunnan, Inner Mongolia and Ningxia provinces. He is also a
co-founder and, since May 1997, has been a director of Datalex Corporation, a
Canadian-based legacy software solution provider. From November 1996 to March
1998, Mr. MacLellan was co-Chairman and an Investment Committee member of the
Strategic East European Fund. From November 1995 to March 1998, Mr. MacLellan
was President, Chief Executive Officer and a Director of PortaCom Wireless,
Inc., a company engaged as a developer and operator of cellular and wireless
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telecommunications ventures in selected developing world markets. Mr. MacLellan
is a former member of the board of directors and co-founder of FirstCom
Corporation (NASDAQ: FCLX), an international telecommunications company that
operates a competitive access fiber and satellite network in Latin America,
which became AT&T Latin America (NASDAQ: ATTL) in August 2000. During 1996, he
was also the Vice-Chairman of Asia American Telecommunications (now Metromedia
China Corporation), a majority-owned subsidiary of Metromedia International
Group, Inc. (AMEX: MMG). Mr. MacLellan was educated at the University of
Southern California in economics and finance, with advanced training in
classical economic theory.
MARK H. ELENOWITZ, DIRECTOR. Mr. Elenowitz is a co-founder and managing director
of the TriPoint family of companies. He is responsible for the overall corporate
development of the firm and assisting Tripoint's clients with high-level
financial services and general business development. From December 2002 to
September 2005, Mr. Elenowitz was a board member of AXM Pharma formerly (AMEX:
AXJ). From September 2001 to March 2002, Mr. Elenowitz was a Director and
President of Image World Media, Inc., an international media company
specializing in the production and distribution of various media content for
worldwide distribution across multiple media platforms, such as traditional
television, film and the Internet. From February 1998 to October 2001, Mr.
Elenowitz was Co-Chairman and Managing Director of GroupNow!, Inc., a financial
consulting firm. In this role he was responsible for the company's overall
corporate development and corporate finance. Mr. Elenowitz integrates a strong,
successful entrepreneurial background with extensive financial services and
capital markets experience. He is also the senior managing director of Investor
Communications Company, LLC (ICC), a national investor relations firm he founded
in 1996. Through ICC, Mr. Elenowitz has developed ongoing relationships with
other investment banking firms, market makers, and analysts. Mr. Elenowitz has
worked with over 30 publicly traded companies providing financial consulting and
strategic planning services. Previously, Mr. Elenowitz held Series 7 and 63
licenses as a broker, and held a Series 24 license (Branch Manager) at regional
brokerage firm and also served as Vice President of Sales at NYSE member firm.
Mr. Elenowitz is the recipient of several entrepreneurial awards. He is a
graduate of the University of Maryland School of Business and Management, with a
Bachelor of Science in Finance.
DR. ROBERT L. ROOKS, DIRECTOR. Dr. Robert L. Rooks has been Chief of Staff of
All Care Animal Referral Center (ACARC) in Fountain Valley, California, since
1990. ACARC is the largest strictly referral veterinary center in the United
States. Dr. Rooks has a staff of over 20 veterinarians in the areas of surgery,
critical care, internal medicine, oncology, dentistry, radiology and neurology.
Their services include 24-hour critical care/emergency service, MRI and CT
scans, color-flow Doppler ultrasounds, hyperbaric oxygen therapy, a complete
orthopedic program including total hip replacements and joint reconstruction,
cobalt radiation therapy, a complete neuro-diagnostic service, a kidney
transplant program and a physical rehabilitation department and much more. He is
the published author of over 100 journals, magazine and newspaper articles. Dr.
Rooks is also the author of the book "Canine Orthopedics" published in 1997 by
Howell Bookhouse. Dr. Rooks completed his undergraduate studies at Iowa State
University in 1978. He graduated from the College of Veterinary Medicine at Iowa
State. Dr. Rooks received his Masters Degree as well as completed his surgical
residency at the University of Illinois in 1981. He is a Diplomat of both the
American College of Veterinary Surgeons and the American College of Veterinary
Practitioner.
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IAN FRASER, DIRECTOR. Since 1997, Mr. Ian Fraser has been President of Fraser
Yacht Sales Ltd., a successful Yacht Brokerage located in Vancouver, B.C. Prior
to establishing Fraser Yacht Sales Ltd., Mr. Fraser gained experience in sales
and marketing both nationally and internationally as a yacht broker for two top
brokerage houses in Vancouver. Previously, Mr. Fraser was worked as an
advertising sales executive with Naylor communications from 1988 to 1990 and
learned valuable communication skills while working with numerous trades
including the Truck Logger's association, the I.W.A of America, and the B.C.
Construction industry. He also operated as a commercial fisherman on the West
coast working on commercial salmon fishing boats for the B.C. Packer Corporation
over a 4 year period and gained valuable knowledge of the coastline of Vancouver
Island and along the mainland from Victoria to the Queen Charlotte Islands. Mr.
Fraser also acquired sea time and commercial shipping skills while working on
the deck department of the B.C. Ferry Corporation based out of Horseshoe Bay
during his early professional career and during the summer months while
attending school in the early 1980s. Mr. Fraser also competes internationally on
ocean racing yachts and has crossed the Pacific and sailed up and down the coast
to Mexico on numerous occasions while racing and delivering racing yachts as
captain. Mr. Fraser studied Business Administration at Simon Fraser University
and Capilano College graduating with a diploma in Business Administration.
MICHAEL BOSWELL, DIRECTOR. Mr. Boswell has also been acting as our Chief
Accounting Officer since August 2005 and will continue to do so until we find an
adequate replacement. Mr. Boswell is a co-founder and member in TriPoint Capital
Advisors, LLC, a boutique merchant bank focused on small and mid-sized growth
companies and a co founder of the TriPoint family of companies. Mr. Boswell
provides high-level financial services to start-up businesses and small to
mid-sized companies. Prior to the founding of TriPoint, Mr. Boswell had a number
of executive positions focusing on business development and management
consulting. Mr. Boswell also spent eight years as a senior analyst and/or senior
engineer for various branches of the United States Government. He earned a MBA
from John Hopkins University and a BS degree in Mechanical Engineering from
University of Maryland.
DARRYL HORTON, DIRECTOR. Mr. Horton has been a businessman successfully involved
in numerous construction and development projects for the past 35 years. He is
the President, Manager and a Partner of Abbotsford Development Corporation and
is currently managing a development project in Abbotsford, British Columbia
called Eagle Mountain. Eagle Mountain is an upscale, master planned community of
single family homes, town homes and commercial properties covering approximately
60 acres that is expected to be valued, upon completion, in excess of 200
million dollars. Prior to Eagle Mountain, Mr. Horton managed, owned and marketed
numerous other residential and commercial projects including the construction of
a 30 million dollar multi-function residential Intermediate Care Facility in
LaJolla California. For 15 years Mr. Horton was a partner in a general
contracting company that did various contracts with an average volume of about
25 million per year. In the 1970's, Mr. Horton was the Vice president of
Community Builders, the largest single family developer in British Columbia. Mr.
Horton is also the director of several other building and development companies
in British Columbia.
VICTOR BOLTON, DIRECTOR. Mr. Bolton founded a Mechanical contracting firm after
graduating from college and evolved that firm into all aspects of the
construction industry including building and raw land developing as well as
extensive property management. Retiring from this business in 2000, Mr. Bolton
now focuses time and energy towards the food manufacturing field.
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Pursuant to our Articles of Incorporation, this proposal can be approved at the
meeting by a majority of the votes entitled to vote thereat.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE ELECTION OF THE ABOVE
NAMED DIRECTORS.
Executive Officers
NAME AGE POSITION
- ---- --- --------
Robert Saunders 53 CEO and President
Michael Boswell 37 Acting Chief Accounting Officer
Brief descriptions of the business experience during the past five years of each
of our executive officers and an indication of directorships, if any, held by
such officer in other companies subject to the reporting requirements under the
Federal securities laws are provided above within Proposal 1.
Significant Employees
The following are employees who are not executive officers, but who are expected
to make significant contributions to our business:
BRUCE EVANS, FARM MANAGER. Mr. Bruce Evans has been involved in shellfish
production since 1985. He successfully established an oyster business, employing
methods of long-line and beach culture production. That business is still in
operation today, producing 7,000 gals of shucked oysters annually and employing
3 full time people and 4 part time people. He moved to Island Scallops in 1989.
Mr. Evans was responsible for securing the leases from the Provincial government
for this scallop grow-out project. He built the established long-line systems
that currently produce scallops for Island Scallops. Mr. Evans worked with a
Japanese scallop farmer for two years in B.C. and spent a month working on
highly acclaimed scallop farms in Japan. Mr. Evans has BS in Marine Biology from
the University of Victoria.
DR. KRISTINA M. MILLER, CHIEF SCIENTIFIC ADVISOR. Dr. Miller is currently Head
of the Molecular Genetics Section in the Pacific Region for the Department of
Fisheries and Oceans, Canada (DFO). She has been a research scientist at DFO
since obtaining her PhD in Biological Sciences from Stanford University in 1992.
The Molecular Genetics section she oversees contains a staff of 26, including
scientists, biologists, computer analysts and research technicians. Dr. Miller
conducts research on the genetic composition, adaptation, immunity and
physiology of wild and domesticated fish and shellfish species using both
molecular and genomic approaches. She has been a leader in the development of
molecular technologies to aid in the conservation and management of aquatic
resources. In the past 10 years, she has published over 40 scientific
peer-reviewed journal manuscripts, and her group has been the focus of numerous
magazine and newspaper articles. Dr. Miller brings a strong scientific component
to the management of Edgewater Foods, and she will serve as Chief Scientific
Advisor. In addition to her PhD, Dr. Miller received a BSc in Zoology from
University of California, Davis in 1983, and a MSc in Biology from University of
British Columbia in 1986. Dr. Miller is Robert Saunders, our Chairman, CEO and
President's wife.
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GOVERNANCE OF EDGEWATER
BOARD COMMITTEES
We currently have six committees appointed by our Board of Directors:
o Audit Committee, which is comprised of Douglas MacLellan (Chair), Robert
Rooks and Ian Fraser. The Board has determined that all of these members
are independent, as that term is defined in Section 121(A) of the
American Stock Exchange's Listing Standards.
o Finance Committee, which is comprised of Mark Elenowitz (Chair), Douglas
MacLellan and Robert Saunders.
o Compensation Committee, which is comprised of Ian Fraser (Chair), Mark
Elenowitz and Doug MacLellan.
o Disclosure Committee, which is comprised of Douglas MacLellan (Chair),
Robert Saunders and Michael Boswell.
o Nominating Committee, which is comprised of Robert Saunders (Chair),
Douglas MacLellan and Robert Rooks. The Board has determined that Mr.
Rooks and Mr. MacLellan are independent, as that term is defined in
Section 121(A) of the American Stock Exchange's Listing Standards.
o Sarbanes-Oxley Steering Committee, which is comprised of Douglas
MacLellan, Robert Saunders, Michael Boswell and Louis Taubman (Louis
Taubman is our outside corporate and securities counsel).
Audit Committee and Financial Expert
We have an Audit Committee as specified in Section 3(a)(58)(A) of the Securities
Exchange Act of 1934, as amended, composed of Douglas MacLellan (Chair), Robert
Rooks and Ian Fraser. The Audit Committee focuses its efforts on assisting our
Board of Directors to fulfill its oversight responsibilities with respect to
our:
o Quarterly and annual consolidated financial statements and financial
information filed with the Securities and Exchange Commission;
o System of internal controls;
o Financial accounting principles and policies;
o Internal and external audit processes; and
o Regulatory compliance programs.
The committee meets periodically with management to consider the adequacy of our
internal controls and financial reporting process. It also discusses these
matters with our independent auditors and with appropriate financial personnel
that we employ. The committee reviews our financial statements and discusses
them with management and our independent auditors before those financial
statements are filed with the Securities and Exchange Commission.
The committee has the sole authority to retain and dismiss our independent
auditors and periodically reviews their performance and independence from
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management. The independent auditors have unrestricted access and report
directly to the committee. The committee met 3 times in fiscal 2006. We do not
have a written charter for the audit committee.
Douglas MacLellan is our Audit Committee Financial Expert, as that term is
defined in Item 401 of Regulation S-B and the Board has determined that Mr.
MacLellan is independent, as that term is used in Item 7(d)(3)(iv) of Schedule
14A under the Exchange Act. Mr. MacLellan's qualifications as an audit committee
financial expert are described in his biography above.
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REPORT OF AUDIT COMMITTEE
We have reviewed Edgewater Foods International, Inc.'s audited financial
statements as of and for the fiscal year ended August 31, 2006, and met with
both management and LBB & Associates Ltd., LLP, Edgewater's independent
auditors, to discuss those financial statements. Management has represented to
us that the financial statements were prepared in accordance with accounting
principles generally accepted in the United States of America.
Management has primary responsibility for Edgewater's financial statements and
overall reporting process, including the company's system of internal controls.
The independent auditors audit the annual financial statements prepared by
management, express an opinion as to whether those financial statements present
fairly, in all material respects, the financial position, results of operations
and cash flows of the company in conformity with accounting principles generally
accepted in the United States of America and discuss with us their independence
and any other matters they are required to discuss with us or that they believe
should be raised with us. We oversee these processes, although we must rely on
the information provided to us and on the representations made by management and
the independent auditors.
We have received and discussed with LBB & Associates, the written disclosure and
the letter required by Independence Standards Board Standard No. 1 (Independence
Discussions with Audit Committees). These items relate to that firm's
independence from Edgewater. We also discussed any matters required to be
discussed pursuant to Statement on Auditing Standards No. 61 (Communications
with Audit Committees) with LBB & Associates.
Based on these reviews and discussions, we recommend to the Board that the
Company's audited financial statements be included in Edgewater's annual report
on Form 10-KSB for the fiscal year ended August 31, 2006.
Douglas MacLellan (Chair)
Robert Rooks
Ian Fraser
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Compensation Committee
The Compensation Committee is responsible for setting executive compensation,
for making recommendations to the full Board concerning director compensation
and for general oversight of the compensation and benefit programs for other
employees. The committee met 1 time in fiscal 2006.
Disclosure Committee
The Disclosure Committee is responsible for oversight of our public disclosure
made in our public filings with Securities and Exchange Commission, in the press
and as communicated to our shareholders by investor relations firms that we
employ. The Disclosure Committee did not meet during fiscal 2006, but rather
disclosure issues were discussed orally at the Audit Committee meetings and no
controls or procedures issues were noted.
The Finance Committee
The Finance Committee assists the Board in matters related to the capital
structure of the Company and is responsible for overseeing the investment of the
Company's assets pending utilization in the Company's operations. The Committee
did not have any meetings during fiscal 2006.
Nominating Committee
The Nominating Committee nominates candidates for the Board and will consider
nominees recommended by shareholders. However, the Board does not have an
express policy with regard to the consideration of any director candidates
recommended by shareholders and believes it can adequately evaluate any such
nominees on a case-by-case basis. Additionally, as discussed below under the
heading "Stockholder Communications to the Board," stockholders are free to send
communications in writing directly to the Board. The Board will consider
director candidates proposed in accordance with the procedures set forth below
under "Shareholder Proposals for the 2008 Annual Meeting" and will evaluate
shareholder-recommended candidates under the same criteria as internally
generated candidates. Although the Board does not currently have a charter or
any formal minimum criteria for nominees, substantial relevant business and
industry experience would generally be considered important, as would the
ability to attend and prepare for board, committee and shareholder meetings. Any
candidate must state in advance his or her willingness and interest in serving
on the board of directors.
To date, we have not engaged third parties to identify or evaluate or assist in
identifying potential nominees, although we reserve the right in the future to
retain a third party search firm, if necessary. We have not received any
recommendations for a director nominee from any shareholder. All of the director
nominees included in this Schedule are standing for re-election. The committee
did not hold any meetings in fiscal 2006.
Sarbanes-Oxley Steering Committee
At the Board's last meeting, the members determined that it was in the company's
best interest to establish a committee to help ensure Edgewater's compliance
with Section 404 of the Sarbanes-Oxley Act. Pursuant to Section 404, we must
include information in our annual reports concerning the scope and adequacy of
our internal controls and procedures for financial reporting, as well as the
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effectiveness of such internal controls and procedures. Accordingly, the Board
created the Sarbanes-Oxley Steering Committee. This committee will have a
leadership role in shaping governance policies and practices regarding internal
controls and procedures, including recommending a SOX 404 compliance plan that
the Company should adopt and to which the committee will monitor the company's
compliance. This committee will meet periodically with our independent auditors
and management to review our internal control structure and financial reporting
matters.
In addition to the members of the committee that are listed above, the committee
intends to hire a project leader for the proposed compliance plan. As the
committee was not established until December 2006, it did not hold any meetings
during fiscal 2006.
Directors Attendance at Meetings
During fiscal 2006, the Board held two meetings. None of the directors attended
fewer than 75% of the total number of Board of Directors meetings or the Board
committee(s) of which he or she was a member during fiscal 2006.
We intend to schedule a Board meeting in conjunction with our Annual Meeting and
expect that our directors will attend, absent a valid reason, such as a schedule
conflict. This is our first annual meeting and therefore, there was no annual or
corresponding board meeting last year.
STOCKHOLDER COMMUNICATIONS WITH DIRECTORS
Edgewater stockholders who want to communicate with our Board or any individual
director can write to:
Edgewater Foods International, Inc.
5552 West Island Highway, Qualicum Beach
British Columbia, Canada V9K 2C8
Attn: Board Administration
Your letter should indicate that you are an Edgewater stockholder. Depending on
the subject matter, management will:
o Forward the communication to the Director or Directors to whom it is
addressed;
o Attempt to handle the inquiry directly, for example where it is a
request for information about Edgewater or it is a stock-related matter;
or
o Not forward the communication if it is primarily commercial in nature or
if it relates to an improper or irrelevant topic.
At each Board meeting, a member of management presents a summary of all
communications received since the last meeting that were not forwarded and makes
those communications available to the Directors on request.
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COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Exchange Act requires our officers, directors and persons
who own more than 10% of any class of our securities registered under Section
12(g) of the Exchange Act to file reports of ownership and changes in ownership
with the SEC. Officers, directors and greater than 10% stockholders are required
by SEC regulation to furnish us with copies of all Section 16(a) forms they
file.
We were a voluntary filer pursuant to Section 15(d) of the Act until August 30,
2006 and, therefore, our officers, directors and 10% or greater holders of our
securities were not required to file reports pursuant to Section 16(a) during
the fiscal year ended August 31, 2006. However, after we filed a Form 8-A to
register our common stock and series A preferred stock pursuant to Section 12(g)
of the Act, on August 30, 2006, based upon our review of copies of such reports,
our officers, directors and 10% stockholders filed the reports required by
Section 16(a).
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Dr. Kristina Miller, our Chief Scientific Advisor is Robert Saunders, our
Chairman, CEO and President's wife.
We are party to a consulting agreement with TriPoint Capital Advisors, LLC, a
company in which Mark Elenowitz, a director and one of our significant
shareholders, indirectly owns a 40% interest. Michael Boswell, our acting Chief
Accounting Officer and one of our directors, indirectly owns a 30% interest in
TriPoint. Louis Taubman, our outside corporate and securities counsel also
indirectly owns an interest (30%) in TriPoint. Our Board recently approved the
Compensation Committee's recommendation of a flat rate $15,000 per month fee,
which shall be reduced to $7,500 per month until our cash flow position
improves, for the legal services Mr. Taubman provides us. The Board also
approved the recommendation of a $15,000 per month fee, which shall be reduced
to $7,000 per month until our cash flow position improves, for the Acting CFO
type services and financial advisory services Michael Boswell and TriPoint,
respectively, provide us. Additionally, our corporate offices in Gaithersburg,
Maryland are currently provided by Tripoint Holdings, LLC, the parent company of
Tripoint, at no cost to us.
Island Scallops, Ltd., our wholly owned subsidiary, recently transferred 100%
ownership of RKS Laboratories, Inc. to Robert Saunders, our Chairman, CEO and
President. RKS is a Vancouver research and development that is working towards
developing superior strains of scallops (developed by Island Scallops and known
as the Pacific Scallop) with beneficial traits such as higher meat yield and
rapid growth. Island Scallops agreed to transfer its ownership of RKS in
consideration for the grant to Island Scallops by RKS and Robert Saunders of a
right of first refusal to commercialize any intellectual property developed by
RKS. Island Scallops has the right to acquire or use any intellectual property
from RKS at RKS' cost, in perpetuity or until such time as RKS shall cease to
exist. Between June and November 2006, Island Scallops agreed to loan RKS a
total of approximately $56,000 under five non-interest bearing notes that are
secured by all of RKS' assets and are due at various dates beginning on June 15,
2007 and ending on November 31, 2007.
13
LEGAL PROCEEDINGS
In 1998, Island Scallops entered into an Agreement with two parties, pursuant to
which Island Scallops was to produce and sell geoduck seed to the two parties.
Island Scallops received advance payments from each of the two parties in 2002
totaling approximately $64,140. As a result of breaches of the Agreements by the
purchasers, it is our position that we may retain any unused portion of these
advance payments.
As of August 31, 2006, one of the two purchasers had claimed that Island
Scallops owed it amounts totaling $88,925. Since it is our position that the
purchasers breached their agreements with Island Scallops, we have no intention
of seeking a settlement of this matter at this time. We are unaware of any
formal proceedings that may have been commenced by either of these two
purchasers in regard to any claims that they may have.
Other than as set forth herein, we are not a party to any material legal
proceeding and to our knowledge, no such proceeding is currently contemplated or
pending.
14
EXECUTIVE AND DIRECTOR COMPENSATION
Summary Compensation Table
- ---------------------------------------------------------------- ------------------------------ ------------ ---------------------
Annual Compensation Awards Payouts
- ---------------------------------------------------------------- ------------------------------ ------------ ---------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Name Year Salary Bonus($) Other Restricted Securities LTIP All Other
and ($) Annual Stock Under- Payouts Compensation
Principal Compen- Awards($) lying ($) ($)
Position sation ($) Options/
SARs(#)
- ---------------- -------- ---------- -------------- ------------ --------------- -------------- ------------ ---------------------
Robert 2006 60,000 150,000 0 0 0 0 0
Saunders,
Chairman,
President and
CEO(1)
- ---------------- -------- ---------- -------------- ------------ --------------- -------------- ------------ ---------------------
Robert 2005 10,000 0 0 0 0 0 0
Saunders,
Chairman,
President and
CEO
- ---------------- -------- ---------- -------------- ------------ --------------- -------------- ------------ ---------------------
Robert 2004 0 0 0 0 0 0 0
Saunders,
Chairman,
President and
CEO
- ---------------- -------- ---------- -------------- ------------ --------------- -------------- ------------ ---------------------
Michael 2006 0 0 0 0 0 0 0
Boswell,
Acting Chief
Account
Officer (2)
- ---------------- -------- ---------- -------------- ------------ --------------- -------------- ------------ ---------------------
Michael 2005 0 0 0 0 0 0 0
Boswell,
President and
Acting Chief
Account
Officer
- ---------------- -------- ---------- -------------- ------------ --------------- -------------- ------------ ---------------------
Michael Boswell 2004 0 0 0 0 0 0 0
- ---------------- -------- ---------- -------------- ------------ --------------- -------------- ------------ ---------------------
(1) In June 2005, we entered into an employment agreement with Mr. Robert
Saunders as our Chairman and President effective on June 29, 2005.
Subsequently in August 2005, Mr. Saunders was appointed CEO by our Board
15
of Directors. Mr. Saunders serves at the pleasure of the Board. For
serving as President, Mr. Saunders' compensation will be US $60,000 per
annum. Additionally, we agreed to grant Mr. Saunders a signing bonus of
US $150,000 to be paid on closing of at least US $3,500,000 in third
party financing and increase his compensation to $120,000 per annum if
we receive at least US $5,000,000 in outside funding. The Board recently
approved the Compensation Committee's recommendation to reduce Mr.
Saunders' compensation to $5,000 per month until our cash flow position
improves, at which time the Committee will reconvene and recommend to
the Board that Mr. Saunders' compensation increase back to $10,000 per
month. Although we have yet to reach a final agreement on payment terms,
we paid Mr. Saunders $50,000 towards the signing bonus in September of
2006.
(2) Mr. Boswell served as our President from March to June 2005, at which
time Mr. Saunders replaced Mr. Boswell as President. Mr. Boswell has
served as our Acting Chief Accounting Officer since August 2005. Mr.
Boswell indirectly owns a minority interest in TriPoint Capital
Advisors, LLC, a significant shareholder and party with which we
maintain a consulting agreement. The Board recently approved the
Compensation Committee's recommendation to pay TriPoint $15,000 per
month, which includes fees for Mr. Boswell's services as our Acting
Chief Accounting Officer during 2006, however TriPoint agreed to reduce
such fee to $7,000 per month until our cash flow position improves, at
which time the Committee will reconvene and recommend a return to
$15,000 per month. In addition, TriPoint has agreed not to accept any
additional fees, other than expenses, until we are sufficiently funded
to carry out our business and operations. Although Mr. Boswell did not
work for us in any capacity until 2005, we are required to include our
last three fiscal years in the above table. According to the above
reasons, Mr. Boswell did not receive any compensation in 2003, 2004 or
2005.
Options/SARs
We did not grant any options or SARs to any of our named executive officers
during the last fiscal year nor did any of our executive officers exercise any
options or SARs during the last fiscal year.
Long Term Incentive Plans
No Long Term Incentive awards were granted in the last fiscal year.
Board of Director Fees
Our directors who are employees do not receive any compensation from us for
services rendered as directors. The Board has created three classes of fees for
outside directors: (1) outside directors who are "independent," as defined in
the Exchange Act will be paid $500 per meeting, whether telephonic or in person
for director fee - there shall not be any fees for written consents in lieu of
board meetings; (2) outside directors who are not "independent" will not receive
any fees at this time, but once our cash flow position improves, the
Compensation Committee will make recommendations; (3) the Vice Chairman will
receive $3,000 per month, which includes $1,500 per month for his role as
Chairman of our Audit Committee. Additionally, although we do not currently
provide stock based compensation to our outside directors, in the future we may
grant outside directors incentive-based stock compensation.
16
Employment Agreements
In June 2005, we entered into an employment agreement with Robert Saunders, our
Chairman, CEO and President. Mr. Saunders will serve at the pleasure of the
Board of Directors. Pursuant to his employment agreement, Mr. Saunders'
compensation will be $60,000 (USD) per annum for his services as our President.
Following the receipt of at least $5,000,000 (USD) min outside funding, Mr.
Saunders will receive an additional $10,000 per month for his services as
Chairman and, thereafter, $20,000 per month provided that we achieve gross
revenues of at least $20,000,000 (USD) for our most recent fiscal year and
continuing as long as we maintain gross revenues of at least $20,000,000 (USD)
for each successive fiscal year. If we fail to achieve gross revenue of
$20,000,000 (USD) in a successive fiscal year, Mr. Saunders compensation as
Chairman shall be reduced to $10,000 (USD) per month. Additionally, we agreed to
grant Mr. Saunders a signing bonus of $150,000 (USD) to be paid upon the closing
of at least $3,500,000 in new third party financing. In August 2006, our Board
approved the following revisions to Mr. Saunders' compensation: reduce Mr.
Saunders' compensation from $10,000 to $5,000 per month until our cash flow
position improves, at which time the Compensation Committee will recommend that
Mr. Saunders' compensation increase back to $10,000 per month. We are discussing
possible restructuring/payment terms regarding the $70,000 deferred compensation
from fiscal year 2006 and 2005 and the $150,000 bonus that was to be paid to Mr.
Saunders upon the closing of at least US$3,500,000 in outside funding. Although
we have yet to reach a final agreement on payment terms, we paid Mr. Saunders
$50,000 towards the bonus in September of 2006.
INDEPENDENT PUBLIC ACCOUNTANTS
The Board reappointed LBB & Associates, Ltd., LPP (formerly Lopez, Blevins, Bork
& Associates, LLP) as the independent accounting firm to audit our financial
statements for fiscal 2007. LBB & Associates, as the Company's independent
accounting firm, audited our financial statements for fiscal years ended 2005
and 2006.
Representatives of LBB & Associates will not be present at the meeting nor will
they be available during that time to respond to any questions.
Audit Fees
The aggregate fees billed for professional services rendered by LBB & Associates
for the audit of the registrant's annual financial statements and review of
financial statements included in the registrant's Form 10-KSB or services that
are normally provided by the accountant in connection with statutory and
regulatory filings or engagements for fiscal years 2006 and 2005 were
approximately $46,000 and $9,000, respectively.
Audit-Related Fees
No such fees were incurred in fiscal 2006.
All Other Fees
No other fees were incurred in fiscal 2006.
17
Our Board of Directors must pre-approve all auditing services and permitted
non-audit services (including the fees and terms thereof) to be performed for
Edgewater by its independent auditors, subject to the de minimus exceptions for
non-audit services described in Section 10A(i)(1)(B) of the Securities Exchange
Act of 1934, which should nonetheless be approved by our Board prior to the
completion of the audit. Each year the independent auditor's retention to audit
our financial statements, including the associated fee, is approved by the Board
before the filing of the previous year's annual report on Form 10-KSB. At the
beginning of the fiscal year, the Board will evaluate other known potential
engagements of the independent auditor, including the scope of work proposed to
be performed and the proposed fees, and approve or reject each service, taking
into account whether the services are permissible under applicable law and the
possible impact of each non-audit service on the independent auditor's
independence from management. At each subsequent Board meeting, the auditor and
management may present subsequent services for approval. Typically, these would
be services such as due diligence for an acquisition, that would not have been
known at the beginning of the year.
Since May 6, 2003, the effective date of the Securities and Exchange Commission
rules stating that an auditor is not independent of an audit client if the
services it provides to the client are not appropriately approved, each new
engagement of LBB & Associates has been approved in advance by the Board, and
none of those engagements made use of the de minimus exception to pre-approval
contained in Section 10A(i)(1)(B) of the Securities Exchange Act of 1934.
BENEFICIAL OWNERSHIP OF EDGEWATER COMMON STOCK
As used in this section, the term beneficial ownership with respect to a
security is defined by Rule 13d-3 under the Securities Exchange Act of 1934, as
amended, as consisting of sole or shared voting power (including the power to
vote or direct the vote) and/or sole or shared investment power (including the
power to dispose of or direct the disposition of) with respect to the security
through any contract, arrangement, understanding, relationship or otherwise,
subject to community property laws where applicable.
As of January 12, 2007 we had a total of 21,188,491 shares of common stock and
7,821,333 shares of preferred stock issued and outstanding, which are the only
issued and outstanding equity securities of the Company. The preferred stock
does not have voting rights with respect to the proposals contained herein, but
we include such stock on as converted basis for purposes of the following table.
The following table sets forth, as of January 12, 2007: (a) the names and
addresses of each beneficial owner of more than five percent (5%) of our common
stock and preferred stock (taken together as one class) known to us, the number
of shares of common stock and preferred stock beneficially owned by each such
person, and the percent of our common stock and preferred stock so owned; and
(b) the names and addresses of each director and executive officer, the number
of shares our common stock and preferred stock beneficially owned, and the
percentage of our common stock and preferred stock so owned, by each such
person, and by all of our directors and executive officers as a group. Each
person has sole voting and investment power with respect to the shares of our
common stock and preferred stock, except as otherwise indicated. Beneficial
ownership consists of a direct interest in the shares of common stock and
preferred stock, except as otherwise indicated.
18
Name and Address Amount and Nature of Percentage
Beneficial Ownership of Voting of
Securities (1)
Robert Saunders, Chairman, President & CEO 9,900,000 34.13%
5552 West Island Highway
Qualicum Beach, British Columbia
Canada V9K 2C8
Douglas C. MacLellan, Vice Chairman 1,040,000 3.58%
8324 Delgany Avenue
Playa del Ray, CA 90293
Mark Elenowitz, Director 1,238,000 (2) 4.27%
400 Professional Drive, Suite 310
Gaithersburg, MD 20879
Dr. Robert Rooks, Director 300,000 1.03%
912 Pine Avenue
Huntington Beach, CA 90293
Ian Fraser, Director 800,000 (3) 2.76%
3056 West 2nd Avenue
Vancouver, British Columbia
Canada V6T 1E9
Michael Boswell, Director & Acting Chief 938,000 (4) 3.23%
Accounting Officer
400 Professional Drive, Suite 310
Gaithersburg, MD 20879
Victor Bolton, Director 0 0.0%
345-916 W. Broadway
Vancouver, BC V5Z 1K7
Darryl Horton, Director 0 0.0%
33568 Eagle Mountain Drive
Abbortsford, BC V3G 2X7
Vision Opportunity Master Fund, Ltd. 2,871,973 (5) 9.99%
20 West 55th St., 5th Floor
New York, NY 10019
All directors and officers as a group (8 persons) 14,216,000 49.00%
(1) All Percentages have been rounded up to the nearest one hundredth of one
percent.
(2) Mr. Elenowitz is a 100% shareholder of MHE, Inc., which owns 18,000
shares of our voting stock. Additionally, MHE, Inc. is a 40% member of
19
TriPoint Capital Advisors, LLC, which owns 3,000,000 shares of our
voting stock. Mr. Elenowitz owns 20,000 shares of our voting stock
directly. Therefore, Mr. Elenowitz beneficially owns 1,238,000shares of
our voting stock.
(3) Mr. Fraser is a 100% shareholder of One Way Grill Limited, which owns
800,000 shares of our voting stock. Therefore, Mr. Fraser beneficially
owns 800,000 shares of our voting stock.
(4) Mr. Boswell and his wife jointly own Invision, LLC, which owns 38,000
shares of our voting stock. Additionally, Invision, LLC. is a 30% member
of TriPoint Capital Advisors, LLC, which owns 3,000,000 shares of our
voting stock. Therefore, Mr. Boswell beneficially owns 938,000 shares of
our voting stock.
(5) Vision owns 5,133,333 shares of our preferred stock and 22,107 shares of
common stock received as dividends on June 30, 2006. However, based upon
the terms of the preferred stock, Vision may not convert its preferred
stock if on any date, it would be deemed the beneficial owner of more
than 9.99% of the then outstanding shares of our common stock. In
addition to the shares listed in the table, Vision holds warrants to
purchase 15,666,668 shares of our common stock, but based upon the terms
of these warrants, Vision cannot exercise them if on any date, it would
be deemed the beneficial owner of more than 9.99% of the then
outstanding shares of our common stock. However, Vision can elect to
waive the cap upon 61 days notice to us.
CHANGES IN CONTROL
To the best of our knowledge, there are no arrangements that could cause a
change in our control.
STOCKHOLDER PROPOSALS FOR THE 2008 ANNUAL MEETING
Any stockholder who intends to present a proposal at the 2008 Annual Meeting of
Stockholders must ensure that the proposal is received by the Corporate
Secretary of Edgewater, 5552 West Island Highway, Qualicum Beach, British
Columbia, Canada V9K 2C8:
o Not later than September 22, 2007, if the proposal is submitted
for inclusion in our proxy materials for that meeting pursuant
to Rule 14a-8 under the Securities Exchange Act of 1934; or
o December 6, 2007.
FORM 10-KSB
On November 28, 2006, the Company filed with the SEC an annual report on Form
10-KSB for the fiscal year ended August 31, 2006. A copy of the Form 10-KSB is
enclosed herewith. Upon written request to the Company's Secretary, at the
Company's U.S. corporate offices, 400 Professional Drive, Suite 310,
Gaithersburg, Maryland 20878, the exhibits set forth on the exhibit index of the
Form 10-KSB may be made available at reasonable charge (which will be limited to
our reasonable expenses in furnishing such exhibits).
20
ADMISSION TICKET
EDGEWATER FOODS INTERNATIONAL, INC.
5552 West Island Highway
Qualicum Beach, British Columbia
Canada V9K 2C8
THIS ADMISSION TICKET ADMITS ONLY THE NAMED STOCKHOLDER AND A
GUEST.
NOTE: If you plan on attending the Annual Meeting in person, please bring, in
addition to this admission ticket, a proper form of identification. Video, still
photography and recording devices are not permitted at the Annual Meeting. For
the safety of attendees, all handbags and briefcases are subject to inspection.
Your cooperation is appreciated.
Directions to 3811 Point Grey Road:
FROM WESTBOUND HIGHWAY 1 (TRANS-CANADA):
1. Exit at Grandview Highway
2. Drive west on Grandview Highway which turns into East 12th Avenue.
3. East 12th Avenue turns into West 12th Avenue which turns into West 10th
Avenue.
3. Turn right (north) onto Alma Street (approximately 20 minutes after exiting
Hwy 1).
5. Turn left (west) onto Point Grey Road.
6. There is a clubhouse located on the north side (close to the water) of Point
Grey Road.
FROM NORTHBOUND HIGHWAY 99:
1. Drive north on Highway 99 into Vancouver.
2. Highway 99 turns into Oak Street after crossing the Oak Street Bridge.
3. Turn left (west) on West 12th Avenue.
4. West 12th Avenue turns into West 10th Avenue.
5. Turn right (north) onto Alma Street.
6. Turn left (west) onto Point Grey Road.
7. There is a clubhouse located on the north side (close to the water) of Point
Grey Road.
FROM DOWNTOWN VANCOUVER:
1. Drive south on Burrard Street across the Burrard Street Bridge.
2. Stay in the far right lane and exit onto Cornwall Avenue.
3. Cornwall Avenue turns into Point Grey Road.
4. There is a clubhouse located on the north side (close to the water) of Point
Grey Road one block west of Alma Street.
21
PROXY
EDGEWATER FOODS INTERNATIONAL, INC.
5552 West Island Highway
Qualicum Beach, British Columbia
Canada V9K 2C8
ANNUAL MEETING OF SHAREHOLDERS - FEBRUARY 12, 2007
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Robert Saunders, as proxy of the undersigned,
with full power to appoint his substitute, and hereby authorizes him to
represent and to vote all the shares of stock of Edgewater Foods International,
Inc. which the undersigned is entitled to vote, as specified on the reverse side
of this card, at the Annual Meeting of Shareholders of Edgewater Foods
International, Inc. to be held at The Royal Vancouver Yacht Club, 3811 Point
Grey Road, Vancouver, British Columbia, Canada V6R 1B3, on February 12, 2007 at
2:00 PM and at any adjournment or postponement thereof.
When this proxy is properly executed, the shares to which this proxy relates
will be voted as specified. If no contrary instruction is indicated for any
proposal, the vote shall be cast in accordance with the recommendation of the
Board of Directors. This proxy authorizes the above designated proxy to vote in
his discretion on such other business as may properly come before the meeting or
any adjournments or postponements thereof to the extent authorized by Rule
14a-4(c) promulgated under the Securities Exchange Act of 1934, as amended.
If you wish to vote in accordance with the Board of Directors' recommendations,
just sign below. You need not mark any boxes.
This proxy is solicited on behalf of the Board of Please mark your votes as
indicated in this Directors of Edgewater Foods International, Inc. The example.
[X] Board of Directors unanimously recommends that you vote "For" each of the
proposals.
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY BY USING THE
ENCLOSED ENVELOPE.
1. To elect The Board of Directors, whose terms are described in the proxy
statement.
To withhold authority to vote for any nominee, mark "For All Except" and write
the nominee's name(s) on the line below.
FOR ALL WITHHOLD ALL FOR ALL EXCEPT
[_] [_] [_]
----------------------------
Please indicate if you intend to attend this meeting [_] YES [_] NO
If address has changed, please check the box and indicate your new address
below [_]
22
- -------------------------------
- -------------------------------
- -------------------------------
I/We: [ ]will attend; [ ]will not attend the meeting.
Signature(s) Date:
- -------------------------------------------------------
- -------------------------------------------------------
PLEASE PRINT YOUR NAME ABOVE
This proxy must be signed exactly as your name appears hereon. When shares are
held by joint tenants, both should sign. Attorneys, executors, administrators,
trustees and guardians should indicate their capacities. If the signer is a
corporation, please print full corporate name and indicate capacity of the duly
authorized officer executing on behalf of the corporation. If the signer is a
partnership, please print full partnership name and indicate capacity of duly
authorized officer executing on behalf of the partnership.
23
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934.
For the Fiscal Year Ended August 31, 2006
Commission File Number 0-50092
EDGEWATER FOODS INTERNATIONAL, INC.
(Name of Small Business Issuer in Its Charter)
Nevada 20-3113571
- --------------------------------------------------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
- --------------------------------------------------------------------------------
5552 West Island Highway, Qualicum Beach, British Columbia, Canada V9K 2C8
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(250) 757-9811
(Issuer's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock and
Series A Convertible Preferred
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act.
YES X NO
---- -------
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities 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 requirement for the past 90 days.
X YES NO
---- -------
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ X ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
YES X NO
---- ---------
The issuer's revenues for its most recent fiscal year were: $527,623.
The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant as of November 27, 2006 was $9,567,496
(computed by multiplying the closing sales price for our common stock on such
date by the number of shares of common stock held by persons other than
officers, directors or by record holders of 10% or more of the registrant's
outstanding common stock. This characterization of officers, directors and 10%
or more beneficial owners as affiliates is for purposes of computation only and
is not an admission for any purposes that such people are affiliates of the
registrant).
The number of shares of our common stock outstanding on November 27, 2006 was
21,049,926.
2
TABLE OF CONTENTS
PART I
Item 1 Description of Business............................... Page 5
Item 2 Description of Property............................... Page 14
Item 3 Legal Proceedings..................................... Page 16
Item 4 Submission of Matter to a Vote of Security Holders.... Page 16
PART II
Item 5 Market for Common Equity, Related Stockholder Matters
and Small Business Issuer Purchases of Equity
Securities............................................ Page 17
Item 6 Management's Discussion and Analysis or Plan of
Operation............................................. Page 22
Item 7 Financial Statements.................................. Page F-1
Item 8 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................... Page 30
Item 8A Controls and Procedures............................... Page 30
PART III
Item 9 Directors and Executive Officers of the Registrant.... Page 32
Item 10 Executive Compensation................................ Page 37
Item 11 Security Ownership of Certain Beneficial Owners, and
Management and Related................................
Stockholder Matters........... Page 40
Item 12 Certain Relationships and Related Transactions........ Page 42
Item 13 Exhibit List and Reports on Form 8-K.................. Page 43
Item 14 Principal Accountants Fees and Services............... Page 46
Signatures............................................ Page 46
3
PART I.
CAUTIONARY STATEMENT REGARDING
FORWARD-LOOKING INFORMATION
From time to time, we may make written statements that are "forward-looking,"
including statements contained in this report and other filings with the
Securities and Exchange Commission, reports to our stockholders and news
releases. All statements that express expectations, estimates, forecasts or
projections are forward-looking statements. In addition, other written or oral
statements which constitute forward-looking statements may be made by us or on
our behalf. Words such as "expects," "anticipates," "intends," "plans,"
"believes," "seeks," "estimates," "projects," "forecasts," "may," "should,"
variations of such words and similar expressions are intended to identify such
forward-looking statements. These statements are not guarantees of future
performance and involve risks, uncertainties and assumptions which are difficult
to predict. Therefore, actual outcomes and results may differ materially from
what is expressed or forecasted in or suggested by such forward-looking
statements. We undertake no obligation to update publicly any forward-looking
statements, whether as a result of new information, future events or otherwise.
Important factors on which such statements are based are assumptions concerning
uncertainties, including but not limited to uncertainties associated with the
following:
(a) volatility or decline of our stock price;
(b) potential fluctuation in quarterly results;
(c) our failure to earn revenues or profits;
(d) inadequate capital and barriers to raising the additional capital
or to obtaining the financing needed to implement its business
plans;
(e) inadequate capital to continue business;
(f) changes in demand for our products and services;
(g) rapid and significant changes in markets;
(h) litigation with or legal claims and allegations by outside parties;
or
(i) insufficient revenues to cover operating costs.
There is no assurance that we will be profitable, we may not be able to
successfully develop, manage or market our products and services, we may not be
able to attract or retain qualified executives and technology personnel, our
products and services may become obsolete, government regulation may hinder our
business, additional dilution in outstanding stock ownership may be incurred due
to the issuance of more shares, warrants and stock options, or the exercise of
warrants and stock options, and other risks inherent in the our businesses.
4
We undertake no obligation to publicly revise these forward-looking statements
to reflect events or circumstances that arise after the date hereof. Readers
should carefully review the factors described in other documents we file from
time to time with the Securities and Exchange Commission, including the
Quarterly Reports on Form 10-QSB and Annual Report on Form 10-KSB and any
Current Reports on Form 8-K filed by us. All forward-looking statements
attributable to us are expressly qualified in their entirety by the cautionary
statement above.
ITEM 1. DESCRIPTION OF BUSINESS
OVERVIEW
We were incorporated under the laws of the State of Nevada on June 12, 2000,
with the name Heritage Management Corporation. In August 2005, we entered into a
share exchange agreement with Edgewater Foods International, Inc., the parent
company of Island Scallops Ltd. an aquaculture company located in Vancouver
Island, British Columbia. As a result of the Share Exchange, Edgewater became
our wholly owned subsidiary and Edgewater's shareholders became the owners of
the majority of our voting stock. Pursuant to the terms of the Share Exchange
Agreement, Edgewater's officers and directors were appointed as our officers and
directors. Additionally, we changed our name from Heritage Management, Inc. to
Edgewater Foods International, Inc.
Our wholly owned subsidiary, Edgewater Foods International Inc., a Nevada
Corporation, is the parent company of Island Scallops Ltd., a Vancouver Island
aquaculture company. Island Scallops was established in 1989 and for over 17
years has successfully operated a scallop farming and marine hatchery business.
Island Scallops is dedicated to the farming, processing and marketing of high
quality, high value marine species: scallops and sablefish. Scallop farming is
relatively new to North America and Island Scallops is the only producer of both
live-farmed Pacific scallops and live sablefish (or blackcod). Given Island
Scallops' unique hatchery technology and extensive research and development, we
believe that there is currently no significant competition for these marine
species. Island Scallops is committed to rapidly expanding production and
profits while continuing to finance the aggressive growth of the company and
maintaining a healthy respect for the marine environment.
Edgewater acquired Island Scallops in June 2005 through a tax free share
exchange. Island Scallops was established in 1989 to commercialize Canadian
government research on scallop aquaculture. Island Scallops' hatchery operations
have diversified to produce other species of shellfish such as mussels, clams,
geoducks and oysters. Island Scallops has also investigated the culture of
halibut, spot prawn, sea urchin and abalone. Island Scallops is the first
hatchery to successfully produce sablefish juveniles for commercial grow-out.
Currently, Island Scallops' primary product is farmed pacific scallops for sale
in the west coast of North America. Island Scallops offers a variety of other
products and services to the industry including aquaculture equipment,
consulting, research and development, and custom processing and marketing.
Internationally, Island Scallops has collaborated with both Japanese and
Moroccan fisheries interests.
5
On August 30, 2006, we filed a Form 8-A to register our common stock and series
A preferred stock pursuant to Section 12(g) of the Act and we therefore ceased
being a voluntary filer.
KEY CORPORATE OBJECTIVES
Our key business development objectives over the next 36 months are to: expand
scallops sales and begin blackcod production using both existing and new
infrastructure at our facilities in Qualicum Beach, Canada, that we anticipate
will allow us to reach annual sales of approximately US$18.4 million and
earnings of approximately US$6 million by the end of 2008 (on scallops sales
alone). We plan to implement this significant expansion through the following
five initiatives:
o Produce at least 15 million scallops of our 2006 scallop class, which
we will start harvesting in the spring of 2008.
o Capitalize on the high demand for sablefish in foreign markets by
entering into the blackcod market in the next 2 to 3 years.
o Expand current distribution by establishing new strategic
relationships with 10-15 American fisheries importers in Seattle,
Portland, San Francisco, San Jose, and Los Angeles in 2007.
o During 2007, rapidly increase farm production with a projected minimum
2007 scallop class of at least 50 million which we will begin to
harvest in early 2009.
o Produce more than 200 million scallop seeds in 2008, with a projected
2008 scallop class of at least 100 million scallops.
MARKETING AND DISTRIBUTION
Our marketing and distribution strategy for Island Scallops is focused on
developing and maintaining long-term relationships with distribution channel
members. Island Scallops also strives to differentiate its products to achieve
consistent supply and quality. Island Scallops believes the scallop market
effectively functions as a commodity market and therefore, relationships with
distributors are important. To develop these relationships, Island Scallops has
identified key purchasing criteria for the distributors: price, quality and
consistent farmed supply. In the short term, Island Scallops intends to adopt a
pricing policy equal to the market wholesale prices. In other words, we do not
intend to set any promotional or premium prices for either the whole or shucked
product, but instead intend to sell our products at the market rate. This would
mean Island Scallops' products would compete on other factors, such as supply
and consistent quality.
Over the long term, for the reasons noted below, Island Scallops wants to
differentiate its products so that it can command premium prices. Freshness is
an important factor for scallops since whole scallops only have a shelf life of
6
approximately 7 days while shucked scallops remain fresh for up to 20 days. Due
to this short shelf life, distributors try to offer the freshest products.
Island Scallops believes it is in a favorable position to supply fresh products
to United States brokers/distributors, especially those located on the west
coast where demand for the product is strong. Currently, these
brokers/distributors are supplied for the most part with east coast North
American scallops, which have several transportation-related delivery delays
that decrease freshness.
Supply is another key factor where Island Scallops has a distinct advantage.
Based on our planned increase in scallop production, we believe that Island
Scallops will have a large quantity of scallops for sale. Therefore, a
distributor would not have to deal with numerous suppliers, which costs
additional time and money. This makes Island Scallops an attractive source for
scallops, since we believe that we will be able to satisfy the demand of
distributors, which will save them time and money.
Island Scallops has also developed a unique live holding system for use with our
distribution model. This system allows Island Scallops to deliver live product
directly to seafood suppliers and individual restaurants.
CURRENT PRODUCTS
Island Scallops currently focuses exclusively on aquaculture products and is not
involved in wild fisheries. All seafood products are produced in private
hatcheries and grown on ocean farm sites. Currently, the Pacific Scallop is the
only product that Island Scallops produces, grows, processes and markets. Island
Scallops has, however, produced a variety of other shellfish species including
the Pacific oyster, European flat oyster, Manila clam, eastern blue mussel,
Mediterranean mussel, rock scallop, geoduck clam and sea urchin, which in the
past we have sold to third party shellfish farmers. Additionally, our hatchery
has produced and is capable of producing a variety of shellfish seed (for
grow-out and sale by our companies) including mussel, oysters and geoduck as
well as scallop seed.
Island Scallops has been a leader in marine hatchery technology for the past 17
years. Island Scallops has developed proprietary hatchery techniques for a
number of marine species, most notably the hybridizing of the Pacific Scallop
and becoming the first company to produce commercial quantities of sablefish
juveniles. Both of these breakthroughs have required many years of research and
considerable investment. In the case of sablefish, which is a cold-water fish
that spawns at depths of 800 - 2400 ft, a variety of techniques were required to
successfully mature, spawn, incubate and rear the larvae. In addition, there
were technical difficulties associated with egg and yolk sac incubation (as well
as larvae rearing and weaning) that were resolved using proprietary technology
developed at Island Scallops. Island Scallops was only able to reach its goal of
commercially farming sablefish with over 8 years of dedicated research and
capital investment of approximately US$2.4 million. We intend to begin
significant further commercialization of sablefish in the next two to three
years, provided we are able to finance the expansion of this product which we
estimate will require at least $5.0 million of capital.
7
SCALLOP OVERVIEW
Island Scallops' main product is the "Pacific Scallop", which is a hybrid of the
imported Japanese scallop and the local weathervane scallop. Between 1993 and
1999, Island Scallops developed this new scallop using Japanese scallops that
were imported under quarantine in the early 1990's. This unique scallop is
marketed as the Pacific scallop and is the largest scallop in the world,
reaching sizes of 15 cm and 500 grams. The scallop species farmed by Island
Scallops, has a proven record of being disease resistant, with a 95% survival
rate during the grow-out phase. We have the necessary farming infrastructure to
significantly increase our scallop production to a minimum of 15 million
scallops annually beginning with the 2006 scallop class which will begin its
harvest in early 2008. Given the high worldwide demand for scallops, Island
Scallops is poised to rapidly expand production and significantly increase
revenues and earnings.
The Pacific Scallop is sold live in four sizes, extra small, small, medium and
large. Pricing ranges from a low of US$1.20 per pound to $4.00 per pound for the
larger sized scallops. Previously, Island Scallops also produced shucked meats
with or without roe. However, due to the large demand and high value for live
scallops, meat product was discontinued and the focus switched to the sale of
live scallops.
The basis for our anticipated scallop farming production increase stems from a
combination of our tenure expansion, our recent financing, improved grow-out
techniques and our transition to a combination of "lantern-style" netting and
ear-hanging methods. Scallops culture utilizes two styles of small cages
referred to as "pearl nets and lantern nets." Pearl nets are shaped like a
pyramid with a 35 by 35 cm square base and grow small scallops from 2-3 mm to
10mm. The 10-mm scallops are grown in cylindrical nets called lantern nets and
are 60 cm in diameter and 1.2 meters deep containing 12 layers. Once the
scallops reach 5cm they can be grown to harvest using a method called
"earhanging" or be grown out in lantern nets. Our Hindoo Creek and Deep Bay
tenures have been approved for expansion and once expansion of our Denman tenure
is approved, which we believe will occur by the second or third quarter of our
next fiscal year, we will be able to increase capacity to approximately
25,000,000 animals per annum. Thereafter, we intend to further expand our Bowser
tenure in 2007, which would supply us with the capacity to produce additional
30-50 million animals at harvest.
As the only hatchery/producer of cultured scallops on the west coast of North
America, Island Scallops has the ability to supply fresh scallops (of a
predictable quality and quantity) throughout the year. Although the supply of
scallops has fluctuated in the past, consumer demand has always absorbed the
available supply. A primary factor for increased consumption is the increasing
health consciousness among consumers. Scallops are low in saturated fats and
cholesterol and high in protein. All parts of the scallop body are edible;
however, different parts tend to be consumed in different regions of the world.
In North America, the adductor muscle is traditionally the only part eaten, with
the rest of the body discarded. In Europe, Australia and Tasmania, the adductor
muscle is usually marketed and eaten with the gonad attached. Japan utilizes the
whole animal, where most of the product is cooked in the shell prior to sale.
Marketed scallops generally take the following product forms:
o Whole-live (shelf life of seven days);
o Whole dried;
o Eviscerated whole;
8
o Shucked fresh (shelf life of about 15-20 days);
o Shucked frozen (shelf life of about a year); and
o Value added forms (smoked, breaded, canned).
The shucked product form is the most significant form for North American
markets. A whole-live product form is the most desirable from the
aquaculturist's point of view, as processing costs are minimal. Island Scallops
has developed a market for whole live scallops, which exceeds 5,000 lbs. per
week into Vancouver. Our initial expansion plan envisions four major cities on
the west coast (Seattle, Portland, San Francisco and Los Angeles) to consume
2,500 lbs. per week per city based on the successful Vancouver model.
Island Scallops currently distributes through specialty wholesalers with
particular expertise in selling to restaurants. In Vancouver these include but
are not limited to Albion Fisheries, Tri-Star Seafood Supply, Pacific Rim
Shellfish, Sea World Fisheries and Teamway Fisheries. As we expand our
distribution, we will continue to focus on specialty wholesalers with strong
ties to major restaurants.
The most predominant scallop production in North America comes from the offshore
fishery located on the Georgia Band on the east coast. Large American and
Canadian fishing companies dominate the fishery. The majority of their product
is shucked aboard ship then supplied to primarily frozen to seafood processors
onshore. The processors then distribute the product to various restaurants,
retail outlets and seafood brokers.
Sablefish (Blackcod) Overview
Sablefish (Anoplopoma fimbria), often called blackcod although not a member of
the cod family, is an elongate fish with two dorsal fins and an anal fin similar
to and opposite the second dorsal fin. Adults are black or greenish gray;
usually with slightly paler blotches or chainlike pattern on the upper back. At
30-61 cm in size they are often greenish with faint stripes on the back.
Sablefish inhabit shelf and slope waters in depths of greater than 1,500 meters,
from Baja California to the Aleutian Islands and the Bering Sea. The larger
populations of sablefish are centered in northern British Columbia and the Gulf
of Alaska. Adults favor mud bottoms and feed on benthic invertebrates, squid and
numerous fish species. In turn, they are prey for halibut, lingcod, hagfishes
and marine mammals such as sea lions. In addition, killer whales have been known
to take sablefish from long line gear as it is being retrieved.
Sablefish spawn from January to March along the continental shelf at depths of
250 to 750 meters. Fecundity ranges from 60,000-200,000 eggs up to one million
eggs for a 102-cm fish. Larval sablefish are found in surface waters over the
shelf and slope in April and May. Juveniles are highly migratory with
significant movement from nursery areas in northern B.C. to the Gulf of Alaska
and the Bering Sea. Sablefish move to deeper waters as they mature. Growth is
rapid with sizes at maturity reaching 52-61 cm for five-year-old males and 58-71
cm for five-to-seven year old females. Sablefish growth appears to be rapid for
the first three-to-five years and slow asymptotically thereafter. Annual natural
mortality of adults has been estimated to be about 10 percent.
9
Island Scallops plans to raise sablefish onshore using shallow ponds or above
ground tanks. This system has been successful in Texas for the culture of
catfish. Tests have shown that sablefish prove to be very hardy when grown in
ponds and have the added advantage of causing sablefish to be parasite free.
Wild sablefish carry a parasite that does not allow the fish to be eaten raw.
With adequate funding, Island Scallops has already demonstrated the feasibility
of onshore sablefish farming and plans to develop a new blackcod facility that
could produce at least 500,000 sablefish as early as 2007, with production
planned to increase by at least 500,000 annually by 2008 and beyond.
Over the past eight years, Island Scallops has also developed proprietary
hatchery technology for the production of sablefish juveniles. We believe that
sablefish will be the next species, after salmon, for successful large-scale
commercial farming. Sablefish, which is a premium-quality whitefish with a
delicate texture and moderate flavor, is an ideal substitute for Chilean sea
bass (currently over-fished in all oceans). To date, Island Scallops has
marketed a limited number of live sablefish into the Vancouver market. Initial
response was excellent for a small 1-kilogram live sablefish (~$11/kg). To
capitalize on Island Scallops' breakthrough sablefish hatchery technology, in
the next two to three years, we plan to construct a new sablefish hatchery
consisting of the following:
o An expanded Brood Stock facility with larger capacity to hold the
various families of selected strains of sablefish. This new facility
will incorporate a new state-of-the-art water treatment system.
o An improved incubation and larval rearing facility incorporating
proprietary improvements in tank design and seawater systems.
o An upgraded zooplankton culture facility with improved handling and
enrichment techniques.
o An expanded and improved juvenile rearing facility incorporating
proprietary recirculation system designs.
As part of this expansion, we also intend to construct a new onshore tank farm
consisting of large and small ponds and tanks complete with associated
recirculation systems. This onshore facility will be used to augment the
juvenile rearing area and will house and grow juvenile fish.
At the present time, worldwide "non-farming" sablefish catches are struggling to
meet the worldwide demand according to DFOWeb, NPFMCWeb and Pacific Fishery
Management Council Website. Currently, there are only two hatchery facilities:
Island Scallops Ltd. and Sablefish Hatcheries Inc. that have produced sablefish
juveniles. Current production is only approximately 100,000 juveniles per year.
Based on our analysis of present market conditions, increasing worldwide
hatchery production tenfold (to roughly 1 million 3 kilo sablefish) would fill
less than 10% of the current world demand shortfall. If Island Scallops' new
sablefish facilities are able to reach a production of 3 million sablefish
annually, this will only fill less than 30% of the current overall shortfall.
The economic potential for sablefish is therefore considerable. Given these
market conditions and opportunities, Island Scallops, subject to our ability to
10
secure adequate funding, is determined to enter the market for sablefish in a
significant manner with the next two to three years.
OTHER PRODUCTS
In the past Island Scallops sold a variety of shellfish larvae and seed to both
international and local customers. Sales included two species of mussels, manila
clams, geoduck clams, oysters, abalone and sea urchins. Island Scallops has
established suppliers of aquaculture equipment in Japan and China and supplies
nets, ropes, floats, and processing equipment into the British Columbia
industry. Currently, Island Scallops is focused almost exclusively on expansion
of scallop sales and development of its sablefish operation with a goal of
further commercialization of sablefish in two to three years. However, during
the second half of 2006, Island Scallops was approached by a new customer and
began producing and selling a limited amount of oyster seed to this customer.
GENERAL FISHERIES MARKET OVERVIEW
The worldwide market for farmed marine species continues to grow. According to
personal communications with the National Marine Fisheries Service, Fisheries
Statistics Division, Silver Spring, MD, in British Columbia alone, farming
production increased from US$44.56 million in 1988 to US$190.24 million in 1998.
Although significant growth occurred in salmon farming and little or no growth
occurred in shellfish (oyster) farming, recent problems within the salmon
industry are causing some salmon farming interests to turn towards shellfish.
Island Scallops can only benefit from this recent trend towards shellfish, as
training farmers in correct husbandry would only add another revenue stream.
The majority of the world's current scallop production comes from three species
of scallops: the Japanese scallop, the sea scallop and the king scallop. The
Chinese scallop is also selling well, but FDA inspections of China facilities
found that the conditions and hygiene were issues as hatcheries were highly
polluted. There has also been a fishery boom on the east coast of Canada and the
United States with the Digby or sea scallop.
In the United States, consumption of scallops exceeded 64 million pounds in
2002. Various communications between Island Scallops personnel and the National
Marine Fisheries Service, Fisheries Statistics Division, Silver Spring, MD and
analysis of data from the Fisheries Statistics & Economics Division of the
National Marine Fisheries Service (NMFS) website for annual landings of
commercial fisheries (http://www.st.nmfs.noaa.gov/st1/commercial/index.html),
tell us that this represented a per capita consumption of 0.22 pounds, with a
dollar value of US$342 million. After shrimp, scallops represent one of the most
popular shellfish products in the United States. In general, per capita
consumption of seafood in the United States has remained steady over the last
six years ranging from 15.2 to 16.2 pounds per annum. Based upon Robert
Saunders', our chairman and president, communications with the National Marine
Fisheries Service, Fisheries Statistics Division of Silver Spring, MD, and
personal observations, given consumers' growing preoccupation with healthier
foods and the increasing availability of seafood (due to the recent successes in
aqua farming and improved distribution channels), we expect per capita
consumption to continue to increase.
11
Shifts in North American shellfish market trends from shucked to live in shell
products can be seen in the oyster markets. Within the last 5 years, we have
seen a significant trend away from shucked oyster meat to live in the shell
product in the Pacific Northwest due to the demand for fresh high quality
products. We believe that once a live in the shell product is readily available
within the scallop market, a shift from frozen scallop meat to fresh in shell
product will also occur.
REGULATORY ENVIRONMENT
Effect of Government Regulation
There are a limited number of regulations that restrict the fishing,
distributing or purchase of scallops in Canada and the United States. Therefore,
the country of origin makes little difference for the pricing or demand of
scallops.
A limitation to market supply is paralytic shellfish poisoning (PSP) or "red
tide". PSP is a toxin generated by plankton (scallops' food) at particular times
of the year. The toxin is passed to the scallop when plankton is digested, but
the toxin does not harm the shellfish. However, the shellfish containing the
toxin can be harmful to humans who consume it. Although only a limited number of
human deaths caused by red-tide poisoning have been reported, the public
announcement of red tide has a devastating effect on most shellfish sales. The
exception is scallop meat, because the adductor muscle of the scallop does not
concentrate the toxin; shucked scallops are safe to eat at any time of the year.
Nevertheless, public perception could still influence demand over short periods
of time. To monitor for PSP, the federal Fisheries Inspection Branch constantly
monitors samples of shellfish production and wild shellfish populations.
Tenure Expansion and Compliance with Environmental Laws
Our planned tenure expansions will require that we undergo an environmental
screening from Transports Canada pursuant to Canadian Environmental Assessment
Act, which includes a review of factors such as the environmental effects of the
planned expansions, including the environmental effects of malfunctions or
accidents that may occur in connection with the planned expansions and any
cumulative environmental effects that are likely to result from such planned
expansions; the significance of such environmental effects and any comments from
the public that are received in accordance with the CEA Act and applicable
regulations; and measures that are technically and economically feasible and
that would mitigate any significant adverse environmental effects of the planned
expansions.
Our Deep Bay and Hindo Creek tenures have received final CEA Act approval, which
lasts for twenty years and which allows us to expand these 2 tenures. We still
need CEA Act approval and re-zoning approval for our Denman tenure and approval
of our Management Plan, along with a satisfactory environmental assesment of our
Bowser bottom lease. Please see our risk factor, If we are unable to expand our
tenures, our projected production may be delayed.
12
COMPETITION
Fisheries Industry in General
Island Scallops is in the farmed seafood business. The main concentration of
marine farming in British Columbia has traditionally been in the salmon sector.
The salmon farming business has developed into a mature industry dominated by
Norwegian farmers. The rest of the British Columbia marine farming sector is in
the shellfish industry, mainly in oysters and Manila clams and more recently
mussels. This sector is rapidly expanding and it accounted for approximately
US$16 million in British Columbia in 2002, according to the British Columbia
Shellfish Growers Association website. Given Island Scallops' expertise and
significant research and development experience, we believe that there is little
or no direct competition in the production of farmed scallops or farmed
sablefish.
Scallops
There are no significant direct competitors in the scallop farming business in
British Columbia. The United States will not allow farming this species in their
waters, as this species is considered "exotic". Although scallop farming is a
very significant industry in Japan and China, only frozen shucked scallops are
currently sold into North America from these countries. Recent examination by
the United States and Canadian Food Inspection authorities of the growing waters
in China resulted in reduced exporting due to high levels of pollution.
Island Scallops is the only hatchery, outside of China, that has successfully
produced the Japanese scallop, and the only company that has successfully,
hybridized the weathervane and the Japanese scallop. Island Scallops is uniquely
positioned as the sole producer of live Pacific Scallops in North America. There
currently are no other hatcheries in North America that we are aware of that are
capable of producing this unique breed. Although a large commercial scallop
fishery exists on the east coast of North America, the majority of the scallops
are shucked at sea with only limited quantities sold live. These scallops are
sold as "Digby" or "Sea" scallops. A number of companies have attempted to grow
the bay scallop and the sea scallop on the east coast, but these companies have
only achieved limited success.
The primary British Columbia participants in scallop farming are Island Scallops
joint venture farmers or independent scallop farmers, which receive their supply
of seed scallops solely from Island Scallops. These farmers are chronically
underfinanced and are generally able to purchase and grow less than 300,000
scallops per farm. Island Scallops is uniquely positioned to rapidly expand
these farms (up to six farms) under an exclusive farming and marketing contract.
Three joint venture farmers are currently farming scallops and receive free
scallop seed, technology and support for a 12% royalty on the harvest and
exclusive marketing of their product through Island Scallops.
Due to its large size and small count per pound, the sea scallop is the prime
competitor in the United States market. The fishery for this scallop is located
primarily on the North American east coast, in particular Georges Bank off New
England and the Maritime provinces. This is a limited opportunity fishery, with
actual fishing time being dictated by sea and other environmental conditions.
13
Sablefish
Island Scallops is currently only one of two hatcheries to produce quantities of
juvenile sablefish. These fish were sold to five commercial salmon farming
facilities and the fish have been marketed successfully. Little demand for a new
species has materialized. Although hatcheries have been constructed in British
Columbia, neither has successfully produced large quantities of sablefish. The
farming of sablefish is still in its infancy and only limited production has
occurred.
This limited production is not a matter of biological barriers but rather a lack
of interest by the major producers to venture into a new marine species. Alaska
sablefish fishermen have expressed interest in farming sablefish and the
Sablefish Association of Alaska has voted unanimously to start farming sablefish
in southern Alaska. Island Scallops has been in discussion with this association
and has been told that due to "anti-aquaculture" policy in Alaska, it is very
unlikely that any farming will occur in the near future.
Washington State contains two parties interested parties in sablefish farming.
The first is the Makah Tribe and the second is a private company, which is
trying to obtain farming permits in Port Angeles. These parties have made
inquiries to Island Scallops for juvenile sablefish. However, to date, no orders
have been placed.
RESEARCH AND DEVELOPMENT
Due to changes in Canadian Federal Government's Research and Development tax
credits (SRED) program, which prevents any part of the research to be combined
with commercial production, no Research and Development claims were made in
fiscal 2005 and 2006. Research did continue on the genetic selection of superior
strains of scallops, as did developments in the culture process for both marine
algae and developments in re-circulation systems. In the near future Island
Scallops plans to conduct research and development under a separate company
called RKS Laboratories Ltd., which has no commercial production and whose
primary goal is the genetic improvement in breeds of the Pacific Scallops and
other marine species. We believe that this will allow the continued support from
the SRED program.
EMPLOYEES
At August 31, 2006, we had 25 full time employees. We anticipate hiring between
10 and 15 temporary workers during the upcoming spring and summer growing
seasons.
None of our employees is represented by a labor union and we consider our
relationships with our employees to be good.
ITEM 2. DESCRIPTION OF PROPERTY
14
For the fiscal year ended August 31, 2006, our U.S. corporate office was located
at 400 Professional Drive, Suite 310, Gaithersburg, Maryland 20878. This space
was provided on a rent free basis by one of our shareholders.
Island Scallops' main office and hatcheries are located on the east side of
Vancouver Island in the town of Qualicum Bay at 5552 West Island Highway,
Qualicum Beach, British Columbia, Canada V9K 2C8. The shellfish hatchery and
processing facilities are housed in a 930 square meter building. A 600 square
meter sablefish hatchery is also located at this site. Corporate scallop farms
are situated along the east and west coasts of Vancouver Island. These
facilities represent the largest private marine research hatchery and the first
fully integrated shellfish producer in Canada.
Island Scallops has a total of seven farm sites (including two joint ventures)
for scallops. Five of these farm sites are located at Island Scallops held
tenures (shellfish tenures are government-granted rights that allow use of
offshore waters to cultivate shellfish). Three of those five scallop farms are
located in Baynes Sound, 25 minutes north of the main facility. These farms
sites total approximately 200 acres and can currently accommodate more than 8
million scallops. Approximately 30% of the farm area is currently being farmed.
As part of our expansion plans, we are currently adding additional main lines
and plan to increase our capacity at these tenures to more than 24 million
scallops in the near future. An additional bottom tenure of 926 acres is located
10 minutes north of the main facility (at Bowser) and is capable of producing at
least 30 million scallops annually. The final farm site on the west coast of
Vancouver Island near Tofino is capable of producing at least three million
scallops, although that site is currently under-developed. Baynes Sound, the
marine waterway situated between eastern Vancouver Island and the western shore
of Denman Island, is considered the most productive and highly utilized
shellfish growing area in coastal British Columbia. The area supports extensive
beach culture (manila clams and oysters) as well as deepwater culture that
produces oysters, scallops and some mussels.
- --------------------- ------------------- ------------------- ------------------
Common Site Name Lands File No. Acres Type
- --------------------- ------------------- ------------------- ------------------
Denman 1406063 38.64 Deepwater
- --------------------- ------------------- ------------------- ------------------
Hindoo Creek 1406664 123.32 Deepwater
- --------------------- ------------------- ------------------- ------------------
Deep Bay 1406711 43 Deepwater
- --------------------- ------------------- ------------------- ------------------
Tofino 1406061 9.6 Deepwater
- --------------------- ------------------- ------------------- ------------------
Bowser 1407517 926 Bottom lease
- --------------------- ------------------- ------------------- ------------------
The three Baynes Sound tenures (Denman, Hindoo Creek and Deep Bay) and the
Tofino tenure offer unique features, which will add additional value to these
properties. These include the split of tenures between east and west shores of
Baynes Sound as well as the east and west coast of Vancouver Island, allowing
continual accessibility to shellfish despite managed closures (harvest
restrictions) due to incidental water quality or Paralytic Shellfish Poisoning
(PSP or red tide). The seasonal closures caused by short-term bacteriological
contamination related to rainfall and upland bacterial sources, are limited to
the western shore of the Baynes Sound and thus to only two of the three tenures
retained by Island Scallops. The result of having operating tenures on both
sides of the Baynes Sound ensures that product can be continually harvested
despite closures that may occur within this management area. The expanded
tenures should easily accommodate our increasing scallop harvest in 2009 and
15
beyond. At their current size and with the introduction of sufficient main
lines, our tenures have the capacity to accommodate approximately 13-15 million
scallops without any increase in their footprints.
Expansion of our Deep Bay and Hindo Creek has been approved and such approval
does not need to be renewed for twenty years. We are seeking approval of our
Denman tenure and our Bowser bottom lease, which once approved, will allow us to
accommodate 30-50 million scallops at harvest. The biggest hurdle to obtaining
the Denman tenure approval is the corresponding re-zoning application that also
must be approved before we can expand the tenure.
Island Scallops' location is a distinct advantage for producing marine species.
The waters off British Columbia are pristine and unspoiled by large populations
or major industries. The close proximity to major western cities allows us to
effectively put our products into the hands of the consumer within 24 hours.
The source of our raw material comes from our own hatchery brood stock. In the
case of the Pacific Scallop, we have been selectively breeding this species for
superior growth and survival for the past 15 years. The breeding program has
produced a vigorous, rapid growing, disease resistant scallop with exceptional
meat yield. In the case of sablefish we have been selecting fast growing fish
for the past 5 years, these display a high degree of domestication. The spawning
season has been extended for both of these species allowing for juvenile
production almost year round. This ability to hold seed stock and select
superior strains gives Island Scallops an advantage in the industry. It also
allows Island Scallops to tailor its production to varying seasonal and market
demands.
ITEM 3. LEGAL PROCEEDINGS
In 1998 our wholly owned subsidiary, Island Scallops, entered into an Agreement
with two parties, pursuant to which Island Scallops was to produce and sell
geoduck seed to the two parties. Island Scallops received advance payments from
each of the two parties in 2002 totaling approximately $64,140. As a result of
breaches of the purchase agreements by the purchasers, it is our position that
we may retain any unused portion of these advance payments.
As of August 31, 2006, one of the two purchasers had claimed that Island
Scallops owed it amounts totaling $88,925. Since it is our position that the
purchasers breached their agreements with Island Scallops, we have no intention
of seeking a settlement of this matter at this time. We are unaware of any
formal proceedings that may have been commenced by either of these two
purchasers in regard to any claims that they may have.
Other than as set forth herein, we are not a party to any material legal
proceeding and to our knowledge, no such proceeding is currently contemplated or
pending.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On July 16, 2006, our Board of Directors approved increasing our authorized
capital by 50,000,000 shares of common stock, for a total of 100,000,000 shares
of common stock, and amending our articles of incorporation accordingly. A
16
majority of our shareholders (67.87%) also approved, by written consent, this
action on July 16, 2006.
PART II
ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL
BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES
The common stock is currently quoted on the over-the-counter Bulletin Board
under the symbol "EDWT."
The following table sets forth the quarterly high and low bid prices for the
common stock since the quarter ended December 31, 2004. The prices set forth
below represent inter-dealer quotations, without retail markup, markdown or
commission and may not be reflective of actual transactions.
HIGH LOW
---- ---
Quarter ended December 31, 2004 $0.25 $0.25
Quarter ended March 31, 2005 $0.30 $0.25
Quarter ended June 30, 2005 $0.55 $0.30
Quarter ended August 31, 2005 $1.95 $0.52
Quarter ended November 30, 2005 $1.80 $1.45
Quarter ended February 28, 2006 $1.64 $1.10
Quarter ended May 31, 2006 $1.45 $0.80
Quarter ended August 31, 2006 $1.70 $1.20
At August 31, 2006, the closing bid price of the common stock was $1.40 and we
had approximately 49 record holders of our common stock. This number excludes
any estimate by us of the number of beneficial owners of shares held in street
name, the accuracy of which cannot be guaranteed.
At November 27, 2006, the closing bid price of the common stock was $1.40 and we
had approximately 46 record holders of our common stock and 13 record holders
of our preferred stock. This number excludes any estimate by us of the number of
beneficial owners of shares held in street name, the accuracy of which cannot be
guaranteed.
Dividends
We have not paid cash dividends on any class of common equity since formation
and we do not anticipate paying any dividends on our outstanding common stock in
the foreseeable future.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
17
2005 Equity Incentive Plan
Our 2005 Equity Incentive Plan is intended to further our growth and financial
success by providing additional incentives to our directors, executives and
selected employees and consultants so that such participants may acquire or
increase their proprietary interest in us. The term "Corporation" shall include
any parent corporation or subsidiary corporation of Edgewater as those terms are
defined in Section 424(e) and (f) of the Internal Revenue Code of 1986, as
amended. Stock options granted under the Plan may be either "Incentive Stock
Options", as defined in Code section 422 and any regulations promulgated under
that Section, or "Nonstatutory Options" at the discretion of our Board of
Directors and as reflected in the respective written stock option agreements
granted pursuant to this Equity Plan. Stock Appreciation Rights, Restricted
Stock, Restricted Stock Unit, Performance Awards, Dividend Equivalents, or Other
Stock-Based Awards may also be granted under the Equity Plan. The Board believes
that the Equity Plan will maintain the flexibility that Edgewater needs to keep
pace with its competitors and effectively recruit, motivate, and retain the
caliber of employees, directors and consultants essential for achievement of our
success.
Individuals eligible to receive awards under the Equity Plan include officers,
directors, employees of and consultants to Edgewater and its affiliates. The
number of shares available under the Equity Plan shall be 5,000,000 shares of
our common stock, as well as the following: As of January 1 of each year,
commencing with the year 2006 and ending with the year 2008, the aggregate
number of Shares available for granting Awards under the Equity Plan shall
automatically increase by a number of Shares equal to the lesser of (x) 5% of
the total number of Shares then outstanding or (y) 1,000,000. The Board may
distribute those shares in whatever form of award they so choose within the
Equity Plan's guidelines. There are no restrictions on the amount of any one
type of award that may be granted under the Equity Plan.
As of August 31, 2006, our Board of Directors had granted 282,000 options to
employees, directors and consultants under the Equity Plan. As of August 31,
2006, there are 6 Directors, 2 executive officers, 10 consultants and
approximately 25 employees other than executive officers, who are eligible to
receive awards under the Equity Plan.
The Board may delegate a Committee to administer the Equity Plan. The Committee
shall not consist of fewer than two members, each of whom is a member of the
Board and all of whom are disinterested persons, as contemplated by Rule 16b-3
promulgated under the Securities Exchange Act of 1934, as amended and each of
whom is an outside director for purposes of Section 162(m) of the Code, acting
in accordance with the provisions of Section 3.
Currently, we do not have any definitive plans for granting further awards under
the Equity Plan and no determination has been made as to the number of awards to
be granted, or the number or identity of recipients of awards. Had the Equity
Plan been in effect last year, the options granted under the 2004 Plan would
have been the awards granted under the Equity Plan.
AMENDING THE PLAN. The Board may amend, alter, suspend, discontinue, or
terminate the Equity Plan, including, without limitation, any amendment,
alteration, suspension, discontinuation, or termination that would impair the
rights of any Participant, or any other holder or beneficiary of any Award
theretofore granted, without the consent of any share owner, Participant, other
18
holder or beneficiary of an Award, or other Person. The Board may also waive any
conditions or rights under, amend any terms of, or amend, alter, suspend,
discontinue, or terminate, any Awards theretofore granted, prospectively or
retroactively, without the consent of any Participant, other holder or
beneficiary of an Award. Except as provided in the following sentence, the Board
is authorized to make adjustments in the terms and conditions of, and the
criteria included in, Awards in recognition of unusual or nonrecurring events
affecting the Company, any Affiliate, or the financial statements of the Company
or any Affiliate, or of changes in applicable laws, regulations, or accounting
principles, whenever the Board determines that such adjustments are appropriate
in order to prevent dilution or enlargement of the benefits or potential
benefits to be made available under the Equity Plan. In the case of any Award
that is intended to qualify as performance-based compensation for purposes of
Section 162(m) of the Code, the Board will not have authority to adjust the
Award in any manner that would cause the Award to fail to meet the requirements
of Section 162(m).
OPTIONS AND RIGHTS. Options and Stock Appreciation Rights may be granted under
the Equity Plan. The exercise price of options granted shall be determined by
the Board or the Committee; provided, however, that such exercise price per
Share under any Incentive Stock Option shall not be less than 100% (110% in the
case of a "10-percent shareholder as such term is used in Section 422(c)(5) of
the Code) of the Fair Market Value of a Share on the date of grant of such
Incentive Stock Option. The Board or Committee shall fix the term of each
Option, provided that no Incentive Stock Option shall have a term greater than
10 years (5 years in the case of a "10-percent shareholder" as such term is used
in Section 422(c)(5) of the Code).
A Stock Appreciation Right granted under the Equity Plan shall confer on the
holder thereof a right to receive, upon exercise thereof, the excess of (1) the
Fair Market Value of one Share on the date of exercise or, if the Board or
Committee shall so determine in the case of any such right other than one
related to any Incentive Stock Option, at any time during a specified period
before or after the date of exercise over (2) the grant price of the right as
specified by the Board or Committee. Subject to the terms of the Plan, the grant
price, term, methods of exercise, methods of settlement, and any other terms and
conditions of any Stock Appreciation Right shall be as determined by the Board
or the Committee. The Board and the Committee may impose such conditions or
restrictions on the exercise of any Stock Appreciation Right as it may deem
appropriate.
FEDERAL INCOME TAX CONSEQUENCES. The current federal income tax consequences of
grants under the Equity Plan are generally described below. This description of
tax consequences is not a complete description, and is based on the Internal
Revenue Code as presently in effect, which is subject to change, and is not
intended to be a complete description of the federal income tax aspects of
options and stock awards under the Equity Plan. Accordingly, the discussion does
not deal with all federal income tax consequences that may be relevant to a
particular recipient, or any foreign, state or local tax considerations.
Accordingly, potential recipients are urged to consult their own tax advisors as
to the specific federal, foreign, state and local tax consequences to them as a
result of receiving an Award under the Equity Plan.
NONQUALIFIED STOCK OPTIONS. A recipient will not be subject to federal income
tax upon the grant of a nonqualified stock option. Upon the exercise of a
nonqualified stock option, the recipient will recognize ordinary compensation
19
income in an amount equal to the excess, if any, of the then fair market value
of the shares acquired over the exercise price. We will generally be able to
take a deduction with respect to this compensation income for federal income tax
purposes. The recipient's tax basis in the shares acquired will equal the
exercise price plus the amount taxable as compensation to the recipient. Upon a
sale of the shares acquired upon exercise, any gain or loss is generally
long-term or short-term capital gain or loss, depending on how long the shares
are held. The required holding period for long-term capital gain is presently
more than one year. The recipient's holding period for shares acquired upon
exercise will begin on the date of exercise.
INCENTIVE STOCK OPTIONS. A recipient who receives incentive stock options
generally incurs no federal income tax liability at the time of grant or upon
exercise of the options. However, the spread will be an item of tax preference,
which may give rise to alternative minimum tax liability at the time of
exercise. If the recipient/optionee does not dispose of the shares before the
date that is two years from the date of grant and one year from the date of
exercise, the difference between the exercise price and the amount realized upon
disposition of the shares will constitute long-term capital gain or loss, as the
case may be. Assuming both holding periods are satisfied, no deduction will be
allowable to us for federal income tax purposes in connection with the option.
If, within two years of the date of grant or within one year from the date of
exercise, the holder of shares acquired upon exercise of an incentive stock
option disposes of the shares, the recipient/optionee will generally realize
ordinary compensation income at the time of the disposition equal to the
difference between the exercise price and the lesser of the fair market value of
the stock on the date of exercise or the amount realized on the disposition. The
amount realized upon such a disposition will generally be deductible by us for
federal income tax purposes.
STOCK AWARDS. If a recipient receives an unrestricted stock award, he/she will
recognize compensation income upon the grant of the stock award. If a recipient
receives a restricted stock award, he/she normally will not recognize taxable
income upon receipt of the stock award until the stock is transferable by the
recipient or no longer subject to a substantial risk of forfeiture, whichever
occurs earlier. When the stock is either transferable or no longer subject to a
substantial risk of forfeiture, the recipient will recognize compensation income
in an amount equal to the fair market value of the shares (less any amount paid
for such shares) at that time. A recipient may, however, elect to recognize
ordinary compensation income in the year the stock award is granted in an amount
equal to the fair market value of the shares (less any amount paid for the
shares) at that time, determined without regard to the restrictions. We will
generally be entitled to a corresponding deduction at the same time, and in the
same amount, as the recipient recognizes compensation income with respect to a
stock award. Any gain or loss recognized by the recipient upon subsequent
disposition of the shares will be capital gain or loss.
TAX DEDUCTIBILITY UNDER SECTION 162(M). Section 162(m) of the Internal Revenue
Code disallows a public company's deductions for employee compensation exceeding
$1,000,000 per year for the chief executive officer and the four other most
highly compensated executive officers. Section 162(m) contains an exception for
performance-based compensation that meets specific requirements. The Equity Plan
is intended to permit all options to qualify as performance-based compensation
at the Board of Directors or Committee's discretion. If an Award is to qualify
as such, it shall clearly state so in the award agreement.
20
WITHHOLDING. We have the right to deduct any taxes required to be withheld with
respect to grants under the Equity Plan. We may require that the participant pay
to us the amount of any required withholding. The Compensation Committee may
permit the participant to elect to have withheld from the shares issuable to him
or her with respect to an option or restricted stock the number of shares with a
value equal to the required tax withholding amount.
The following table provides information as of August 31, 2006 with respect to
compensation plans (including individual compensation arrangements) under which
our securities are authorized for issuance:
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Plan Category Number of securities to be Weighted average exercise Number of securities
issued upon exercise of price of outstanding remaining available for
outstanding options, options, warrants and future issuance under
warrants and rights rights equity compensation plans
(excluding securities
reflected in column (a))
(a) (b) (c)
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Equity Compensation plans
approved by security holders 282,000 $1.50 5,718,000*
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Equity compensation plans not
approved by security holders N/A N/A N/A
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Total 282,000 $1.50 5,718,000
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
*As of January 1 of each year, commencing with the year 2006 and ending with the
year 2008, the aggregate number of shares available for granting Awards under
the Equity Plan shall automatically increase by a number of Shares equal to the
lesser of (x) 5% of the total number of Shares then outstanding or (y)
1,000,000.
RECENT SALES OF UNREGISTERED SECURITIES
To accomplish the Share Exchange with Edgewater, we issued an aggregate of
19,000,000 shares of common stock in exchange for all of the issued and
outstanding capital stock of Edgewater. The shares were issued to 17 accredited
investors pursuant to the exemption from registration provided by Section 4(2)
of the Securities Act for issuances not involving any public offering.
In October 2005, we engaged Aurelius Consulting to provide marketing and
investor relations services. The initial term of the agreement is one year.
Aurelius is entitled to receive 100,000 shares of our restricted common stock
during the term of its agreement (25,000 per quarter), in consideration for
their services. The shares were valued at $1.45 per share, the closing bid price
21
for shares of our common stock on the date of the contract. The shares were
issued in accordance with the exemption from the registration provisions of the
Securities Act of 1933, as amended, provided by Section 4(2) of such Act for
issuances not involving any public offering.
On October 21, 2005 and November 11, 2005, our board approved issuing a total of
25,000 shares of our common stock to The Shemano Group, LLC for preparing a
research report for us. The shares were valued at $1.50 per share, the closing
market bid of our common stock on the date of the resolution. The shares were
issued in accordance with the exemption from the registration provisions of the
Securities Act of 1933, as amended, provided by Section 4(2) of such Act for
issuances not involving any public offering.
On January 31, 2006, we issued 400,000 shares of our restricted common stock to
World Wide Mortgage as consideration for agreeing to extend the due date for us
to repay our CDN $1,500,000 loan pursuant to the bridge loan agreement dated
November 9, 2004 and amended on April 15, 2005 between us and World Wide. The
shares have piggy-back registration rights that require us to register the
shares in our next registration statement. The shares were valued at $1.30 per
share, the closing bid price for shares of our common stock on the date we
issued the shares. The shares were issued in accordance with the exemption from
the registration provisions of the Securities Act of 1933, as amended, provided
by Section 4(2) of such Act for issuances not involving any public offering.
Pursuant to the financings we closed on April 12, May 30, June 30 and July 11,
2006, we issued an aggregate of 30,905,619 shares of our preferred stock. The
shares were issued to 10 accredited investors pursuant to the exemption from
registration provided by Section 4(2) of the Securities Act for issuances not
involving any public offering.
On June 30, we issued 22,860 shares of common stock to the two accredited
investors of our April 12 and May 30, 2006 financings as payment of the
semi-annual dividend (8% per annum) per the terms of the Certificate of
Designation of the Relative Rights and Preferences of the Series A Convertible
Preferred Stock. The dividend shares were issued to these investors pursuant to
the exemption from registration provided by Section 4(2) of the Securities Act
for issuances not involving any public offering.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion should be read in conjunction with our financial
statements and the notes thereto which appear elsewhere in this report. The
results shown herein are not necessarily indicative of the results to be
expected in any future periods. This discussion contains forward-looking
statements based on current expectations, which involve uncertainties. Actual
results and the timing of events could differ materially from the
forward-looking statements as a result of a number of factors. Readers should
also carefully review factors set forth in other reports or documents that we
file from time to time with the Securities and Exchange Commission.
22
OVERVIEW
In the second quarter of 2006, we started harvesting our 2004 year class of
scallops and began inspecting our 2005 year class of scallops as we prepare to
begin moving these scallops to their final grow-out stage in the second half of
2006. We refer to the year-class of scallops based on when the scallops were
spawned. Generally, the harvest occurs approximately 22 to 24 months after
spawning of the scallops. Originally, we planned to ear-hang our entire 2005
scallop crop, but after inspection of growth rates of the 2004 ear-hung crops
and an analysis of labor costs of ear-hanging versus the cost of additional nets
we decided to use nets for the final grow-out stage of the 2005 crop.
In October 2005, we installed twenty new longlines at our Hindoo Creek scallop
farm in Baynes Sound (1). Each longline is 108 yds (324 feet) long and submerged
at approximately 25 ft depth. In July 2006, we received approval for an
additional 23 longlines. The October and July additions bring the tenure up to
its management plan of 67. At harvest, each new longline has the capacity to
hold 90,000 scallops in final stage grow-out nets, thereby increasing the
production of this farm to 6 million scallops. Additionally, the Deep Bay tenure
has been expanded to 32 longlines, which has the capacity to hold 2.8 million at
harvest.
In the fourth quarter of 2006, we transferred our 2005 year-class scallops,
which had been maturing in our tenured growing sites and joint venture
locations, to final stage large grow-out nets on our farm sites. We anticipate
commencing harvesting up to approximately four million 2005 year-class scallops
during April of 2007. The 2006 year-class scallop spawning season commenced in
March of 2006 and was completed in April 2006. The scallop brood-stock
conditioning for these spawning began in mid-December 2005. We expect to begin
harvesting the 2006 year-class scallops during the Spring of 2008, however, we
could begin harvesting portions of the class sooner if mortality rates (at
various points of the growth cycle) are significantly better than our current
projection or if growth rates are substantially higher. We anticipate that of
the over 350 million larvae that were spawned during the 2006 spawning season,
at least 10 million scallops could reach full maturity and thus be harvested.
During the fourth quarter of 2006, we began moving the 2006 scallop crop from
the onshore ponds at our harvest facility into grow-out nets at our tenure
sites. This transfer will continue during the first quarter of 2007. The use of
DNA based family analysis started in 2005 will continue through 2006, with the
goal of breeding high meat yield scallops.
As a result of the above, we believe that the 2005 scallop-class will produce at
least $5.5 million of revenue over a twelve month period beginning in April of
2007. We anticipate that the harvest of our 2006 scallop class will eventually
result in total revenue of at least $14.0 million over the twelve month period
beginning in April 2008. If our mortality rates are better than our current
projections, our revenues from the 2005 and 2006 scallop class could be higher,
however, conversely, if our mortality rates are worse than we anticipate our
revenues for this period could be lower than we anticipate. In the near term,
the sales of the remainder of our 2004 scallop class between October 2006 and
March 2007 are expected to produce more the $1.0 million of revenue.
Additionally, we plan on generating additional revenues via the sale of scallop
and possibly other shellfish seed.
23
LIQUIDITY AND CASH RESOURCES
At August 31, 2006, we had a cash balance of approximately $1,817,000. We expect
to achieve operating positive cash flow in 2007. During the year ending August
31, 2006 we completed four private equity financings that resulted in net
proceeds of approximately $5,140,000. These financings contain warrants which if
fully exercised could raise approximately an additional $34,350,000. The
exercise of the warrants is, however, to a large extent dependent upon the price
of our stock in the public market. As a result, we cannot guarantee when any of
the warrants will be exercised, if at all and, as a result, the proceeds from
the exercise of the warrants may not be available to us should we require
additional financing or ever. Prior to the three months third quarter of 2006,
our recent expansion had been largely funded by a short term note with a maximum
limit of approximately $1,451,000. Previously, we have also relied on short term
loans from certain shareholders to assist with our working capital needs and to
meet short term cash requirements. We used a portion of our recent private
equity financing to repay these short term loans and as a result we have been
able to deploy the bulk of the proceeds from our financing toward our business
strategy.
SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the
acquired entities since their respective dates of acquisition. All significant
inter-company amounts have been eliminated.
Cash and equivalents
Cash and equivalents include cash, bank indebtedness, and highly liquid short
term market investments with terms to maturity of three months or less. The
Company considers all highly liquid investments with original maturities of 90
days or less to be cash equivalents. The Company maintains its cash balances
primarily in on financial institution, which exceeded federally insured limits
by $1,653,378 at August 31, 2006. The Company has not experienced any losses, in
such accounts and believes it is not exposed to any significant credit risk on
cash and cash equivalents.
Accounts receivable
Accounts receivable is presented net of allowance for doubtful accounts. The
allowance for doubtful accounts reflects estimates of probable losses in
accounts receivable. The allowance is determined based on balances outstanding
for over 90 days at the period end date, historical experience and other current
information.
Loans receivable
Loans receivable is presented net of an allowance for loan losses, as necessary.
The loans are written off when collectibility becomes uncertain.
24
Inventory
We maintain inventories of raw materials for our aquaculture products, of
biomass (inventory of live aquaculture product being actively cultivated), and
of finished goods (aquaculture product ready for sale).
Inventories are reported at the lesser of cost or estimated net realizable
value. Biomass and finished goods includes direct and reasonably attributable
indirect production costs related to hatchery, cultivation, harvesting, and
processing activities. Carrying costs per unit are determined on a weighted
average basis.
Long term investments
Long term investments are recorded at cost. We review our investments
periodically to assess whether there is an "other than temporary" decline in the
carrying value of the investment. We consider whether there is an absence of an
ability to recover the carrying value of the investment by reference to
projected undiscounted future cash flows for the investment. If the projected
undiscounted future cash flow is less than the carrying amount of the asset, the
asset is deemed impaired. The amount of the impairment is measured as the
difference between the carrying value and the fair value of the asset.
Property, plant, and equipment
Property, plant, and equipment are recorded at cost less accumulated
amortization and are amortized in the following manner based on estimated useful
lives:
Buildings 4% - 5% declining balance
Seawater piping and tanks 6% declining balance
Boats 15% declining balance
Field equipment 20% declining balance
Office equipment 20% declining balance
Vehicles 30% declining balance
Computer equipment 30% declining balance
Impairment of long-lived assets
We monitor the recoverability of long-lived assets, including property and
equipment and intangible assets, based upon estimates using factors such as
expected future asset utilization, business climate, and undiscounted cash flows
resulting from the use of the related assets or to be realized on sale. Our
policy is to write down assets to the estimated net recoverable amount, in the
period in which it is determined likely that the carrying amount of the asset
will not be recoverable.
Government assistance
Government assistance we receive, such as grants, subsidies, and tax credits, is
recorded as a recovery of the appropriate related expenditure in the period that
the assistance is received.
25
We have received government assistance in the form of loans, for which repayment
is may not be required if we fail to meet sufficient future revenue levels to
repay these loans based on a percentage of gross sales for certain products over
a defined period of time. If we receive any such assistance, it is initially
recorded as a liability, until such time as all conditions for forgiveness are
met, and is then recognized as other income in that period.
Farm license costs
We must pay annual license costs in respect to government-granted tenures that
it holds, which give us the right to use certain offshore ocean waters for the
purpose of aquaculture farming. Such license costs are recognized as an expense
when incurred.
Research and development costs
Development costs include costs of materials, wages, and reasonably attributable
indirect costs incurred by us which are directly attributable to the development
of hatchery techniques for sablefish and shellfish, these costs are expensed
when incurred.
Research costs are expensed when incurred.
Income taxes
We calculate our provision for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 (Accounting for Income Taxes) ("SPAS
109"), which requires an asset and liability approach to financial accounting
for income taxes. This approach recognizes the amount of taxes payable or
refundable for the current year, as well as deferred tax assets and liabilities
attributable to the future tax consequences of events recognized in the
financial statements and tax returns. Deferred income taxes are adjusted to
reflect the effects of enacted changes in tax laws or tax rates. Deferred income
tax assets are recorded in the financial statements if realization is considered
more likely than not.
Revenue recognition
We recognize revenue when it is realized or realizable, and earned. We consider
revenue realized or realizable and earned when there is persuasive evidence of a
contract, the product has been delivered or the services have been provided to
the customer, the sales price is fixed or determinable, and collectibility is
reasonably assured.
Our revenue is derived principally from the sale of scallops we produce or
purchase from third parties, and from the sale of seed and farm supplies to
other aquaculture farms.
Financial instruments
The carrying amount of our financial instruments, which include cash, accounts
receivable, loans receivable, bank indebtedness, accounts payable and accrued
26
liabilities, short term debt and long term debt approximate fair value. It is
management's opinion that the Company is not exposed to significant interest,
currency or credit risk arising from these financial instruments unless
otherwise noted.
Derivative financial instruments
In connection with the sale of debt or equity instruments, we may sell options
or warrants to purchase our common stock. In certain circumstances, these
options or warrants may be classified as derivative liabilities, rather than as
equity. Additionally, the debt or equity instruments may contain embedded
derivative instruments, such as embedded derivative features, which in certain
circumstances may be required to be bifurcated from the associated host
instrument and accounted for separately as a derivative instrument liability.
We account for all derivatives financial instruments in accordance with SFAS No.
133. Derivative financial instruments are recorded as liabilities in the
consolidated balance sheet, measured at fair value. When available, quoted
market prices are used in determining fair value. However, if quoted market
prices are not available, we estimate fair value using either quoted market
prices of financial instruments with similar characteristics or other valuation
techniques.
The identification of, and accounting for, derivative instruments is complex.
Our derivative instrument liabilities are re-valued at the end of each reporting
period, with changes in the fair value of the derivative liability recorded as
charges or credits to income, in the period in which the changes occur. For
options, warrants and bifurcated embedded derivative features that are accounted
for as derivative instrument liabilities, we estimate fair value using either
quoted market prices of financial instruments with similar characteristics or
other valuation techniques. The valuation techniques require assumptions related
to the remaining term of the instruments and risk-free rates of return, our
current common stock price and expected dividend yield, and the expected
volatility of our common stock price over the life of the option. The
identification of, and accounting for, derivative instruments and the
assumptions used to value them can significantly affect our financial
statements.
Derivative financial instruments that are not designated as hedges or that do
not meet the criteria for hedge accounting under SFAS No. 133 are recorded at
fair value, with gains or losses reported currently in earnings. All derivative
financial instruments held by us at August 31, 2006 were not designated as
hedges.
Foreign exchange
The functional currency of our foreign subsidiaries is the local foreign
currency. All assets and liabilities denominated in foreign currencies are
translated into U.S. dollars at the exchange rate prevailing on the balance
sheet date. Revenues, costs and expenses are translated at average rates of
exchange prevailing during the period. Translation adjustments resulting from
translation of the subsidiaries' accounts are accumulated as a separate
component of shareholders' equity. Gains and losses resulting from foreign
currency transactions are included in the consolidated statements of operations
and have not been significant.
27
Use of estimates
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues,
expenses and disclosure of contingent assets and liabilities. Such estimates
include providing for amortization of property, plant, and equipment, and
valuation of inventory. Actual results could differ from these estimates.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off-balance sheet arrangements that have or are reasonably
likely to have a current or future effect on our financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources that is material to our investors.
INVESTMENTS IN TENURES AS COMPARED TO ESTIMATED MARKET VALUE OF TENURES
We currently carry our investment in Island Scallops' tenures at $3,609. This
amount represents the initial carrying costs of certain tenures acquired by
Island Scallop's subsidiary. These tenures do not expire until various dates
ranging from 2021 - 2024, however, we believe that they have an indefinite
useful life because renewal on expiration is anticipated. The area available for
shellfish aquaculture within Baynes Sound is fully subscribed, and as a result
new tenures are not available through the Canadian Provincial application and
review process. The shellfish companies within the Sound are also well
established and sales of tenures are quite rare, making the assessment of the
market value for the Island Scallops tenures difficult. Historical sales and
government auction of tenures have received as much as $300,000 (CDN) for a
small beach tenure (less than 4 acres) and $65,000 CDN) for a small deepwater
tenure without infrastructure. The few tenures on the market over the previous
12 months suggest that the current market value is approximately $10,000 to
$25,000 (CDN) per acre. Based on listings of tenures on the coast of British
Columbia, discussions with local shellfish growers and individuals from the BC
Assets and Land Corporation, and an independent appraisal (commissioned by
Island Scallops) that recently estimated the value of our roughly 1018 acres of
tenures, the value is estimated to be approximately $8,600,000. If the proposed
expansion of two of our tenures is approved, the estimated market value of our
overall tenures would increase to roughly $10,600,000. The estimated market
value is based on the size, location and whether they are beach or deepwater in
nature. However, given the variable nature of the shellfish tenures market, the
actual value that we receive from the sale of a tenure or a partial tenure could
vary significantly from these estimated values.
Although we cannot determine the exact amount we would ultimately receive from
the sale of our tenure(s), based upon the information stated above we expect to
receive more than the carrying cost ($3,609) from such sale. Accordingly, the
carrying cost of our tenures is not indicative of their actual value. This
analysis indicates our cash generating capabilities after considering
investments in capital assets necessary to maintain and enhance existing
operations.
COMPARISON OF RESULTS FOR THE FISCAL YEAR ENDED AUGUST 31, 2006, TO THE FISCAL
YEAR ENDED AUGUST 31, 2005.
28
Revenues. Revenues for the fiscal year ended August 31, 2006, were approximately
$528,000. We had revenues of approximately $316,000 for the fiscal year ended
August 31, 2005. This is an increase of approximately $212,000 or 67%. The
increase in our revenue was mainly the result an increase in oyster seed and
scallop seed sales. As was the case in 2005, management continued its emphasis
on the development and production of larger 2005 and 2006 scallop crops.
Management believes that our emphasis on expansion of future crops will yield a
significant increase in revenues starting in 2007 and beyond.
Gross profit (loss). Gross loss for the year ended August 31, 2006, was
approximately $48,000, a decrease of approximately $3,000 as compared to gross
loss of roughly $51,000, for the year ended August 31, 2005. The slight decrease
in the amount of gross loss for 2006 (as compared to 2005) was mainly
attributable to management's continued focus on the expansion and development of
larger scallop crops and larger scallop yields for the crop year 2005 and 2006.
We continued to focus resources on the maintaining, developing and tending our
scallop crops in 2005 and 2006 and believe that we will begin seeing benefits
from our efforts in developing larger crops as early as the first quarter of
2007.
General and administrative. General and administrative expenses for the fiscal
year ended August 31, 2006, were approximately $653,000. Our general and
administrative expenses were approximately $221,000 for the fiscal year ended
August 31, 2005. This is an increase of approximately $432,000 or 195%. Our
increase in general and administrative expenses for the year ended August 31,
2006 were attributable to costs associated with establishing, building, and
supporting our infrastructure and included various consulting costs, legal and
accounting fees compensation paid as result of our recent financing, overhead,
realized stock compensation and salaries. We anticipate that these costs may
continue to rise as we continue to expand our operations.
Stock compensation expense. During the year ended August 31, 2006, we had stock
compensation expense of approximately $183,000. The expense was for two
consulting groups who would provide services to us. As such, we incurred a stock
compensation expense of approximately $183,000 for year ended August 31, 2006.
During the year ended August 31, 2005, our Board of Directors authorized the
issuance of shares of our restricted common stock to an individual who would
provide services to Edgewater. Based upon the common stock trading price at the
times of issuance, and FASB rules, we were required to incur non-cash expenses
for the issuance of stock of approximately $10. Since these shares were issued
by Edgewater in June 2005 prior to the share exchange, these shares were valued
based on the par value, $0.0001 of the stock at time of issuance and we recorded
a $10 stock compensation expense for the issuance of these shares during the
year ended August 31, 2005.
Other income (expense), net. Interest expense for the year ended August 31, 2006
was approximately $696,000. Interest expense for the year ending August 31, 2005
was approximately $81,000. The increase in interest expense was due to the
issuance of common stock for the extension of the due date of debt. Other income
for the year ended August 31, 2006 was approximately $45,000 as opposed to other
income of approximately $2,600 for the year ending August 31, 2005. We
recognized a loss of approximately $2,666,000 which was related to the change in
the fair value of warrants issued to 10 institutional and accredited investors
in conjunction with preferred stock financings on April 12, May 30, June 30 and
29
July 11 and the market price of the common stock underlying such warrants at
August 31, 2006. No such loss was recorded for the year ended August 31, 2005.
As a result, other expense for the year ended August 31, 2006 was approximately
$3,316,000 as compared to other expense of approximately $78,000 for the year
ended August 31, 2005. This increase was primarily attributed to loss associated
with the change in fair value of the recently issued warrants and interest
expense related to the extension of a former bridge financing loan.
Net profit (loss). As a result of the above, the net loss for the year ended
August 31, 2006, was approximately $4,200,000 as compared to a net loss of
approximately $350,000 for the year ended August 31, 2005.
RISK FACTORS
You should carefully consider the risks described below before making an
investment in us. All of these risks may impair our business operations. If any
of the following risks actually occurs our business, financial condition or
results of operations could be materially adversely affected. In such case, the
trading price of our common stock could decline, and you may lose all or part of
your investment.
RISKS RELATING TO AQUACULTURE
We are subject to a number of biological and environmental risks.
Our business would be adversely affected if our scallop crop is infected by
Perkinsus Quagwadi. Perkinsus affects a variety of scallops. In 1992, mortality
due to Perkinsus infection was large and mortality was high, but Island Scallops
was able to overcome this disease by breeding the remaining stock. Eight years
of successfully breeding hardy individuals resulted in the remaining populations
of scallops being Perkinsus-free. Although there is a chance that other diseases
may occur, the Island Scallops hybrid scallop has proven resistant to Perkinsus
disease for the last ten years.
Paralytic Shellfish Poisoning (PSP or Red Tide) could limit the amount of
scallops available for sale.
Paralytic Shellfish Poisoning (PSP or red tide) is another concern when farming
scallops. The adductor muscle can be processed for sale to the traditional
scallop meat market even when there is a PSP closure. On the other hand, the
live animal market is stopped by PSP toxicity. Sewage Contamination (faecal
coliform) is also monitored by the Canadian Food Inspection Agency (CFIA) to
avoid this problem. These types of contaminants do not threaten the crop, it
only causes a temporary displacement to the marketing of the product. Island
Scallops' aquaculture is not without total risk; however, the development
program over the last decade has reduced the risk of disease and increased the
historical grow-out survival rate to 95% over the past six years. Despite these
advances, however, an outbreak of PSP, even if it did not affect Island
Scallops' stock, could have a depressive effect on the shellfish market in
general, which could then adversely affect our business.
30
Aquaculture and scallop farming is subject to a variety of general disease
risks.
Bacteria are almost always associated with mortalities in the larval stages of
growth. Control of disease outbreaks in the hatchery consists of regular
inspection, growth rates, color and larvae is checked for proper shape. Proper
hygiene practices within the hatchery minimize problems with Bacteria. In
general, scallops are harder to handle and transport and care needs to be taken
when moving them. Scallops can develop a stress related disease that can be
avoided by proper handling conditions such as temperature, moisture rates and
time before getting back in the water (maximum time being 24 hours).
Boring sponges and worms can adversely impact our scallop yield.
Boring sponges and worms are organisms that make holes in the scallop's shell,
weakening it and requiring the scallop to make repairs. Secreting additional
layers of shell material to mend these holes directs energy away from growth and
maintenance of the scallop. In cases of severe infestation, the adductor muscle
may be reduced in weight by up to 50%, and the meat may be discolored.
Our business would be adversely affected if our scallop crop is infected by
flatworm.
Flatworms can be devastating, destroying all seed within 2 weeks. Island
Scallops has managed to minimize this problem and keep mortalities down by
keeping the seeds in the pond a little longer so it becomes larger, making the
time spent in the first net culture less. We then move the seeds to a larger
mesh net culture, which causes the flatworms to fall off and no longer pose a
problem. This husbandry technique alleviates the problem to a large degree.
Scallops raised in the open ocean are subject to a variety of predators that
could adversely impact crop yield.
Starfish are a major predator of scallops, particularly in bottom culture. If
the hanging techniques are far enough from the bottom, even during extreme low
tides, then this does is not problematic. Since starfish and crabs have a
free-swimming larval stage as part of their life cycle, it is possible that
these larvae can settle within the "grow-out" nets and settle there and prey on
these scallops. However, with proper husbandry techniques these effects can be
minimized.
Our business would be adversely affected if a majority of our scallop crop
experiences fouling.
Fouling is caused by settlement and growth of several organisms such as
macroalgae, bryozoans, barnacles and mussels on the nets. Heavy fouling of
culture nets and scallops impedes growth of the scallops. Since most fouling
occurs in shallower waters, hanging scallops at deeper depths can reduce
fouling. If culture systems are managed properly, fouling is not a problem.
Aquaculture can be subject to a variety of growing conditions that can adversely
affect product growth and development.
31
Certain growing conditions and sea conditions can affect the quality and
quantity of scallops produced, decreasing the supply of our products and
negatively impacting profitability. Extreme wave actions tend to make scallops
seasick. In cases of extreme seasickness, scallops stop feeding and growth is
reduced. This may create mortality by weakening the scallops and making them
susceptible to other problems and diseases. Currently, the water leases owned by
Island Scallops are located in areas where this will prove to be less
problematic. Additionally, if other environmental conditions are unfavorable,
growing conditions in the ocean can greatly inhibit scallop growth. Generally
this risk is mitigated by year-to-year variations in growing conditions.
However, we cannot guarantee that we will not be negatively affected, at least
in the short term, if we experience poor growing conditions.
Increased mortality rates would adversely impact our business.
In general, increased mortality rates in juveniles are due to improper feeding
and hatchery husbandry. Once scallops are introduced to the ocean, increased
mortality rates are caused by the above factors as well as fluctuations in
salinity and currents. Given the location of Island Scallops' current farming
areas, the salinity and currents should not be problematic. Mortality rates can
also increase due to overcrowding problems. In cases of extreme overcrowding
scallops actually bite each other and their shells become damaged.
If we are unable to expand our tenures, our projected production may be delayed.
To increase our production capacity, we must expand our tenures. However,
expanding tenures requires government approval, which can be a timely and costly
process. Two of our tenures, Hindoo Creek and Deep Bay, have been approved for
expansion. Our Denman tenure must be re-zoned before expansion thereof will be
approved and our Bowser bottom lease Management Plan must be reconfigured before
expansion of that area is approved. Although we are confident that such approval
will be granted after issues raised by local residents and fisherman, such as
the use of surface floats for our longlines have been addressed, there is no
guarantee that it will be granted. In the future, we will seek expansion of our
other tenures, which also may not be granted. If we do not receive expansion
approval for our Denman tenure and Bowser bottom lease, it will delay our
proposed expansion.
BUSINESS RISKS
We will require additional capital to fund our current business plan.
Our success is dependent on future financings. The aquaculture or marine farming
industry is a capital-intensive business, which requires substantial capital
expenditures to develop and acquire farms and to improve or expand current
production. Further, the farming of marine life and acquisition of additional
farms may require substantial amounts of working capital. We project the need
for significant capital spending and increased working capital requirements over
the next several years. There can be no assurance that we will be able to secure
such financing on terms, which are acceptable, if at all. The failure to secure
future financing with favorable terms could have a material adverse effect on
our business and operations.
We are dependent on certain key existing and future personnel.
32
Our success will depend, to a large degree, upon the efforts and abilities of
our officers and key management employees such as Mr. Saunders, Mr. Bruce Evans,
Ms. Patti Greenham and Ms. Leslie Chapman. The loss of the services of one or
more of these or other key employees could have a material adverse effect on our
operations. We currently maintain key man life insurance on Mr. Saunders for a
value of $1,000,000. We also have an employment agreement with Mr. Saunders. We
do not maintain key man insurance for, nor do we currently have employment
agreements with, any of our other key employees. In addition, as our business
plan is implemented, we will need to recruit and retain additional management
and key employees in virtually all phases of our operations. Key employees will
require a strong background in the marine aquaculture industry. We cannot assure
that we will be able to successfully attract and retain key personnel.
The fact that our directors and officers own approximately 49% of our capital
stock and 68% of our voting capital stock may decrease your influence on
shareholder decisions.
Our executive officers and directors, in the aggregate, beneficially own
approximately 49% of our capital stock and 68% of our voting capital stock. As a
result, our officers and directors, will have the ability to influence our
management and affairs and the outcome of matters submitted to shareholders for
approval, including the election and removal of directors, amendments to our
bylaws and any merger, consolidation or sale of all or substantially all of our
assets.
Our acquisitions and potential future acquisitions involve a number of risks.
Our potential future acquisitions involve risks associated with assimilating
these operations into our company; integrating, retaining and motivating key
personnel; integrating and managing geographically-dispersed operations
integrating the technology and infrastructures of disparate entities; and risks
inherent in the husbandry and farming of marine species.
We may have difficulty competing with larger and better-financed companies in
our sector.
In general, the aquaculture industry is intensely competitive and highly
fragmented. Many of our competitors have greater financial, technical, marketing
and public relations resources than we presently have. Our sales may be harmed
to the extent we are not able to compete successfully against such seafood
producers.
Contamination of our seafood would harm our business.
Because our products are designed for human consumption, our business is subject
to certain hazards and liabilities related to food products, such as
contamination. A discovery of contamination in any of our products, through
tampering or otherwise, could result in a recall of our products. Any such
recall would significantly damage our reputation for product quality, which we
believe is one of our principal competitive assets, and could seriously harm our
business and sales. Although we maintain insurance to protect against such
risks, we may not be able to maintain such insurance on acceptable terms and
such insurance may not be adequate to cover any resulting liability.
33
We may experience barriers to conducting business due to potential government
regulations.
There are no hatchery/producer competitors in the scallop farming business in
British Columbia. The United States will not allow the farming of the species
farmed by Island Scallops in their waters, as this species is considered an
"exotic". It is unlikely that the Canadian government would decide to regulate
this species like the United States does (as the Canadian government developed
the technology) however if it does, this would have a material adverse affect on
our business.
Our business may be adversely affected by price volatility.
If market prices for Island Scallops' products decrease, we will incur a loss of
profits. However, our operational costs will increase because we will have to
produce the same quantity to meet the current demand, which will decrease profit
margin. This form of price volatility would be detrimental for our business.
Foreign exchange rates risks, political stability risk, and/or the imposition of
adverse trade regulations could harm our business.
We conduct some of our business in foreign currencies. Our profitability depends
in part on revenues received in United States dollars as a result of sales into
the United States. A decline in the value of the United States dollar against
the Canadian dollar would adversely affect earnings from sales in the United
States. As part of our plans to acquire other businesses we may expand our
operations to other countries, operate those businesses in foreign currencies,
and export goods from those countries. Thus far, we have not engaged in any
financial hedging activities to offset the risk of exchange rate fluctuations.
We may in the future, on an as-needed basis, engage in limited financial hedging
activities to offset the risk of exchange rate fluctuations. There is a risk
that a shift in certain foreign exchange rates or the imposition of unforeseen
and adverse political instability and/or trade regulations could adversely
impact the costs of these items and the liquidity of our assets, and have an
adverse impact on our operating results. In addition, the imposition of
unforeseen and adverse trade regulations could have an adverse effect on our
exported seafood operations. We expect the volume of international transactions
to increase, which may increase our exposure to future exchange rate
fluctuations.
Our common stock may be considered a "penny stock" and may be difficult to sell.
The SEC has adopted regulations which generally define a "penny stock" to be an
equity security that has a market price of less than $5.00 per share or an
exercise price of less than $5.00 per share, subject to specific exemptions. The
market price of our common stock is less than $5.00 per share and, therefore, it
may be designated as a "penny stock" according to SEC rules. This designation
requires any broker or dealer selling these securities to disclose certain
information concerning the transaction, obtain a written agreement from the
purchaser and determine that the purchaser is reasonably suitable to purchase
the securities. These rules may restrict the ability of brokers or dealers to
sell our common stock and may affect the ability of investors to sell their
shares.
34
ITEM 7. FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Edgewater Foods International, Inc.
Qualicum Beach, British Columbia, Canada
We have audited the accompanying consolidated balance sheet of Edgewater Foods
International, Inc. as of August 31, 2006, and the related statements of
operations, stockholders' deficit, and cash flows for each of the two years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion of these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standard require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statement referred to above present fairly, in all
material respects, the financial position of Edgewater Foods International, Inc.
as of August 31, 2006, and the results of its operations and its cash flows for
each of the two years then ended, in conformity with the accounting principles
generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that Edgewater
will continue as a going concern. As discussed in Note 16 to the financial
statements, Edgewater has incurred losses from operations for the year ended
August 31, 2006 and has suffered operating losses since its inception in its
efforts to establish and execute our business strategy. Edgewater will require
additional working capital to develop its business until Edgewater either (1)
achieves a level of revenues adequate to generate sufficient cash flows from
operations; or (2) obtains additional financing necessary to support its working
capital requirements. These conditions raise substantial doubt about Edgewater's
ability to continue as a going concern. Management's plans with regard to this
matter are described in Note 16. The accompanying financial statements do not
include any adjustments that might results from the outcome of these
uncertainties.
LBB & Associates Ltd., LLP
- --------------------------
LBB & Associates Ltd., LLP
Houston, Texas
October 26, 2006
F-1
EDGEWATER FOODS INTERNATIONAL
CONSOLIDATED BALANCE SHEET
AUGUST 31, 2006
ASSETS
Current assets:
Cash $ 1,816,742
Accounts receivable, net of allowance for
doubtful accounts of $386 38,850
Inventory 1,252,051
Other current assets 67,596
------------
Total current assets 3,175,239
Property, plant and equipment, net 1,824,394
Investments in other assets 3,609
------------
Total assets $ 5,003,242
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Bank indebtedness $ 689
Short term debt 462,249
Current portion of warrant liabilities 1,743,996
Current portion of long term debt 948,732
Accounts payable and accrued liabilities 687,405
------------
Total current liabilities 3,843,071
Warrant liabilites, net of current portion 20,415,454
Long term debt, net of current portion 40,217
------------
Total liabilities 24,298,742
------------
Stockholders' Deficit
Series A preferred stock, par $0.001, 10,000,000
authorized, 7,887,999 issued and outstanding 7,888
Common stock, par $0.001, 100,000,000 authorized,
20,983,260 issued and outstanding 2,098
Additional paid in capital --
Accumulated deficit (19,049,166)
Accumulated other comprehensive income -
foreign exchange adjustment (256,320)
------------
Total stockholders' deficit (19,295,500)
------------
Total Liabilities and Stockholders' Deficit $ 5,003,242
============
See accompanying summary of accounting policies and notes to financial
statements
F-2
EDGEWATER FOODS INTERNATIONAL
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDING AUGUST 31, 2006 and 2005
2006 2005
------------ ------------
Revenue $ 527,623 $ 315,869
Cost of goods sold 576,069 366,724
------------ ------------
Gross profit (loss) (48,446) (50,855)
------------ ------------
Operating Expenses:
General and administrative expenses (329,870) (137,337)
Salaries and benefits (323,186) (83,653)
Stock compensation expense (182,500) --
------------ ------------
Total operating expense (835,556) (220,990)
------------ ------------
Loss from operations (884,002) (271,845)
------------ ------------
Other income (expense):
Interest expense, net (695,889) (80,868)
Change in fair value of warrants (2,665,571) --
Other income (expense) 45,185 2,637
------------ ------------
Other income (expense), net (3,316,275) (78,231)
------------ ------------
Net loss (4,200,277) (350,076)
Dividend on preferred stock (34,709) --
------------ ------------
Net loss applicable to common shareholders $ (4,234,986) $ (350,076)
============ ============
Net loss per share
Basic and diluted $ (0.20) $ (0.03)
============ ============
Weighted average shares outstanding
Basic and diluted 20,794,784 11,899,320
============ ============
See accompanying summary of accounting policies and notes to financial
statements
F-3
EDGEWATER FOODS INTERNATIONAL
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
YEARS ENDED AUGUST 31, 2006
Other
Accumulated Comprehensive
Paid Income
Preferred Stock Common Stock in Foreign Exchange
Number Value Number Value Capital Adjustment
------------ ------------ ------------ ------------ ------------ ------------
Balance at August 31, 2004 -- $ -- 10,300,000 $ 1,030 $ (1,029) $ 144,012
Comprehensive loss
Net loss
Foreign exchange adjustment (314,415)
Total comprehensive loss
Common stock issued for services -- -- 100,000 10 --
Common stock issued in
connection Island Scallops, Ltd.
with -- -- 8,600,000 860 (860)
Forgiveness of shareholder debt 3,153,848
Common stock issued in
connection with Heritage
Management recapitalization -- -- 1,585,400 159 (159)
------------ ------------ ------------ ------------ ------------ ------------
Balance at August 31, 2005 -- -- 20,585,400 2,059 3,151,800 (170,403)
Comprehensive loss
Net loss
Foreign (85,917)
Total comprehensive loss
Common stock cancelled -- -- (150,000) (15) 15
Common stock issued for services -- -- 525,000 52 702,448
Common stock issued for dividends 22,860 2 34,707
Preferred Series A stock issued in
connection with financing 7,887,999 7,888 -- -- 5,132,136
Warrants liability incurred in
connection with financings (9,021,106)
------------ ------------ ------------ ------------ ------------ ------------
Balance at August 31, 2006 7,887,999 $ 7,888 20,983,260 $ 2,098 $ 0 $ (256,320)
============ ============ ============ ============ ============ ============
Accumulated
Deficit Total
------------ ------------
Balance at August 31, 2004 $ (3,991,330) $ (3,847,317)
Comprehensive loss
Net loss (350,076) (350,076)
Foreign exchange adjustment (314,415)
------------
Total comprehensive loss
(664,491)
10
Common stock issued for services
Common stock issued in
connection Island Scallops, Ltd.
with --
Forgiveness of shareholder debt 3,153,848
Common stock issued in
connection with Heritage
Management recapitalization --
------------ ------------
Balance at August 31, 2005 (4,341,406) (1,357,950)
Comprehensive loss
Net loss (4,200,277) (4,200,277)
Foreign (85,917)
------------
Total comprehensive loss (4,286,194)
Common stock cancelled --
Common stock issued for services 702,500
Common stock issued for dividends (34,709) --
Preferred Series A stock issued in
connection with financing 5,140,024
Warrants liability incurred in
connection with financings (10,472,774) (19,493,880)
------------ ------------
Balance at August 31, 2006 $(19,049,166) $(19,295,500)
============ ============
See accompanying summary of accounting policies and notes to financial
statements
F-4
EDGEWATER FOODS INTERNATIONAL
CONSOLIDATED STATEMENTS OF CASHFLOWS
YEARS ENDED AUGUST 31, 2006 and 2005
2006 2005
------------ ------------
Cash flows from operating activities:
Net income (loss) $ (4,200,277) $ (350,076)
Adjustments to reconcile net loss to net
cash used in operating
activities:
Depreciation and amortization 123,008 80,435
Changes in fair value of warrants 2,665,570 --
Common stock issued for services 702,500 10
Bad debt expense -- 347
Changes in current assets and liabilities:
Accounts receivable (38,850) 25,069
Prepaid expenses (16,061) --
Other current assets (2,628) (22,338)
Loan receivable -- --
Inventory (711,925) (540,126)
Accounts payable 197,681 221,644
Bank overdrafts (38,538) 38,538
------------ ------------
Net cash used in operating activities (1,319,520) (546,497)
------------ ------------
Cash flows from investing activities:
Purchase of property, plant and equipment (784,291) (493,018)
------------ ------------
Net cash provided by (used in) investing activities (784,291) (493,018)
------------ ------------
Cash flows from financing activities:
Line of credit, net (64,675) 6,591
Proceeds from short term debt 862,451 1,125,247
Payment of short term debt (1,609,901) (38,128)
Proceeds from long term debt 62,112 --
Payment of long term debt (382,456) (25,408)
Proceeds from the sale of common stock -- 860
Proceeds from sale of preferred stock 5,140,024 --
------------ ------------
Net cash provided by financing activities 4,007,555 1,069,162
------------ ------------
Foreign currency translation effect (87,562) (41,997)
Net increase in cash 1,816,182 (12,350)
Cash, beginning of period 560 12,910
------------ ------------
Cash, end of period $ 1,816,742 $ 560
============ ============
Supplemental cash flow information:
Interest $ -- $ --
============ ============
Income taxes $ -- $ --
Supplement disclosure of non-cash transactions:
Issuance of common stock for dividends $ 34,709 $ --
Warrant liability incurred in connection with financing $ 19,493,880 $ --
F-5
See accompanying summary of accounting policies and notes to financial
statements
Edgewater Foods International, Inc.
Notes to Consolidated Financial Statements
NOTE 1. BASIS OF PRESENTATION, ORGANIZATION AND NATURE OF OPERATIONS
Edgewater Foods International Inc., a Nevada Corporation, is the parent company
of Island Scallops Ltd., a Vancouver Island aquaculture company. Island Scallops
was established in 1989 and for over 15 years has successfully operated a
scallop farming and marine hatchery business. Island Scallops is dedicated to
the farming, processing and marketing of high quality, high value marine
species: scallops and sablefish.
On June 29, 2005, Edgewater Foods International, Inc. ("Edgewater"), a holding
private company established under the laws of Nevada in order to acquire assets
in the aquaculture industry, issued 10,300,000 shares of common stock in
exchange for a 100% equity interest in Island Scallops, Ltd. As a result of the
share exchange, Island Scallops, Ltd. become the wholly own subsidiary of
Edgewater Foods International, Inc. As a result, the shareholders of Island
Scallops owned a majority (54.21%) of the voting stock of Edgewater Foods
International, Inc. The transaction was regarded as a reverse merger whereby
Island Scallops was considered to be the accounting acquirer as its shareholders
retained control of Edgewater Foods after the exchange, although Edgewater is
the legal parent company. The share exchange was treated as a recapitalization
of Edgewater Foods. As such, Island Scallops, Ltd. (and its historical financial
statements) is the continuing entity for financial reporting purposes.
On August 15, 2005, we completed a reverse acquisition of Heritage Management
Corporation, a public shell company, as that term is defined in Rule 12b-2 of
the Exchange Act, established under the laws of Nevada on June 12, 2000. To
accomplish the share exchange we issued 19,000,000 shares of common stock on a
one to one ratio for a 100% equity interest in Edgewater Foods. Per the terms of
the Share Exchange and Bill of Sale of Heritage Funding Corporation and E. Lee
Murdoch, Heritage was delivered with zero assets and zero liabilities at time of
closing. Following the reverse acquisition, we changed the name of Heritage
Management Corporation to "Edgewater Foods International, Inc." The transaction
was regarded as a reverse merger whereby Edgewater was considered to be the
accounting acquirer as it retained control of Heritage after the exchange.
Although the Company is the legal parent company, the share exchange was treated
as a recapitalization of Edgewater. Edgewater is the continuing entity for
financial reporting purposes. The Financial Statements have been prepared as if
Edgewater had always been the reporting company and then on the share exchange
date, had changed its name and reorganized its capital stock.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the
acquired entities since their respective dates of acquisition. All significant
inter-company amounts have been eliminated.
F-6
Cash and equivalents
Cash and equivalents include cash, bank indebtedness, and highly liquid short
term market investments with terms to maturity of three months or less. The
Company considers all highly liquid investments with original maturities of 90
days or less to be cash equivalents. The Company maintains its cash balances
primarily in on financial institution, which exceeded federally insured limits
by $1,653,378 at August 31, 2006. The Company has not experienced any losses, in
such accounts and believes it is not exposed to any significant credit risk on
cash and cash equivalents.
Accounts receivable
Accounts receivable is presented net of allowance for doubtful accounts. The
allowance for doubtful accounts reflects estimates of probable losses in
accounts receivable. The allowance is determined based on balances outstanding
for over 90 days at the period end date, historical experience and other current
information.
Loans receivable
Loans receivable is presented net of an allowance for loan losses, as necessary.
The loans are written off when collectibility becomes uncertain.
Inventory
The Company maintains inventories of raw materials for its aquaculture products,
of biomass (inventory of live aquaculture product being actively cultivated),
and of finished goods (aquaculture product ready for sale).
Inventories are reported at the lesser of cost or estimated net realizable
value. Biomass and finished goods includes direct and reasonably attributable
indirect production costs related to hatchery, cultivation, harvesting, and
processing activities. Carrying costs per unit are determined on a weighted
average basis.
At August 31, 2006, inventory consisted of the following:
Biomass (Scallops): $1,252,051
Reclassification
Certain amounts in the 2005 financial statements have been reclassified to
conform to the 2006 financial statement presentation.
Long term investments
Long term investments are recorded at cost. The Company reviews its investments
periodically to assess whether there is an "other than temporary" decline in the
carrying value of the investment. The Company considers whether there is an
absence of an ability to recover the carrying value of the investment by
reference to projected undiscounted future cash flows for the investment. If the
projected undiscounted future cash flow is less than the carrying amount of the
asset, the asset is deemed impaired. The amount of the impairment is measured as
the difference between the carrying value and the fair value of the asset.
F-7
Property, plant, and equipment
Property, plant, and equipment are recorded at cost less accumulated
amortization and are amortized in the following manner based on estimated useful
lives:
Buildings 4% - 5% declining balance
Seawater piping and tanks 6% declining balance
Boats 15% declining balance
Field equipment 20% declining balance
Office equipment 20% declining balance
Vehicles 30% declining balance
Computer equipment 30% declining balance
Impairment of long-lived assets
The Company monitors the recoverability of long-lived assets, including property
and equipment and intangible assets, based upon estimates using factors such as
expected future asset utilization, business climate, and undiscounted cash flows
resulting from the use of the related assets or to be realized on sale. The
Company's policy is to write down assets to the estimated net recoverable
amount, in the period in which it is determined likely that the carrying amount
of the asset will not be recoverable. At August 31, 2006 no indication of
impairment were present.
Government assistance
Government assistance received by the Company, such as grants, subsidies, and
tax credits, is recorded as a recovery of the appropriate related expenditure in
the period that the assistance is received.
The Company has received government assistance in the form of loans, for which
repayment may not be required if the Company fails to meet sufficient future
revenue levels to repay these loans based on a percentage of gross sales for
certain products over a defined period of time., Such assistance received by the
Company is initially recorded as a liability, until such time as all conditions
for forgiveness are met, and is then recognized as other income in that period.
Farm license costs
The Company must pay annual license costs in respect to government-granted
tenures that it holds, which give the Company the right to use certain offshore
ocean waters for the purpose of aquaculture farming. Such license costs are
recognized as an expense when incurred.
Research and development costs
Development costs include costs of materials, wages, and reasonably attributable
indirect costs incurred by the Company which are directly attributable to the
development of hatchery techniques for sablefish and shellfish. These costs are
expensed when incurred.
F-8
Research costs are expensed when incurred.
Income taxes
The Company calculates its provision for income taxes in accordance with
Statement of Financial Accounting Standards No. 109 (Accounting for Income
Taxes) ("SFAS 109"), which requires an asset and liability approach to financial
accounting for income taxes. This approach recognizes the amount of taxes
payable or refundable for the current year, as well as deferred tax assets and
liabilities attributable to the future tax consequences of events recognized in
the financial statements and tax returns. Deferred income taxes are adjusted to
reflect the effects of enacted changes in tax laws or tax rates. Deferred income
tax assets are recorded in the financial statements if realization is considered
more likely than not.
Revenue recognition
The Company recognizes revenue when it is realized or realizable, and earned.
The Company considers revenue realized or realizable and earned when it has
persuasive evidence of a contract, the product has been delivered or the
services have been provided to the customer, the sales price is fixed or
determinable, and collectibility is reasonably assured.
Revenue of the Company is derived principally from the sale of scallops produced
by the Company or purchased from third parties, and from the sale of seed and
farm supplies to other aquaculture farms.
Financial instruments
The carrying amount of the Company's financial instruments, which include cash,
accounts receivable, loans receivable, bank indebtedness, accounts payable and
accrued liabilities, short term debt, shareholder debt, and long term debt,
approximate fair value. It is management's opinion that the Company is not
exposed to significant interest, currency or credit risk arising from these
financial instruments unless otherwise noted.
Derivative Financial Instruments
In connection with the sale of debt or equity instruments, we may sell options
or warrants to purchase our common stock. In certain circumstances, these
options or warrants may be classified as derivative liabilities, rather than as
equity. Additionally, the debt or equity instruments may contain embedded
derivative instruments, such as embedded derivative features, which in certain
circumstances may be required to be bifurcated from the associated host
instrument and accounted for separately as a derivative instrument liability.
The Company accounts for all derivatives financial instruments in accordance
with SFAS No. 133. Derivative financial instruments are recorded as liabilities
in the consolidated balance sheet, measured at fair value. When available,
quoted market prices are used in determining fair value. However, if quoted
market prices are not available, the Company estimates fair value using either
quoted market prices of financial instruments with similar characteristics or
other valuation techniques.
The identification of, and accounting for, derivative instruments is complex.
Our derivative instrument liabilities are re-valued at the end of each reporting
F-9
period, with changes in the fair value of the derivative liability recorded as
charges or credits to income, in the period in which the changes occur. For
options, warrants and bifurcated embedded derivative features that are accounted
for as derivative instrument liabilities, we estimate fair value using either
quoted market prices of financial instruments with similar characteristics or
other valuation techniques. The valuation techniques require assumptions related
to the remaining term of the instruments and risk-free rates of return, our
current common stock price and expected dividend yield, and the expected
volatility of our common stock price over the life of the option. The
identification of, and accounting for, derivative instruments and the
assumptions used to value them can significantly affect our financial
statements.
Derivative financial instruments that are not designated as hedges or that do
not meet the criteria for hedge accounting under SFAS No. 133 are recorded at
fair value, with gains or losses reported currently in earnings. All derivative
financial instruments held by the Company as August 31, 2006 were not designated
as hedges.
Foreign exchange
The functional currency of the Company's foreign subsidiary is the local foreign
currency (Canadian dollars). All assets and liabilities denominated in foreign
currencies are translated into U.S. dollars at the exchange rate prevailing on
the balance sheet date. Revenues, costs and expenses are translated at average
rates of exchange prevailing during the period. Translation adjustments
resulting from translation of the subsidiaries' accounts are accumulated as a
separate component of shareholders' equity. Gains and losses resulting from
foreign currency transactions are included in the consolidated statements of
operations and have not been significant.
Use of estimates
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues,
expenses and disclosure of contingent assets and liabilities. Such estimates
include providing for amortization of property, plant, and equipment, and
valuation of inventory. Actual results could differ from these estimates.
Concentration of risk
The Company operates in the regulated aquaculture industry. Material changes in
this industry or the applicable regulations could have a significant impact on
the Company.
The quality and quantity of the aquaculture products cultivated, harvested and
processed by the Company could be impacted by biological and environmental risks
such as contamination, parasites, predators, disease and pollution. These
factors could severely restrict the ability of the Company to successfully
market its products.
During the year ended August 31, 2006, three customers, Summer Breeze, TriStar
and Sea World, individually accounted for 30%, 15% and 13% or our revenues
respectively, and we therefore are materially dependent upon such customers. The
Company's ongoing operations are dependent on continued business from these
customers.
F-10
Stock-based compensation
The Company accounts for stock-based employee compensation arrangements using
the intrinsic value method in accordance with the provisions of Accounting
Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to
Employees," and complies with the disclosure provisions of SFAS No. 123
"Accounting for Stock-Based Compensation," as amended by SFAS No. 148. Under APB
Opinion No. 25, compensation cost is generally recognized based on the
difference, if any, on the date of grant between the fair value of the Company's
common stock and the amount an employee must pay to acquire the stock.
The Company periodically issues common stock for acquisitions and services
rendered. Common stock issued is valued at the estimated fair market value, as
determined by management and the board of directors of the Company. Management
and the board of directors consider market price quotations, recent stock
offering prices and other factors in determining fair market value for purposes
of valuing the common stock.
The following table illustrated the effect on net income and earnings per share
if Edgewater had applied the fair value recognition provisions of FASB Statement
No. 123, Accounting for Stock-Based Compensation, to stock-based employee
compensation.
Year Ended
August 31,
2006 2005
----------------------------
Net loss, as reported $ (4,200,277) $(350,076)
Add: Stock based intrinsic value included
in report loss -- --
Less: Total stock-based employee compensation
expense determined under the fair value based
method for all awards -- (370,565)
---------------------------
Pro-forma net loss $ (4,200,277) $(720,641)
---------------------------
Basis and diluted net loss per share
As reported $ (0.20) $ (0.03)
Pro-forma $ (0.20) $ (0.03)
The fair value of each option granted is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions: dividend yield $0, expected volatility of 93%, average risk-free
F-11
interest rate of 4.15%, and expected lives of 10 and 5 years (for 2006) and
dividend yield $0, expected volatility of 100%, average risk-free interest rate
of 4.70% and 4.71%, and expected lives of 10 and 5 years (for 2005).
Basic and diluted net loss per share
Basic income or loss per share includes no dilution and is computed by dividing
net income or loss by the weighted-average number of common shares outstanding
for the period. Diluted income or loss per share includes the potential dilution
that could occur if securities or other contracts to issue common stock were
exercised or converted into common stock. For all periods presented, diluted
loss per share equaled the basic loss per share as all convertible instruments
were anti-dilutive.
Recent accounting pronouncements
In December of 2004, the FASB issued Statement of Financial Accounting Standards
No, 123 (revised 2004) (Share-Based Payment) ("SFAS 123R"). SFAS 123R is a
revision of SFAS 123 (Accounting for Stock-Based Compensation), and supersedes
Accounting Principles Beard ("APB") Opinion No. 25 (Accounting for Stock Issued
to Employees). SFAS 123R requires that the fair value of employees awards
issued, modified, repurchased or cancelled after implementation, under
share-based payment arrangements, be measured as of the date the award is
issued, modified, repurchased or cancelled. The resulting cost is then
recognized in the statement of earnings over the service period. SFAS 123R is
required to be adopted by the Company not later than for the 2007 fiscal year.
In the opinion of Management, the adoption of this statement will not have a
significant impact on the Company's consolidated financial statements.
In December of 2004, the FASB issued Statement of Financial Accounting Standards
No. 153 (Exchanges of Nonmonetary Assets - An Amendment of APB Opinion No. 29,
Accounting for Nonmonetary transactions) ("SFAS 153"). SFAS 153 eliminates the
exception from fair value measurement for nonmonetary exchanges of similar
productive assets in paragraph 21(b) of APB Opinion No. 29 and replaces it with
an exception for exchanges that do not have commercial substance, SFAS 153
specifies that a nonmonetary exchange has commercial substance if the future
cash flows of the entity are expected to change significantly as a result of the
exchange. SFAS 153 is effective for fiscal periods beginning after June 15,
2005, and is required to be adopted by the Company in the second quarter of the
2006 fiscal year. We do not currently believe that the adoption of SFAS No. 153
will have a material impact on its consolidated financial statements.
In May 2005, SFAS No. 154, "Accounting Changes and Error Corrections" (a
replacement of APB Opinion No. 20 and SFAS No. 3) was issued. Statement 154
requires that all voluntary changes in accounting principles and changes
required by a new accounting pronouncement that do not include specific
transition provisions be applied retrospectively to prior periods' financial
statements, unless it is impracticable to do so. APB Opinion 20 required that
most voluntary changes in accounting principle be recognized by including the
cumulative effect of changing to the new accounting principle as a component of
net income in the period of change. Statement 154 is effective prospectively for
accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005, with earlier application encouraged. Earlier
application is permitted for accounting changes and corrections of errors made
in fiscal years beginning after the date the Statement was issued (May 2005).
SFAS 154 does not change the transition provisions of any existing accounting
pronouncements, including those that are in a transition phase as of the
effective date of the Statement. Accordingly, the Company will implement the
provisions of this accounting pronouncement in the fiscal reporting period
ending August 31, 2007. We do not currently believe that the adoption of SFAS
145 No. 154 will have a material impact on our consolidated financial
statements.
In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109 ("FIN
48"). FIN 48 clarifies the accounting for uncertainty in income taxes recognized
F-12
in a company's financial statements and prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of
a tax position expected to be taken in a tax return. The Interpretation also
provides guidance on de-recognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. FIN 48 is effective
for fiscal years beginning after December 15, 2006. Currently, there would be no
effect of this interpretation on the company's financial position and results of
operations.
NOTE 3. PROPERTY, PLANT AND EQUIPMENT
Property, Plant and Equipment at August 31, 2006 consisted of the following:
Accumulated Net Book
Cost Amortization Value
------------------------------------
Land $ 227,355 $ -- $ 227,355
Buildings 451,445 230,302 221,143
Seawater piping and tanks 473,376 268,965 204,411
Boats and Barge 286,489 118,063 168,426
Field equipment 1,701,247 716,419 984,828
Office equipment 13,673 12,373 1,300
Vehicles 38,168 33,283 4,885
Computer equipment 17,149 5,103 12,046
------------------------------------
$3,208,902 $1,384,508 $1,824,394
Accumulated amortization was $1,384,508 year ended August 31, 2006. Depreciation
expenses are $123,000 and $10,195 for the year ended August 31, 2006 and 2005
respectively.
NOTE 4. RELATED PARTY TRANSACTIONS
The Company has two secured notes receivable from RKS Laboratories, Inc.
("RKS"), a Vancouver research and development that is working towards developing
superior strains of scallops with beneficial traits such as higher meat yield
and rapid growth. (Robert Saunders owns 100% of RKS.) The first non-interest
bearing note in the amount of $18,044 is secured by all assets of RKS is due on
or before June 15, 2007. The second non-interest bearing note in the amount of
$4,971 is also secured by all assets of RKS is due on or before August 31, 2007.
These amounts are included in other current assets.
F-13
NOTE 5. INVESTMENTS IN TENURES
The Company carries its Investment in Tenures at $3,609 at August 31, 2006. This
amount represent the carrying costs of certain shellfish tenures acquired by the
subsidiary of the Company's wholly-owned subsidiary Island Scallops Ltd., 377332
B.C. Ltd. Shellfish tenures are government-granted rights allowing limited use
of offshore waters for the purposes of cultivation of shellfish. The granting of
shellfish tenure rights are the responsibility of the Provincial (British
Columbia) Government and not the Canadian Federal Government. As such, the
government assistance that we receive via loan agreement with various Federal
Agencies has no effect on our ability to renew and/or modify these tenure
agreements. The tenure held by 377332 B.C. Ltd. has an expiration date of July
10, 2021. Other shellfish tenures held by the Company and its subsidiaries have
expiration dates ranging from 2021 to 2024.
These tenures are considered to have an indefinite useful life because renewal
on expiration is anticipated, and therefore are not subject to amortization.
NOTE 6. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Included in accounts payable and accrued liabilities are balances outstanding
related to credit cards held in the name of the shareholder totaling $13,325 at
August 31, 2006. The Company used these credit cards as a means of short term
financing and incurs interest charges on such unpaid balances.
Included in accounts payable and accrued liabilities at August 31, 2006 is an
amount of $118,963 in respect to an agreement to purchase geoduck seed from the
Company (for additional information see Note 10 - Contingent Liabilities).
Included in accounts payable and accrued liabilities at August 31, 2006 is an
amount of $59,856 payments due and interest accrued in respect to the loan from
the National Research Council of Canada Industrial Research Assistance Program
(see Note 8 - Long Term Debt for additional information).
NOTE 7. SHORT TERM DEBT
These consolidated financial statements include Island Scallop's mortgage loan
repayable at $2,030 per month including interest calculated at the greater of
10% and (Canadian) prime plus 6% (12% as of August 31, 2006). The loan, which is
due on April 1, 2007, is secured by a second charge on the real property of
Island Scallops. At August 31, 2006, the principal due is $192,690.
These consolidated financial statements include a non-interest bearing loan to
Island Scallops from Industry Science and Technology Canada requiring repayment
equal to 0.5% of gross scallop sales of the Company's wholly owned subsidiary
(Island Scallops) for each preceding year, which is due January 1, 2007. If at
the due date the Company has not generated sufficient revenues to be required to
repay the original amount of $164,254, the remaining portion of the loan is to
be forgiven. Amounts currently due bear interest based on the published rates of
90 day (Canadian) treasury bills.
Included in short-term debt at August 31, 2006 is estimated royalties of $60,045
payable to a third party from who the former sole shareholder of Island Scallops
Ltd. originally acquired the shares of Island Scallops Ltd. The 1992 share
purchase agreement (for Island Scallops) provided that the third party was to
F-14
receive from the Company 3% of revenues of the Company as earned, on a quarterly
basis, throughout the period from December 1, 1992 to November 30, 2002. The
third party holds a first charge (or first lien) over inventory of the Company
(including broodstock) in the amount of $315,770 in support of its royalty
entitlement. The third party has not taken further action to enforce payment of
the arrears liability. To date, we have accrued the entire balance of $60,045 as
a current liability and we plan to pay it with available funds in the near
future.
Included in short-term notes payable at August 31, 2006 is an unsecured
non-interest bearing demand loan from an individual with a face value of $45,260
and no specific terms of repayment. However, the lender has informally requested
that the loan be repaid in full by October 6, 2008.
NOTE 8. LONG TERM DEBT
These consolidated financial statements include a Western Diversification
Program non-interest bearing loan to Island Scallops that requires repayment
equal to 12% of gross revenues from scallop sales of the Company, payable
semi-annually, with no specified due date. At August 31, 2006 as Island Scallops
is in arrears in respect to the payment of these amounts, the full principal
balance of $611,055 is reflected as a current liability. Our management of the
Company is seeking to renegotiate terms of repayment of this debt (for
additional information see Note 15 - Subsequent Events).
These consolidated financial statements include the Company's wholly owned
subsidiary's (Island Scallops) unsecured non-interest bearing loan from the
National Research Council of Canada Industrial Research Assistance Program which
requires quarterly payments commencing March 1, 2003 equal to 3% of gross black
cod revenues of the Island Scallops until the earlier of full repayment or
December 1, 2012. The amount repayable is up to 150% of the original advance of
$397,532, if repayment is before December 1, 2007. If at December 1, 2012,
Island Scallops has not earned sufficient revenues to be required to repay the
original loan amount, the remaining portion of the loan is to be forgiven.
Amounts currently due at August 31, 2006, bear interest at a rate of 1% per
month. At August 31, 2006, Island Scallops is in arrears in respect to the
payment of these amounts. The National Council of Canada Industrial Research
Assistance Program has requested payment of the $59,856 that they claim is owed
under this loan agreement. As such, at August 31, 2006, $59,856 is included in
accounts payable and accrued liabilities and remaining full principal balance of
$337,676 is reflected as a current liability. The Company is seeking to
renegotiate the repayment terms.
These consolidated financial statements include two bank loans for Island
Scallops. The first bank loan is repayable at $1,128 per month, plus interest
calculated at the floating base rate of the Business Development Bank of Canada
plus 1.5% annum (7.5% as of August 31, 2006), is due February 23, 2009, and is
secured by a General Security Agreement over the assets of the Company's wholly
owned subsidiary (Island Scallops), a mortgage charge on Island Scallop's real
property and a personal guarantee of $45,110 by our Chairman, President and CEO,
and former sole shareholder of Island Scallops. At August 31, 2006, the
principal due is $33,833. The second bank loan is repayable at $470 per month
plus interest calculated at (Canadian) prime plus 3% per annum (9% as of August
31, 2006), is unsecured and is due October 23, 2007. At August 31, 2006, the
principal due is $6,384.
F-15
As a result, at August 31, 2006, the Company had $988,949 of long-term debt less
a current portion of $948,732 for a balance of $40,217. Principal payments due
within each of the next five fiscal years and subsequently, in respect to long
term debt are approximately as follows:
2007 $948,732
2008 $6,384
2009 $33,833
-------------------
$988,949
===================
NOTE 9. WARRANT LIABILITIES
The warrants that each investor received as a result of our April 12, May 30,
June 30 and July 11 Preferred Stock Financing (see Note 13 - Preferred Stock
Financing for additional details) contained a cashless exercise provision that
becomes effective if our registration statement (that we are required to file
under the registration rights agreement) is not declared effective one-year
after the initial issue date of each warrant. As such and in accordance with the
accounting guidelines under SFAS No. 133, we valued the warrants as a derivative
financial instrument and the corresponding liabilities were entered onto our
consolidated balance sheet, measured at fair value. The Company determined the
fair value of the warrants as follows as of April 12, 2006, May 30, 2006, June
30, 2006 and July 11, 2006 (the issuance date):
The Company used the Black Scholes option-pricing model with the following
assumptions: an expected life equal to the contractual term of the warrants
(one, three or five), underlying stock price of $1.10 (at April 12), $1.40 (at
May 30), $1.35 (at June 30) and $1.40 (July 11) no dividends; a risk free rate
of 4.91%, 4.90% and 4.91%, which equals the one, three and five-year yield on
Treasury bonds at constant (or fixed) maturity (for those warrants issued on
April 12), a risk free rate of 4.99%, which equals three and five-year yield on
Treasury bonds at constant (or fixed) maturity (for those warrants issued on May
30), a risk free rate of 4.71% and 4.70%, which equals the three and five-year
yield on Treasury bonds at constant (or fixed) maturity (for those warrants
issued on June 30) and a risk free rate of 4.71% and 4.70%, which equals the
three and five-year yield on Treasury bonds at constant (or fixed) maturity (for
those warrants issued on July 11); and volatility of 93%. Under the assumptions,
the Black-Scholes option pricing model yielded an aggregate value of
approximately $19,494,000 with a current portion of approximately $1,225,000.
The Company performed the same calculations as of August 31, 2006, to revalue
the warrants as of that date. In using the Black Scholes option-pricing model,
the Company used an underlying stock price of $1.40 per share; no dividends; a
risk free rate of 5.00%, 4.71% and 5.70%, which equals the one, three and
five-year yield on Treasury bonds at constant (or fixed); and maturity
volatility of 97%. The resulting aggregate allocated value of the warrants as of
August 31 2006 equaled approximately $22,160,000. The change in fair value of
approximately $2,666,000 (with a current portion of roughly $519,000) was
recorded for the period ended August, 2006.
Upon the earlier of the warrant exercise or the expiration date, the warrant
liability will be reclassified into shareholders' equity. Until that time, the
warrant liability will be recorded at fair value based on the methodology
described above. Liquidated damages under the registration rights agreement will
be expensed as incurred and will be included in operating expenses.
F-16
NOTE 10. CONTINGENT LIABILITIES
The Company's wholly owned subsidiary, Island Scallops, entered into an
Agreement in the 1998 year with two parties, under which Island Scallops was to
produce and sell geoduck seed to the two parties. Island Scallops received
advance payments from each of the two parties in the 2002 year of approximately
$64,140 and recognized related revenue of $43,705 in respect to seed delivered
in the 2002 year. The balance of the deposits received (advance payments), net
of sales, totaling $118,963, is included in accounts payable and accrued
liabilities.
Management's position is that the two parties violated the terms of the
agreement, such that the Company is entitled to retain the balance of the
deposits. Per the terms of the original agreement, Island Scallop was entitled
to make up any shortfall in the product produced in the following year. Although
product was available and offered by Island Scallops in the following year, the
two parties refused to honor the terms of the agreement and would not accept the
product (to make up the shortfall) in the following YEAR.
As of August 31, 2004, one of the two parties had made claims that the Company
owed to it amounts totaling $88,925. This particular party believed that the
agreement required Island Scallops to deliver the product in year one and did
not allow Island Scallop to make up any shortfall with product produced in the
following year. The balance included in accounts payable and accrued liabilities
related to this party is $34,708.
Any additional liability to the Company, or any reduction of the currently
recognized liability, in respect to these deposits will be recorded at the time
a conclusion to this matter can be determined.
Neither the Company nor its wholly owned subsidiary maintain insurance in
respect to replacement of its inventory. Consequently, the Company is exposed to
financial losses or failure as a result of this risk.
NOTE 11. INCOME TAXES
The Company did not provide any current or deferred United States federal, state
or foreign income tax provision or benefit for the period presented because it
has experienced operation losses since inception. The Company has provided a
full valuation allowance on the deferred tax asset, consisting primarily
unclaimed research and development expenditures, because of uncertainty
regarding the Company's ability to realize the benefit.
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the net deferred taxes at August 31, 2006 are as follows:
August 31,
2006
---------------
Deferred tax asset attributable to:
Net operating loss carryover $ 884,219
Less, valuation allowance (884,219)
---------------
Total net deferred tax asset $ -
===============
F-17
Edgewater follows Statement of Financial Accounting Standards Number 109 (SFAS
109), "Accounting for Income Taxes." SFAS No. 109 requires a valuation
allowance, if any, to reduce the deferred tax assets reported if, based on the
weight of the evidence, it is more likely than not that some portion or all of
the deferred tax assets will not be realized. Management has determined that a
valuation allowance of $884,219 at August 31, 2006 is necessary to reduce the
deferred tax assets to the amount that will more than likely than not be
realized. The change in valuation allowance for 2006 was approximately $438,661.
At August 31, 2006 Edgewater had net operating loss carryforwards amounting to
approximately $524,000 for U.S. and Canadian tax purposes, respectively, that
expires in various amounts beginning in 2009 and 2009 in the U.S. and Canada,
respectively.
The federal statutory tax rate reconciled to the effective tax rate for 2006 is
as follows:
2006 2005
--------------------
Tax at U.S. statutory rate 34.0% 34%
State tax rate, net of federal benefits 0.0 0.0
Foreign tax rate in excess of U.S. statutory rate 17.6% 17.6%
Change in valuation allowance 51.6% 51.6%
--------------------
Effective tax rate 0.0% 0.0%
====================
NOTE 12. STOCK-COMPENSATION EXPENSE
In October 2005, we engaged Aurelius Consulting to provide marketing and
investor relations services. The initial term of the agreement is one year.
Aurelius is entitled to receive 100,000 shares of our restricted common stock
during the term of its agreement (25,000 per quarter), in consideration for
their services. The shares were valued at $1.45 per share, the closing bid price
for shares of our common stock on the date of the contract. Therefore, the total
aggregate value of the transaction recognized by the Company in the first
quarter of 2006 was $145,000.
At October 21, 2005 and November 11, 2005, our board approved the issuing a
total of 25,000 shares of the Company's common stock to The Shemano Group, LLC
for preparing a research report for the Company. The shares were valued at $1.50
per share, the closing market bid of our common stock on the date of the
resolution. Therefore, the total aggregate value of the transaction recognized
by the Company in the first quarter of 2006 was $37,500.
On January 31, 2006, we issued 400,000 shares of our restricted common stock to
World Wide Mortgage as consideration for agreeing to extend the due date to
April 15, 2006 for us to repay our CDN $1,500,000 loan pursuant to the bridge
loan agreement dated November 9, 2004 and amended on April 15, 2005 between us
and World Wide. The shares have piggy-back registration rights that require us
to register the shares in our next registration statement. The shares were
valued at $1.30 per share, the closing bid price for shares of our common stock
on the date we issued the shares. Therefore, the total aggregate value of the
transaction is $520,000 which was recorded as interest expense.
F-18
On June 30, 2006, we issued 22,860 shares of common stock to the two accredited
investors of our April 12 and May 30, 2006 financings as payment of the
semi-annual dividend (8% per annum) per the terms of the Certificate of
Designation of the Relative Rights and Preferences of the Series A Convertible
Preferred Stock (see Note 13 - Preferred Shares Financing for additional
information on the Series A Convertible Preferred Stock). The number of shares
issued was based on the Dividend Payment at a rate of 8% per annum (subject to a
pro rata adjustment) of the Liquidation Preference Amount ($1,416,000 for the
April 12 financing and $1,500,000 for the May 30 financing) payable in shares
equal to 90% of the quotient of (i) the Dividend Payment divided by (ii) the
average of the VWAP for the twenty (20) trading days immediately preceding the
date the Dividend Payment is due, but in no event less than $0.65. As such, the
shares were valued at approximately $34,700 and the total aggregate value of the
transaction was recorded as a preferred stock dividend.
Stock Options
In August 2005, our Board of Directors approved the "Edgewater Foods
International 2005 Equity Incentive Plan." The Board of Directors reserved
5,000,000 shares of our common stock to be issued in the form of incentive
and/or non-qualified stock options for employees, directors and consultants to
Edgewater. As of August 31, 2006, our Board of Directors had authorized the
issuance of 282,000 options to employees.
Stock option activity during the year ending August 31, 2006 was as follows:
Weighted Average
Number of Exercise Price
Shares
-----------------------------------
Outstanding, August 31, 2005 282,000 $ 1.50
Granted -- --
Exercised -- --
Forfeited -- --
Expired -- --
-----------------------------------
Outstanding, August 31, 2006 282,000 $
1.50
===================================
Exercisable, August 31, 2006 282,000 $
1.50
===================================
At August 31, 2006, 62,000 of the outstanding options expire in August 2010 with
the remaining balance of 220,000 having an expiration date of August 2015.
NOTE 13. PREFERRED STOCK FINANCING
On April 12, 2006, we completed a private equity financing of $1,062,000 with
two accredited investors. Net proceeds from the financing were approximately
$952,000. We issued 1,888,000 shares of our Series A Preferred Stock, par value
$0.001 per share and stated value of $0.75 per share, at a purchase price of
$0.5625 per share. Each investor also received one of each of the following
warrants: (i) Series A Warrant, (ii) Series B Warrant, (iii) Series C Warrant,
(iv) Series D Warrant, (v) Series J Warrant, (vi) Series E Warrant, (vii) Series
F Warrant, (viii) Series G Warrant, and (ix) Series H Warrant, each to purchase
a number of shares of common stock equal to 50% of the number of Series A
Preferred Stock purchased, except for the Series J Warrants, which entitled the
investor to purchase a number of shares of common stock equal to 100% of the
number of shares of Series A Preferred Stock purchased. We issued a total of
9,440,000 Warrants. Each of the Warrants has a term of 5 years, except for the
Series J Warrants, which have a term of 1 year.
F-19
In connection with the April 12, 2006 financing, we paid cash compensation to a
placement consultant in the amount of $84,960 and issued him 188,800 warrants.
Each of the placement consultant's warrants allow him to purchase one share of
our Series A Preferred Stock, and one half of each of the Series A-I Warrants
and one Series J warrant. Each of the placement consultant's warrants to
purchase the securities described above is exercisable at a price of $0.5625 per
warrant, for a period of three years. The fees were recorded as a cost of
capital.
On May 30, 2006, we completed another round of private equity financing of
$1,500,000 with one accredited investor pursuant to a Series A Convertible
Preferred Stock Purchase Agreement. Net proceeds from this financing were
approximately $1,380,000. We issued 2,000,000 shares of our Series A Preferred
Stock, stated value of $0.75 per share, at a purchase price of $0.75 per share
and the investor also received one of each of the following warrants: (i) Series
A Warrant, (ii) Series B Warrant, (iii) Series C Warrant, and (iv) Series D
Warrant, each to purchase a 1,000,000 shares of Common Stock; therefore, we
issued a total of 4,000,000 Warrants. Each of the Warrants has a term of 5 years
and is identical to the Series A-D Warrants we issued to investors pursuant to
the financing we closed on April 12, 2006 as disclosed in our Current Report on
Form 8-K filed on April 14, 2006. Each share of the Series A Preferred Stock is
convertible into one fully paid and nonassessable share of our common stock.
In connection with the May 30, 2006 financing, we paid cash compensation to a
placement consultant in the amount of $120,000 and issued him 200,000 warrants.
Each of the placement consultant's warrants allow him to purchase one share of
our Series A preferred stock, and one half of each of the Series A-D Warrants.
Each of the placement consultant's warrants to purchase the securities described
above is exercisable at a price of $0.75 per warrant, for a period of 3 years.
The fees were recorded as a cost of capital.
On June 30, 2006 and July 11, 2006, we completed two final rounds of private
equity financing, accepting subscriptions in the aggregate amount of $2,840,000
from nine institutional and accredited investors pursuant to the May 30, 2006
Series A Convertible Preferred Stock Purchase. On June 30, 2006 and July 11,
2006, we entered into separate Joinder Agreements to each of the Series A
Convertible Preferred Stock Purchase Agreement and the Registration Rights
Agreement, each dated as of May 30, 2006, with each of the new investors which
added such investors as additional parties to the May 30, 2006 financing
documents. Net cash proceeds from these two rounds were approximately
$2,808,000. Pursuant to these round two final financings, we issued a total of
3,786,666 shares of our Series A Preferred Stock, stated value of $0.75 per
share, at a purchase price of $0.75 per share and each investor also received
one of each of the following warrants: (i) Series A Warrant, (ii) Series B
Warrant, (iii) Series C Warrant, and (iv) Series D Warrant, each to purchase
1,893,338 shares of Common Stock ; therefore, we issued a total of 7,573,352
Warrants in these two final rounds of financing. Each of the Warrants has a term
of 5 years and is identical to the Series A-D Warrants we issued to investors
pursuant to the financings we closed on April 12, 2006 and May 30, 2006. Each
share of the Series A Preferred Stock is convertible into one fully paid and
nonassessable share of our common stock.
In connection with the June 30, 2006 and July 11, 2006 financing, we paid a
total placement consultant fee of $217,000. The placement consultant received
$160,000 of his fee in securities (as described below) and $57,000 in cash. As a
result, we issued the placement consultant 213,333 shares of our Series A
Preferred Stock, and one of each of the A-D Warrants, each to purchase 106,667
shares of our Common Stock. The A-D Warrants issued to the placement consultant
are identical to the Series A-D Warrants we issued to the investors as described
above. The fees were recorded as a cost of capital.
F-20
We used a portion of the proceeds of the above referenced private equity
financings to repay the entire balance of short-term loan with an authorized
limit of $1,451,510 secured by our assets, including a mortgage charge in the
amount of $1,451,510 on land and building of the Company, and by a personal
guarantee of Robert Saunders, our Chairman, President and CEO, and former sole
shareholder of Island Scallops. (For additional information on this note, please
see Note 7 - Short Term Debt above)
Series A Preferred Stock
Our Board of Directors of has designated 10,000,000 shares of our
authorized preferred stock as Series A Convertible Preferred Stock. The
principal terms of the preferred stock are as follows:
Voting. Except with respect to specified transactions that may affect
the rights, preferences, privileges or voting power of the Series A Preferred
Stock and except as otherwise required by Nevada law, the Series A Preferred
Stock has no voting rights. We shall not affect such specified transactions,
which include authorizing, creating, issuing or increasing the authorized or
issued amount of any class or series of stock, ranking pari passu or senior to
the Series A Preferred Stock, with respect to the distribution of assets on
liquidation, dissolution or winding up, without the affirmative vote or consent
of the holders of at least 75% of the shares of the Series A Preferred Stock
outstanding at the time, given in person or by proxy, either in writing or at a
meeting, in which the holders of the Series A Preferred Stock vote separately as
a class. The common stock into which the Series A Preferred Stock is convertible
shall, upon issuance, have all of the same voting rights as other issued and
outstanding common stock and none of the rights of the Series A Preferred Stock.
Dividends. The holders of record of shares of Series A Preferred Stock
are entitled to receive, out of any assets at the time legally available
therefor and when and as declared by the Board of Directors, dividends at the
rate of 8% per annum in shares of our common stock. The number of shares of
common stock to be issued to the holder shall be an amount equal to 90% of the
quotient of (i) the dividend payment divided by (ii) the average of the daily
volume weighted average price (VWAP) of our common stock for such date on the
OTC Bulletin Board for the 20 trading days immediately preceding the date the
dividend payment is due, but in no event less than $0.65. Dividends on the
Series A Preferred Stock are cumulative, accrue and are payable semi-annually.
Dividends on the Series A Preferred Stock are prior and in preference to any
declaration or payment of any distribution on any outstanding shares of junior
stock. So long as any shares of Series A Preferred Stock are outstanding, we
will not declare, pay or set apart for payment any dividend or make any
distribution on any junior stock (other than dividends or distributions payable
in additional shares of junior stock), unless at the time of such dividend or
distribution we shall have paid all accrued and unpaid dividends on the
outstanding shares of Series A Preferred Stock.
Conversion. At any time on or after the issuance date, the holder of
any such shares of Series A Preferred Stock may, at the holder's option, elect
to convert all or any portion of the shares of the Series A Preferred Stock held
by such person into a number of fully paid and nonassessable shares of common
stock equal to the quotient of (i) the liquidation preference amount ($0.75) of
the shares of Series A Preferred Stock being converted plus any accrued but
unpaid dividends divided by (ii) the conversion price, which initially is $0.75
per share, subject to certain adjustments.
F-21
If within 3 business days of our receipt of an executed copy of a
conversion notice the transfer agent shall fail to issue and deliver to a holder
the number of shares of common stock to which such holder is entitled upon such
holder's conversion of the Series A Preferred Stock or to issue a new preferred
stock certificate representing the number of shares of Series A Preferred Stock
to which such holder is entitled, we shall pay additional damages to such holder
on each business day after such 3rd business day that such conversion is not
timely effected in an amount equal 0.5% of the product of (A) the sum of the
number of shares of common stock not issued to the holder on a timely basis and
to which such holder is entitled and, in the event we failed to deliver a
preferred stock certificate to the holder on a timely basis, the number of
shares of common stock issuable upon conversion of the shares of Series A
Preferred Stock represented by such certificate, as of the last possible date
which we could have issued such certificate to such holder timely and (B) the
closing bid price of our common stock on the last possible date which we could
have issued such common stock and such certificate, as the case may be, to such
holder timely. If we fail to pay those additional damages within 5 business days
of the date incurred, then such payment shall bear interest at the rate of 2.0%
per month (pro rated for partial months) until such payments are made.
The conversion price of the Series A Preferred Stock may be adjusted in
the event of (i) combination, stock split, or reclassification of the common
stock; (ii) capital reorganization; (iii) distribution of dividends; or (iv) the
issuance or sale of additional shares of common stock or common stock
equivalents.
Liquidation. In the event of the liquidation, dissolution or winding up
of our affairs, whether voluntary or involuntary, the holders of shares of
Series A Preferred Stock then outstanding shall be entitled to receive, out of
our assets available for distribution to its stockholders, an amount equal to
$0.75 per share or the liquidation preference amount, of the Series A Preferred
Stock plus any accrued and unpaid dividends before any payment shall be made or
any assets distributed to the holders of the common stock or any other junior
stock. If our assets are not sufficient to pay in full the liquidation
preference amount plus any accrued and unpaid dividends payable to the holders
of outstanding shares of the Series A Preferred Stock and any series of
preferred stock or any other class of stock ranking pari passu, as to rights on
liquidation, dissolution or winding up, with the Series A Preferred Stock, then
all of said assets will be distributed among the holders of the Series A
Preferred Stock and the other classes of stock ranking pari passu with the
Series A Preferred Stock, if any, ratably in accordance with the respective
amounts that would be payable on such shares if all amounts payable thereon were
paid in full. The liquidation payment with respect to each outstanding
fractional share of Series A Preferred Stock shall be equal to a ratably
proportionate amount of the liquidation payment with respect to each outstanding
share of Series A Preferred Stock. All payments pursuant thereto, shall be in
cash, property (valued at its fair market value as determined by an independent
appraiser reasonably acceptable to the holders of a majority of the Series A
Preferred Stock) or a combination thereof; provided, however, that no cash shall
be paid to holders of junior stock unless each holder of the outstanding shares
of Series A Preferred Stock has been paid in cash the full Liquidation
Preference Amount plus any accrued and unpaid dividends to which such holder is
entitled as provided herein. After payment of the full liquidation preference
amount plus any accrued and unpaid dividends to which each holder is entitled,
such holders of shares of Series A Preferred Stock will not be entitled to any
further participation as such in any distribution of our assets.
F-22
NOTE 14. COMMITMENTS AND CONTINGENCIES
Corporate Offices
For the fiscal year ended August 31, 2006, our U.S. corporate office was located
at 400 Professional Drive, Suite 310, Gaithersburg, Maryland 20878. This space
was provided on a rent free basis by one of our shareholders. As a result, the
Company did not recognize rental expense in the fiscal year.
Employment Agreements
We entered into an employment agreement with Mr. Robert Saunders as our Chairman
and President effective on June 29, 2005. Subsequently in August 2005, Mr.
Saunders was appointed CEO by our Board of Directors. Mr. Saunders will serve at
the pleasure of the Board of Director's. For serving as President, Mr. Saunders'
compensation will be US $60,000 per annum. Additionally, we agreed to grant Mr.
Saunders a signing bonus of US $150,000 to be paid on closing of at least US
$3,500,000 in third party financing and increase his compensation to $120,000
per annum if we receive at least US $5,000,000 in outside funding. After the
completion of our Preferred Stock Financing (see Note 13 - Preferred Shares
Financing for additional information on the Series A Convertible Preferred
Stock), Mr. Saunders was due the signing bonus of $150,000 and a monthly salary
of $10,000 per month beginning in August 2006. However, Mr. Saunders agreed to
reduce his monthly salary to $5,000 per month until such time that we become
significantly cash flow positive for its operations. Additionally, we are
currently discussing possible restructuring/payment terms of the $150,000 bonus
and the accrued salary of $70,000 as of August 31, 2006 until such time that we
become significantly cash flow positive for its operations.
NOTE 15. SUBSEQUENT EVENTS (UNAUDITED)
In September 2006, the Company entered into a Settlement Agreement with the
Minister of Western Economic Diversification to amend the repayment terms of the
Company non-interest bearing loan of $611,055 (to Island Scallops) with the
Western Diversification Program. The Company agreed to repay the $174,976 due as
of August 31, 2006 in accordance with a payment schedule beginning with a
payment of $64,202 in September 2006 and continuing with monthly payment of
roughly $10,070 until August 15, 2007. The parties agreed that the remaining
balance of the $436,079 shall be repaid via quarterly payment equal to the
greater of $31,577 or 4% of the gross scallop sales starting the quarter
beginning on June 1, 2007 and subsequent quarters until the balance is repaid.
Under the terms of this agreement, the first quarter payment will be due on
September 30, 2007.
In September 2006, we engaged PR Global Concept GBR to provide international
investor relations services. The initial term of the agreement is two years.
Pursuant to the consulting agreement, we will pay PR Global $5,000 per month for
the term of the agreement. As additional compensation, we will also issue a
total of 500,000 options to purchase our common stock in quarter installments,
the first of which vested immediately upon signing the agreement and the
remainder of which will vest 3 months, 12 months and the final installment, 15
months after the date of signing; the options are exercisable at strike prices
ranging from $1.40 to $2.25.
F-23
NOTE 16. GOING CONCERN
Prior to the completion of our Preferred Stock Financing (see Note 13 for
additional details), our working capital had been primarily financed with
various forms of debt. We have suffered operating losses since inception in our
efforts to establish and execute our business strategy. As of August 31, 2006 we
had a cash balance of approximately $1,800,000. Although management believes
that we have adequate funds to maintain our business operations into the next
fiscal year and until we become cash flow positive, we are likely to continue to
suffer operational losses until the first quarter of our 2007 fiscal year. Until
our operations are able to demonstrate and maintain positive cash flows, we may
require additional working capital to fund our ongoing operations and execute
our business strategy. Based on these factors, there is substantial doubt about
our ability to continue as a going concern.
The financial statements do not include any adjustments relating to the
recoverability and classification of liabilities that might be necessary should
we be unable to continue as a going concern. Our ability to continue as a going
concern is dependent upon our ability to generate sufficient cash flows to meet
our obligations on a timely basis and ultimately to attain profitability. Our
Management intends to obtain working capital through operations and to seek
additional funding through debt and equity offerings to help fund our operations
as we expand. There is no assurance that we will be successful in our efforts to
raise additional working capital or achieve profitable operations. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
NOTE 17. FOREIGN OPERATIONS
The Company's share of the net assets held outside of the United States totaled
approximately $3,250,000 at August 31, 2006.
F-24
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
We have had no disagreements with our certified public accountants with respect
to accounting practices or procedures or financial disclosure.
ITEM 8A. CONTROLS AND PROCEDURES
QUARTERLY EVALUATION OF CONTROLS
As of the end of the period covered by this annual report on Form 10-KSB, the
Company evaluated the effectiveness of the design and operation of (i) their
disclosure controls and procedures, and (ii) their internal control over
financial reporting. The evaluators who performed this evaluation were our Chief
Executive Officer, Robert Saunders and Acting Chief Accounting Officer, Michael
Boswell; their conclusions, based on and as of the date of the Evaluation (i)
with respect to the effectiveness of our Disclosure Controls and (ii) with
respect to any change in our Internal Controls that occurred during the most
recent fiscal quarter that has materially affected, or is reasonably likely to
materially affect our Internal Controls are presented below.
CEO AND CFO CERTIFICATIONS
Attached to this annual report, as Exhibits 31.1 and 31.2, are certain
certifications of the CEO and Acting CAO, which are required in accordance with
the Exchange Act and the Commission's rules implementing such section (the "Rule
13a-14(a)/15d-14(a) Certifications"). This section of the annual report contains
the information concerning the Evaluation referred to in the Rule
13a-14(a)/15d-14(a) Certifications. This information should be read in
conjunction with the Rule 13a-14(a)/15d-14(a) Certifications for a more complete
understanding of the topic presented.
DISCLOSURE CONTROLS AND INTERNAL CONTROLS
Disclosure Controls are procedures designed with the objective of ensuring that
information required to be disclosed in the Company's reports filed with the
Securities and Exchange Commission under the Securities Exchange Act, such as
this annual report, is recorded, processed, summarized and reported within the
time period specified in the Commission's rules and forms. Disclosure Controls
are also designed with the objective of ensuring that material information
relating to the Company is made known to the CEO and the Acting CAO by others,
particularly during the period in which the applicable report is being prepared.
Internal Controls, on the other hand, are procedures which are designed with the
objective of providing reasonable assurance that (i) the Company's transactions
are properly authorized, (ii) the Company's assets are safeguarded against
unauthorized or improper use, and (iii) the Company's transactions are properly
recorded and reported, all to permit the preparation of complete and accurate
financial statements in conformity with accounting principals generally accepted
in the United States.
LIMITATIONS ON THE EFFECTIVENESS OF CONTROLS
30
The Company's management does not expect that their Disclosure Controls or their
Internal Controls will prevent all error and all fraud. A control system, no
matter how well developed and operated, can provide only reasonable, but not
absolute assurance that the objectives of the control system are met. Further,
the design of the control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their
costs. Because of the inherent limitations in all control systems, no evaluation
of controls can provide absolute assurance that all control issues and instances
of fraud, if any, within the Company have been detected. These inherent
limitations include the realities that judgments in decision-making can be
faulty and that breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management override of the
control. The design of a system of controls also is based in part upon certain
assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated objectives under all
potential future conditions. Over time, control may become inadequate because of
changes in conditions, or because the degree of compliance with the policies or
procedures may deteriorate. Because of the inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur and
not be detected.
SCOPE OF THE EVALUATION
The CEO and Acting CAO's evaluation of the our Disclosure Controls and Internal
Controls included a review of the controls' (i) objectives, (ii) design, (iii)
implementation, and (iv) the effect of the controls on the information generated
for use in this annual report. In the course of the Evaluation, the CEO and
Acting CAO sought to identify data errors, control problems, acts of fraud, and
they sought to confirm that appropriate corrective action, including process
improvements, was being undertaken. This type of evaluation is done on a
quarterly basis so that the conclusions concerning the effectiveness of our
controls can be reported in our quarterly reports on Form 10-QSB and annual
reports on Form 10-KSB. The overall goals of these various evaluation activities
are to monitor our Disclosure Controls and Internal Controls, and to make
modifications if and as necessary. Our external auditors also review Internal
Controls in connection with their audit and review activities. Our intent in
this regard is that the Disclosure Controls and the Internal Controls will be
maintained as dynamic systems that change (including improvements and
corrections) as conditions warrant.
Among other matters, the Evaluation was to determine whether there were any
significant deficiencies or material weaknesses in our Internal Controls, which
are reasonably likely to adversely affect our ability to record, process,
summarize and report financial information, or whether the Evaluators identified
any acts of fraud, whether or not material, involving management or other
employees who have a significant role in our Internal Controls. This information
was important for both the Evaluation, generally, and because the Rule
13a-14(a)/15d-14(a) Certifications, Item 5, require that the CEO and Acting CAO
disclose that information to our Board (audit committee), and our independent
auditors, and to report on related matters in this section of the annual report.
In the professional auditing literature, "significant deficiencies" are referred
to as "reportable conditions". These are control issues that could have
significant adverse affect on the ability to record, process, summarize and
report financial data in the financial statements. A "material weakness" is
31
defined in the auditing literature as a particularly serious reportable
condition where the internal control does not reduce, to a relatively low level,
the risk that misstatement cause by error or fraud may occur in amounts that
would be material in relation to the financial statements and not be detected
within a timely period by employee in the normal course of performing their
assigned functions. The Evaluators also sought to deal with other controls
matters in the Evaluation, and in each case, if a problem was identified, they
considered what revisions, improvements and/or corrections to make in accordance
with our ongoing procedures.
CONCLUSIONS
Based upon the Evaluation, our disclosure controls and procedures are designed
to provide reasonable assurance of achieving our objectives. Our CEO and Acting
CAO concluded that our disclosure controls and procedures are effective at that
reasonable assurance level to ensure that material information relating to us is
made known to management, including the CEO and Acting CFO, particularly during
the period when our periodic reports are being prepared, and that our Internal
Controls are effective at that assurance level to provide reasonable assurance
that our financial statements are fairly presented inconformity with accounting
principals generally accepted in the United States. Additionally, there has been
no change in our Internal Controls that occurred during our most recent fiscal
quarter that has materially affected, or is reasonably likely to affect, our
Internal Controls.
PART III.
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table and text set forth the names and ages of all directors and
executive officers as of November 27, 2006. The Board of Directors is comprised
of only one class. All of the directors will serve until the next annual meeting
of shareholders, which is anticipated to be held in January or February of 2007,
and until their successors are elected and qualified, or until their earlier
death, retirement, resignation or removal. To date we have not had an annual
meeting. Except as disclosed herein, there are no family relationships among
directors and executive officers. Also provided herein are brief descriptions of
the business experience of each director, executive officer and advisor during
the past five years and an indication of directorships held by each director in
other companies subject to the reporting requirements under the Federal
securities laws.
Dr. Kristina Miller, our Chief Scientific Advisor is the wife of Robert
Saunders, our Chairman, CEO and President.
NAME AGE POSITION
- ---- --- --------
Robert Saunders 53 Chairman, CEO and President
Douglas C. MacLellan 50 Vice Chairman
Mark H. Elenowitz 36 Director
Robert L. Rooks 51 Director
Ian Fraser 45 Director
Michael Boswell 37 Director, Acting Chief Accounting Officer
32
ROBERT SAUNDERS, CHAIRMAN, CEO AND PRESIDENT. Mr. Saunders has directed all
research and development efforts at Island Scallops since its establishment.
After studying for his B.Sc. at the University of British Columbia in the early
1970's, Mr. Saunders has worked exclusively in the aquaculture research and
development field. His efforts have primarily involved designing and
implementing innovative culture technology and methods for new aquaculture
species in British Columbia. Mr. Saunders has direct experience with managing
projects similar to the type proposed, such as developing the hatchery
technology for producing the Japanese scallop and the development of sablefish
aquaculture.
DOUGLAS C. MACLELLAN, VICE-CHAIRMAN. Since May 1992, Mr. MacLellan has been
President and Chief Executive Officer of the MacLellan Group, Inc., a privately
held business incubator and financial advisory firm. Mr. MacLellan is currently
a member of the board of directors and chairman of the audit committee of AMDL,
Inc. (AMEX: ADL), a publicly held biotechnology firm. From 2002 until September
2005, Mr. MacLellan was Vice Chairman and a Director of AXM Pharma, Inc. (AMEX;
AXJ). From March 1998 through October 2000, Mr. MacLellan was the co-founder and
a significant shareholder of Wireless Electronique, Ltd., a China-based
telecommunications company having joint venture operations with China Unicom
(NASDAQ: CHU) in Yunnan, Inner Mongolia and Ningxia provinces. He is also a
co-founder and, since May 1997, has been a director of Datalex Corporation, a
Canadian-based legacy software solution provider. From November 1996 to March
1998, Mr. MacLellan was co-Chairman and an Investment Committee member of the
Strategic East European Fund. From November 1995 to March 1998, Mr. MacLellan
was President, Chief Executive Officer and a Director of PortaCom Wireless,
Inc., a company engaged as a developer and operator of cellular and wireless
telecommunications ventures in selected developing world markets. Mr. MacLellan
is a former member of the board of directors and co-founder of FirstCom
Corporation (NASDAQ: FCLX), an international telecommunications company that
operates a competitive access fiber and satellite network in Latin America,
which became AT&T Latin America (NASDAQ: ATTL) in August 2000. During 1996, he
was also the Vice-Chairman of Asia American Telecommunications (now Metromedia
China Corporation), a majority-owned subsidiary of Metromedia International
Group, Inc. (AMEX: MMG). Mr. MacLellan was educated at the University of
Southern California in economics and finance, with advanced training in
classical economic theory.
MARK H. ELENOWITZ, DIRECTOR. Mr. Elenowitz is a co-founder and managing director
of the TriPoint family of companies. He is responsible for the overall corporate
development of the firm and assisting Tripoint's clients with high-level
financial services and general business development. From December 2002 to
September 2005, Mr. Elenowitz was a board member of AXM Pharma formerly (AMEX:
AXJ). From September 2001 to March 2002, Mr. Elenowitz was a Director and
President of Image World Media, Inc., an international media company
specializing in the production and distribution of various media content for
worldwide distribution across multiple media platforms, such as traditional
television, film and the Internet. From February 1998 to October 2001, Mr.
Elenowitz was Co-Chairman and Managing Director of GroupNow!, Inc., a financial
consulting firm. In this role he was responsible for the company's overall
corporate development and corporate finance. Mr. Elenowitz integrates a strong,
successful entrepreneurial background with extensive financial services and
capital markets experience. He is also the senior managing director of Investor
Communications Company, LLC (ICC), a national investor relations firm he founded
33
in 1996. Through ICC, Mr. Elenowitz has developed ongoing relationships with
other investment banking firms, market makers, and analysts. Mr. Elenowitz has
worked with over 30 publicly traded companies providing financial consulting and
strategic planning services. Previously, Mr. Elenowitz held Series 7 and 63
licenses as a broker, and held a Series 24 license (Branch Manager) at regional
brokerage firm and also served as Vice President of Sales at NYSE member firm.
Mr. Elenowitz is the recipient of several entrepreneurial awards. He is a
graduate of the University of Maryland School of Business and Management, with a
Bachelor of Science in Finance.
DR. ROBERT L. ROOKS, DIRECTOR. Dr. Robert L. Rooks has been Chief of Staff of
All Care Animal Referral Center (ACARC) in Fountain Valley, California, since
1990. ACARC is the largest strictly referral veterinary center in the United
States. Dr. Rooks has a staff of over 20 veterinarians in the areas of surgery,
critical care, internal medicine, oncology, dentistry, radiology and neurology.
Their services include 24-hour critical care/emergency service, MRI and CT
scans, color-flow Doppler ultrasounds, hyperbaric oxygen therapy, a complete
orthopedic program including total hip replacements and joint reconstruction,
cobalt radiation therapy, a complete neuro-diagnostic service, a kidney
transplant program and a physical rehabilitation department and much more. He is
the published author of over 100 journals, magazine and newspaper articles. Dr.
Rooks is also the author of the book "Canine Orthopedics" published in 1997 by
Howell Bookhouse. Dr. Rooks completed his undergraduate studies at Iowa State
University in 1978. He graduated from the College of Veterinary Medicine at Iowa
State. Dr. Rooks received his Masters Degree as well as completed his surgical
residency at the University of Illinois in 1981. He is a Diplomat of both the
American College of Veterinary Surgeons and the American College of Veterinary
Practitioner.
IAN FRASER, DIRECTOR. Since 1997, Mr. Ian Fraser has been President of Fraser
Yacht Sales Ltd., a successful Yacht Brokerage located in Vancouver, B.C. Prior
to establishing Fraser Yacht Sales Ltd., Mr. Fraser gained experience in sales
and marketing both nationally and internationally as a yacht broker for two top
brokerage houses in Vancouver. Previously, Mr. Fraser was worked as an
advertising sales executive with Naylor communications from 1988 to 1990 and
learned valuable communication skills while working with numerous trades
including the Truck Logger's association, the I.W.A of America, and the B.C.
Construction industry. He also operated as a commercial fisherman on the West
coast working on commercial salmon fishing boats for the B.C. Packer Corporation
over a 4 year period and gained valuable knowledge of the coastline of Vancouver
Island and along the mainland from Victoria to the Queen Charlotte Islands. Mr.
Fraser also acquired sea time and commercial shipping skills while working on
the deck department of the B.C. Ferry Corporation based out of Horseshoe Bay
during his early professional career and during the summer months while
attending school in the early 1980s. Mr. Fraser also competes internationally on
ocean racing yachts and has crossed the Pacific and sailed up and down the coast
to Mexico on numerous occasions while racing and delivering racing yachts as
captain. Mr. Fraser studied Business Administration at Simon Fraser University
and Capilano College graduating with a diploma in Business Administration.
MICHAEL BOSWELL, DIRECTOR AND ACTING CHIEF ACCOUNTING OFFICER. Mr. Boswell is a
co-founder and member in TriPoint Capital Advisors, LLC, a boutique merchant
bank focused on small and mid-sized growth companies and a co founder of the
TriPoint family of companies. Mr. Boswell provides high-level financial services
to start-up businesses and small to mid-sized companies. Prior to the founding
of TriPoint, Mr. Boswell had a number of executive positions focusing on
34
business development and management consulting. Mr. Boswell also spent eight
years as a senior analyst and/or senior engineer for various branches of the
United States Government. He earned a MBA from John Hopkins University and a BS
degree in Mechanical Engineering from University of Maryland.
DARRYL HORTON, DIRECTOR. Mr. Horton has been a businessman successfully involved
in numerous construction and development projects for the past 35 years. He is
the President, Manager and a Partner of Abbotsford Development Corporation and
is currently managing a development project in Abbotsford, British Columbia
called Eagle Mountain. Eagle Mountain is an upscale, master planned community of
single family homes, town homes and commercial properties covering approximately
60 acres that is expected to be valued, upon completion, in excess of 200
million dollars. Prior to Eagle Mountain, Mr. Horton managed, owned and marketed
numerous other residential and commercial projects including the construction of
a 30 million dollar multi-function residential Intermediate Care Facility in
LaJolla California. For 15 years Mr. Horton was a partner in a general
contracting company that did various contracts with an average volume of about
25 million per year. In the 1970's, Mr. Horton was the Vice president of
Community Builders, the largest single family developer in British Columbia. Mr.
Horton is also the director of several other building and development companies
in British Columbia.
VICTOR BOLTON, DIRECTOR. Mr. Bolton founded a Mechanical contracting firm after
graduating from college and evolved that firm into all aspects of the
construction industry including building and raw land developing as well as
extensive property management. Retiring from this business in 2000, Mr. Bolton
now focuses time and energy towards the food manufacturing field.
Significant Employees
The following are employees who are not executive officers, but who are expected
to make significant contributions to our business:
BRUCE EVANS, FARM MANAGER. Mr. Bruce Evans has been involved in shellfish
production since 1985. He successfully established an oyster business, employing
methods of long-line and beach culture production. That business is still in
operation today, producing 7,000 gals of shucked oysters annually and employing
3 full time people and 4 part time people. He moved to Island Scallops in 1989.
Mr. Evans was responsible for securing the leases from the Provincial government
for this scallop grow-out project. He built the established long-line systems
that currently produce scallops for Island Scallops. Mr. Evans worked with a
Japanese scallop farmer for two years in B.C. and spent a month working on
highly acclaimed scallop farms in Japan. Mr. Evans has BS in Marine Biology from
the University of Victoria.
DR. KRISTINA M. MILLER, CHIEF SCIENTIFIC ADVISOR. Dr. Miller is currently Head
of the Molecular Genetics Section in the Pacific Region for the Department of
Fisheries and Oceans, Canada (DFO). She has been a research scientist at DFO
since obtaining her PhD in Biological Sciences from Stanford University in 1992.
The Molecular Genetics section she oversees contains a staff of 26, including
scientists, biologists, computer analysts and research technicians. Dr. Miller
conducts research on the genetic composition, adaptation, immunity and
physiology of wild and domesticated fish and shellfish species using both
35
molecular and genomic approaches. She has been a leader in the development of
molecular technologies to aid in the conservation and management of aquatic
resources. In the past 10 years, she has published over 40 scientific
peer-reviewed journal manuscripts, and her group has been the focus of numerous
magazine and newspaper articles. Dr. Miller brings a strong scientific component
to the management of Edgewater Foods, and she will serve as Chief Scientific
Advisor. In addition to her PhD, Dr. Miller received a BSc in Zoology from
University of California, Davis in 1983, and a MSc in Biology from University of
British Columbia in 1986. Dr. Miller is Robert Saunders, our Chairman, CEO and
President's wife.
AUDIT COMMITTEE AND FINANCIAL EXPERT
We have an Audit Committee as specified in Section 3(a)(58)(A) of the Securities
Exchange Act of 1934, as amended, composed of Douglas MacLellan (Chair), Robert
Rooks and Ian Fraser. The Audit Committee focuses its efforts on assisting our
Board of Directors to fulfill its oversight responsibilities with respect to
our:
o Quarterly and annual consolidated financial statements and financial
information filed with the Securities and Exchange Commission;
o System of internal controls;
o Financial accounting principles and policies;
o Internal and external audit processes; and
o Regulatory compliance programs.
The committee meets periodically with management to consider the adequacy of our
internal controls and financial reporting process. It also discusses these
matters with our independent auditors and with appropriate financial personnel
that we employ. The committee reviews our financial statements and discusses
them with management and our independent auditors before those financial
statements are filed with the Securities and Exchange Commission.
The committee has the sole authority to retain and dismiss our independent
auditors and periodically reviews their performance and independence from
management. The independent auditors have unrestricted access and report
directly to the committee.
AUDIT COMMITTEE FINANCIAL EXPERT
Douglas MacLellan is our Audit Committee Financial Expert, as that term is
defined in Item 401 of Regulation S-B and the Board has determined that Mr.
MacLellan is independent, as that term is used in Item 7(d)(3)(iv) of Schedule
14A under the Exchange Act. Mr. MacLellan's qualifications as an audit committee
financial expert are described in his biography above.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Exchange Act requires our officers, directors and persons
who own more than 10% of any class of our securities registered under Section
12(g) of the Exchange Act to file reports of ownership and changes in ownership
36
with the SEC. Officers, directors and greater than 10% stockholders are required
by SEC regulation to furnish us with copies of all Section 16(a) forms they
file.
We were a voluntary filer pursuant to Section 15(d) of the Act until August 30,
2006 and, therefore, our officers, directors and 10% or greater holders of our
securities were not required to file reports pursuant to Section 16(a) during
the fiscal year ended August 31, 2006. However, after we filed a Form 8-A to
register our common stock and series A preferred stock pursuant to Section 12(g)
of the Act, on August 30, 2006, based upon our review of copies of such reports,
our officers, directors and 10% stockholders filed the reports required by
Section 16(a).
CODE OF ETHICS
On August 3, 2005, we adopted a code of ethics that applies to our Chief
Executive Officer and Principal Financial and Accounting Officer. You may obtain
a copy of any of our codes of ethics at no cost, by written request to:
Edgewater Foods International, Inc., 5552 West Island Highway, Qualicum Beach,
British Columbia, Canada V9K 2C8; or, by oral request at: (250) 757-9811.
ITEM 10. EXECUTIVE COMPENSATION
Summary Compensation Table
------------------------------ -----------
ANNUAL COMPENSATION AWARDS Payouts
- -------------------------------------------------------------- -------------- --------------- -----------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other All
Name Annual Restricted Securities Other
And Compen- Stock Underlying LTIP Compen-
Principal sation Award(s) Options/ Payouts sation
Position Year Salary($) Bonus($) ($) $ SARs (#) ($) ($)
- ---------------- -------- ---------- -------------- --------- --------------- --------------- ------------ -----------
Robert 2006 60,000 150,000 0 0 0 0 0
Saunders,
Chairman,
President and
CEO(1)
- ---------------- -------- ---------- -------------- --------- --------------- --------------- ------------ -----------
Robert 2005 10,000 0 0 0 0 0 0
Saunders,
Chairman,
President and
CEO
- ---------------- -------- ---------- -------------- --------- --------------- --------------- ------------ -----------
37
Robert 2004 0 0 0 0 0 0 0
Saunders,
Chairman,
President and
CEO
- ---------------- -------- ---------- -------------- --------- --------------- --------------- ------------ -----------
Michael 2006 0 0 0 0 0 0 0
Boswell,
President and
Acting Chief
Account
Officer (2)
- ---------------- -------- ---------- -------------- --------- --------------- --------------- ------------ -----------
Michael 2005 0 0 0 0 0 0 0
Boswell,
President and
Acting Chief
Account Officer
- ---------------- -------- ---------- -------------- --------- --------------- --------------- ------------ -----------
Michael Boswell 2004 0 0 0 0 0 0 0
- ---------------- -------- ---------- -------------- --------- --------------- --------------- ------------ -----------
(1) In June 2005, we entered into an employment agreement with Mr. Robert
Saunders as our Chairman and President effective on June 29, 2005.
Subsequently in August 2005, Mr. Saunders was appointed CEO by our
Board of Directors. Mr. Saunders will serve at the pleasure of the
Board of Director's. For serving as President, Mr. Saunders'
compensation will be US $60,000 per annum. Additionally, we agreed to
grant Mr. Saunders a signing bonus of US $150,000 to be paid on
closing of at least US $3,500,000 in third party financing and
increase his compensation to $120,000 per annum if we receive at least
US $5,000,000 in outside funding. The Board recently approved the
Compensation Committee's recommendation to reduce Mr. Saunders'
compensation to $5,000 per month until our cash flow position
improves, at which time the Committee will reconvene and recommend to
the Board that Mr. Saunders' compensation increase back to $10,000 per
month.
(2) Mr. Boswell served as our President from March to June 2005, at which
time Mr. Saunders replaced Mr. Boswell as President. Mr. Boswell has
served as our Acting Chief Accounting Officer since August 2005. Mr.
Boswell indirectly owns a minority interest in TriPoint Capital
Advisors, LLC, a significant shareholder and party with which we
maintain a consulting agreement. The Board recently approved the
Compensation Committee's recommendation to pay TriPoint $15,000 per
month, which includes fees for Mr. Boswell's services as our Acting
Chief Accounting during 2005, however TriPoint agreed to reduce such
fee to $7,000 per month until our cash flow position improves, at
which time the Committee will reconvene and recommend a return to
$15,000 per month. In addition, TriPoint has agreed not to accept any
additional fees, other than expenses, until we are sufficiently funded
to carry out our business and operations. Although Mr. Boswell did not
work for us in any capacity until 2005, we are required to include our
38
last three fiscal years in the above table. According to the above
reasons, Mr. Boswell did not receive any compensation in 2003, 2004 or
2005.
Options/SARs
We did not grant any options or SARs to any of our named executive officers
during the last fiscal year nor did any of our executive officers exercise any
options or SARs during the last fiscal year.
Long Term Incentive Plans
No Long Term Incentive awards were granted in the last fiscal year.
BOARD OF DIRECTORS
Our directors who are employees do not receive any compensation from us for
services rendered as directors. The Board has created three classes of fees for
outside directors: (1) outside directors who are "independent," as defined in
the Exchange Act will be paid $500 per meeting, whether telephonic or in person
for director fee - there shall not be any fees for written consents in lieu of
board meetings; (2) outside directors who are not "independent" will not receive
any fees at this time, but once our cash flow position improves, the
Compensation Committee will reconvene and make recommendations; (3) the Vice
Chairman will receive $3,000 per month, which includes $1,500 per month for his
role as Chairman of our Audit Committee. Additionally, although we do not
currently provide stock based compensation to our outside directors, in the
future we may grant outside directors incentive-based stock compensation.
BOARD COMMITTEES
We currently have five committees appointed by our Board of Directors:
o Audit Committee, which is comprised of Douglas MacLellan (Chair),
Robert Rooks and Ian Fraser.
o Finance Committee, which is comprised of Mark Elenowitz (Chair),
Douglas MacLellan and Robert Saunders.
o Compensation Committee, which is comprised of Ian Fraser (Chair), Mark
Elenowitz and Doug MacLellan.
o Disclosure Committee, which is comprised of Douglas MacLellan (Chair),
Robert Saunders and Michael Boswell.
o Nominating Committee, which is comprised of Robert Saunders (Chair),
Douglas MacLellan and Robert Rooks.
39
EMPLOYMENT AGREEMENTS
In June 2005, we entered into an employment agreement with Robert Saunders, our
Chairman, CEO and President. Mr. Saunders will serve at the pleasure of the
Board of Directors. Pursuant to his employment agreement, Mr. Saunders'
compensation will be $60,000 (USD) per annum for his services as our President.
Following the receipt of at least $5,000,000 (USD) min outside funding, Mr.
Saunders will receive an additional $10,000 per month for his services as
Chairman and, thereafter, $20,000 per month provided that we achieve gross
revenues of at least $20,000,000 (USD) for our most recent fiscal year and
continuing as long as we maintain gross revenues of at least $20,000,000 (USD)
for each successive fiscal year. If we fail to achieve gross revenue of
$20,000,000 (USD) in a successive fiscal year, Mr. Saunders compensation as
Chairman shall be reduced to $10,000 (USD) per month. Additionally, we agreed to
grant Mr. Saunders a signing bonus of $150,000 (USD) to be paid upon the closing
of at least $3,500,000 in new third party financing. In August 2006, our Board
approved the following revisions to Mr. Saunders' compensation: reduce Mr.
Saunders' compensation from $10,000 to $5,000 per month until our cash flow
position improves, at which time the Compensation Committee will recommend that
Mr. Saunders' compensation increase back to $10,000 per month. We are discussing
possible restructuring/payment terms regarding the $70,000 deferred compensation
from fiscal year 2006 and 2005 and the $150,000 bonus that was to be paid to Mr.
Saunders upon the closing of at least US$3,500,000 in outside funding. Although
we have yet to reach a final agreement on payment terms, we paid Mr. Saunders
$50,000 towards the bonus in September of 2006.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Securities authorized for issuance under equity compensation plans. Please see
Part II, Item 5: "Market for Common Equity and Related Stockholder Matters"
above.
Security Ownership of Certain Beneficial Owners and Management
As used in this section, the term beneficial ownership with respect to a
security is defined by Rule 13d-3 under the Securities Exchange Act of 1934, as
amended, as consisting of sole or shared voting power (including the power to
vote or direct the vote) and/or sole or shared investment power (including the
power to dispose of or direct the disposition of) with respect to the security
through any contract, arrangement, understanding, relationship or otherwise,
subject to community property laws where applicable.
As of November 27, 2006 we had a total of 21,049,926 shares of common stock and
7,821,333 shares of Preferred Stock issued and outstanding, which are the only
issued and outstanding voting equity securities of the Company.
The following table sets forth, as of November 27, 2006: (a) the names and
addresses of each beneficial owner of more than five percent (5%) of our common
stock and Preferred Stock (taken together as one class) known to us, the number
of shares of common stock and Preferred Stock beneficially owned by each such
person, and the percent of our common stock and Preferred Stock so owned; and
(b) the names and addresses of each director and executive officer, the number
of shares our common stock and Preferred Stock beneficially owned, and the
40
percentage of our common stock and Preferred Stock so owned, by each such
person, and by all of our directors and executive officers as a group. Each
person has sole voting and investment power with respect to the shares of our
common stock and Preferred Stock, except as otherwise indicated. Beneficial
ownership consists of a direct interest in the shares of common stock and
Preferred Stock, except as otherwise indicated.
Name and Address Amount and Nature of Percentage
Beneficial Ownership of Voting of
Securities (1)
Robert Saunders 9,900,000 34.29%
Chairman, President and CEO
5552 West Island Highway
Qualicum Beach, British Columbia
Canada V9K 2C8
Douglas C. MacLellan 1,040,000 3.60%
Vice Chairman
8324 Delgany Avenue
Playa del Ray, CA 90293
Mark Elenowitz 1,238,000 (2) 4.29%
Director
400 Professional Drive
Suite 310
Gaithersburg, MD 20879
Dr. Robert Rooks 300,000 1.04%
Director
912 Pine Avenue
Huntington Beach, CA 90293
Ian Fraser 800,000 2.77%
Director
3056 West 2nd Avenue
Vancouver, British Columbia
Canada V6T 1E9
Michael Boswell 938,000 (3) 3.25%
Director and
Acting Chief Accounting Officer
400 Professional Drive
Suite 310
Gaithersburg, MD 20879
41
Name and Address Amount and Nature of Percentage
Beneficial Ownership of Voting of
Securities (1)
Victor Bolton 0 0.0%
345-916 W. Broadway
Vancouver, BC V5Z 1K7
Darryl Horton 0 0.0%
33568 Eagle Mountain Drive
Abbortsford, BC V3G 2X7
All directors and officers as a
group (8 persons) 14,216,000 49.24%
- ----------------
(1) All Percentages have been rounded up to the nearest one hundredth of
one percent.
(2) Mr. Elenowitz is a one hundred (100%) percent shareholder of MHE,
Inc., which owns 18,000 shares of our voting stock. Additionally, MHE,
Inc. is a forty percent (40%) member of TriPoint Capital Advisors,
LLC, which owns 3,000,000 shares of our voting stock. Mr. Elenowitz
owns 20,000 shares of our voting stock directly. Therefore, Mr.
Elenowitz beneficially owns 1,238,000shares of our voting stock.
(3) Mr. Boswell and his wife jointly own Invision, LLC, which owns 38,000
shares of our voting stock. Additionally, Invision, LLC. is a thirty
percent (30%) member of TriPoint Capital Advisors, LLC, which owns
3,000,000 shares of our voting stock. Therefore, Mr. Boswell
beneficially owns 938,000 shares of our voting stock
CHANGES IN CONTROL
To the best of our knowledge, there are no arrangements that could cause a
change in our control.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Dr. Kristina Miller, our Chief Scientific Advisor is Robert Saunders, our
Chairman, CEO and President's wife.
We are party to a consulting agreement with TriPoint Capital Advisors, LLC, a
company in which Mark Elenowitz, a director and one of our significant
shareholders, indirectly owns a 40% interest. Michael Boswell, our acting Chief
Accounting Officer and one of our directors, indirectly owns a 30% interest in
TriPoint. Louis Taubman, our outside corporate and securities counsel also
indirectly owns an interest (30%) in TriPoint. Our Board recently approved the
Compensation Committee's recommendation of a flat rate $15,000 per month fee,
which shall be reduced to $7,500 per month until our cash flow position
improves, for the legal services Louis Taubman provides us. The Board also
approved the recommendation of a $15,000 per month fee, which shall be reduced
42
to $7,000 per month until our cash flow position improves, for the Acting CFO
type services and financial advisory services Michael Boswell and TriPoint,
respectively, provide us. Additionally, our corporate offices in Gaithersburg,
Maryland are currently provided by Tripoint Holdings, LLC, the parent company of
Tripoint at no cost to us.
Island Scallops, our wholly owned subsidiary, recently transferred 100%
ownership of RKS Laboratories, Inc. to Robert Saunders, our Chairman, CEO and
President. RKS is a Vancouver research and development that is working towards
developing superior strains of scallops (developed by Island Scallops and known
as the Pacific Scallop) with beneficial traits such as higher meat yield and
rapid growth. Island Scallops agreed to transfer its ownership of RKS in
consideration for the grant to Island Scallops by RKS and Robert Saunders of a
right of first refusal to commercialize any intellectual property developed by
RKS. Island Scallops has the right to acquire or use any intellectual property
from RKS at RKS' cost, in perpetuity or until such time as RKS shall cease to
exist. In June and August 2006, Island Scallops agreed to loan RKS a total of
approximately $23,000 under two non-interest bearing notes that are secured by
all assets of RKS and are due on or before June 15, 2007 or August 31, 2007,
respectively.
ITEM 13. EXHIBITS LIST
Exhibit Number Description
- -------------- -----------
3.1+ Articles of Incorporation of the Company, as amended.
3.2 Amended and restated Bylaws of the Company (Incorporated by
reference to Exhibit 3.1 to the Company's Current Report on
Form 8-K filed on August 16, 2005).
4.1+ Form of certificate representing shares of the Company's
common stock.
4.2 Form of Certificate of Designation of Rights and Preferences
of Series A Convertible Preferred Stock. (Incorporated by
reference to Exhibit 10.3 to the Company's Current Report on
Form 8-K filed on April 14, 2006).
4.3+ Form of certificate representing shares of the Company's
preferred stock.
10.1 Form of Series A Convertible Preferred Stock Purchase
Agreement, dated April 12, 2006, by and between the Company
and each of the Purchasers thereto (Incorporated by
reference to Exhibit 10.1 to the Company's Current Report on
Form 8-K filed on April 14, 2006).
10.2 Form of Registration Rights Agreement, dated April 12, 2006,
by and between the Company and each of the Purchasers
thereto. (Incorporated by reference to Exhibit 10.2 to the
Company's Current Report on Form 8-K filed on April 14,
2006).
10.4 Form of Individual Lock-Up Agreement dated April 12, 2006 by
and between the Company and each of the shareholders listed
therein. (Incorporated by reference to Exhibit 10.4 to the
Company's Current Report on Form 8-K filed on April 14,
2006).
10.5 Form of Lock-Up Agreement dated April 12, 2006 by and
between the Company and World Wide Mortgage Corporation.
(Incorporated by reference to Exhibit 10.5 to the Company's
Current Report on Form 8-K filed on April 14, 2006).
43
10.6 Form of Series A Warrant dated April 12, 2006. (Incorporated
by reference to Exhibit 10.6 to the Company's Current Report
on Form 8-K filed on April 14, 2006).
10.7 Form of Series B Warrant dated April 12, 2006. (Incorporated
by reference to Exhibit 10.7 to the Company's Current Report
on Form 8-K filed on April 14, 2006).
10.8 Form of Series C Warrant dated April 12, 2006. (Incorporated
by reference to Exhibit 10.8 to the Company's Current Report
on Form 8-K filed on April 14, 2006).
10.9 Form of Series D Warrant dated April 12, 2006. (Incorporated
by reference to Exhibit 10.9 to the Company's Current Report
on Form 8-K filed on April 14, 2006).
10.10 Form of Series E Warrant dated April 12, 2006. (Incorporated
by reference to Exhibit 10.10 to the Company's Current
Report on Form 8-K filed on April 14, 2006).
10.11 Form of Series F Warrant dated April 12, 2006. (Incorporated
by reference to Exhibit 10.11 to the Company's Current
Report on Form 8-K filed on April 14, 2006).
10.12 Form of Series G Warrant dated April 12, 2006. (Incorporated
by reference to Exhibit 10.12 to the Company's Current
Report on Form 8-K filed on April 14, 2006).
10.13 Form of Series H Warrant dated April 12, 2006. (Incorporated
by reference to Exhibit 10.13 to the Company's Current
Report on Form 8-K filed on April 14, 2006).
10.14 Form of Series J Warrant dated April 12, 2006. (Incorporated
by reference to Exhibit 10.14 to the Company's Current
Report on Form 8-K filed on April 14, 2006).
10.15 Form of Series A Convertible Preferred Stock Purchase
Agreement, dated May 30, 2006, by and between the Company
and each of the Purchasers thereto (Incorporated by
reference to Exhibit 10.1 to the Company's Current Report on
Form 8-K filed on May 30, 2006).
10.16 Form of Registration Rights Agreement, dated May 30, 2006,
by and between the Company and each of the Purchasers
thereto. (Incorporated by reference to Exhibit 10.2 to the
Company's Current Report on Form 8-K filed on May 30, 2006).
10.17 Form of Series A Warrant dated May 30, 2006. (Incorporated
by reference to Exhibit 10.3 to the Company's Current Report
on Form 8-K filed on May 30, 2006).
10.18 Form of Series B Warrant dated May 30, 2006. (Incorporated
by reference to Exhibit 10.4 to the Company's Current Report
on Form 8-K filed on May 30, 2006).
10.19 Form of Series C Warrant dated May 30, 2006. (Incorporated
by reference to Exhibit 10.5 to the Company's Current Report
on Form 8-K filed on May 30, 2006).16, 2005).
10.20 Form of Series D Warrant dated may 30, 2006. (Incorporated
by reference to Exhibit 10.6 to the Company's Current Report
on Form 8-K filed on May 30, 2006).
44
10.21 Amendment to Registration Rights Agreement dated May 30,
2006(Incorporated by reference to Exhibit 10.7 to the
Company's Current Report on Form 8-K filed on August 16,
2005).
10.22 Form of Joinder Agreement to the Series A Convertible
Preferred Stock Purchase Agreement, dated May 30, 2006, by
and between the Company and each of the Purchasers thereto
(Incorporated by reference to Exhibit 10.1 to the Company's
Current Report on Form 8-K filed on June 30, 2006).
10.23 Form of Joinder Agreement to the Registration Rights
Agreement, dated May 30, 2006, by and between the Company
and each of the Purchasers thereto. (Incorporated by
reference to Exhibit 10.2 to the Company's Current Report on
Form 8-K filed on June 30, 2006).
21.1+ List of Subsidiaries.
31.1+ Certification of Chief Executive Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2+ Certification of Acting Chief Accounting Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1+ Certification of Chief Executive Officer and Acting Chief
Accounting Officer Pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
+ Filed herewith.
45
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
(1) AUDIT FEES
The aggregate fees billed for professional services rendered by LBB &
Associates, Ltd., LPP (formerly Lopez, Blevins, Bork & Associates, LLP) for the
audit of the registrant's annual financial statements and review of financial
statements included in the registrant's Form 10-KSB or services that are
normally provided by the accountant in connection with statutory and regulatory
filings or engagements for fiscal years 2006 and 2005 were approximately $46,000
and $9,000, respectively.
(2) AUDIT-RELATED FEES
NONE
(3) TAX FEES
NONE
(4) ALL OTHER FEES
NONE
(5) AUDIT COMMITTEE POLICIES AND PROCEDURES
The policy of our Audit Committee is to pre-approve all audit and
permissible non-audit services to be performed by the Company's independent
auditors during the fiscal year.
No services related to Audit-Related Fees, Tax Fees or All Other Fees
described above, were approved by the Audit Committee.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
/s/ Robert Saunders Dated: November 28, 2006
- ---------------------------
Robert Saunders
President and Chief Executive Officer
/s/ Michael Boswell Dated: November 28, 2006
- ---------------------------
Michael Boswell
Director & Acting Chief Accounting Officer
46
/s/ Douglas C. MacLellan Dated: November 28, 2006
- ---------------------------
Douglas C. MacLellan
Vice-chairman of the Board
/s/ Mark H. Elenowitz Dated: November 28, 2006
- ---------------------------
Mark H. Elenowitz
Director
/s/ Robert Rooks Dated: November 28, 2006
- --------------------------
Dr. Robert Rooks
Director
/s/ Ian Fraser Dated: November 28, 2006
- --------------------------
Ian Fraser
Director
Dated:
- --------------------------
Victor Bolton
Director
/s/ Daryl Horton Dated: November 28, 2006
- --------------------------
Darryl Horton
Director
47
Exhibit 31.1
Certification of Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act and Rule 13a-14(a)
or 15d-14(a) under the Securities Exchange Act of 1934
I, Robert Saunders, certify that:
1. I have reviewed this Annual Report on Form 10-KSB of Edgewater Foods
International, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the small business issuer as of, and for, the periods presented in this
report;
4. The small business issuer's other certifying officer and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e) for the small
business issuer and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the small
business issuer, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the period
in which this report is being prepared;
b) Evaluated the effectiveness of the small business issuer's disclosure
controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as
of the end of the period covered by this report based on such
evaluation; and
c) Disclosed in this report any change in the small business issuer's
internal control over financial reporting that occurred during the
small business issuer's most recent fiscal quarter (the small business
issuer's fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect,
the small business issuer's internal control over financial reporting;
and
5. The small business issuer's other certifying officer and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the small business issuer's auditors and the audit committee
of the small business issuer's board of directors (or persons performing
the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the small business issuer's
ability to record, process, summarize and report financial information
; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the small business issuer's
internal control over financial reporting.
Date: November 28, 2006
By: /s/ Robert Saunders
- ------------------------
Robert Saunders
Chief Executive Officer
Exhibit 31.2
------------
Certification of Acting Chief Accounting Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act and Rule 13a-14(a)
or 15d-14(a) under the Securities Exchange Act of 1934
I, Michael Boswell, certify that:
1. I have reviewed this Annual Report on Form 10-KSB of Edgewater Foods
International, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the small business issuer as of, and for, the periods presented in this
report;
4. The small business issuer's other certifying officer and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e) for the small
business issuer and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the small
business issuer, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the period
in which this report is being prepared;
b) Evaluated the effectiveness of the small business issuer's disclosure
controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as
of the end of the period covered by this report based on such
evaluation; and
c) Disclosed in this report any change in the small business issuer's
internal control over financial reporting that occurred during the
small business issuer's most recent fiscal quarter (the small business
issuer's fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect,
the small business issuer's internal control over financial reporting;
and
5. The small business issuer's other certifying officer and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the small business issuer's auditors and the audit committee
of the small business issuer's board of directors (or persons performing
the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the small business issuer's
ability to record, process, summarize and report financial information
; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the small business issuer's
internal control over financial reporting.
Date: November 28, 2006
By: /s/ Michael Boswell
-----------------------
Michael Boswell
Acting Chief Accounting Officer
Exhibit 32.1
------------
Written Statement of the Chief Executive Officer and Acting Chief Accounting
Officer Pursuant to 18 U.S.C. Section 1350
In connection with the filing of the Annual Report on Form 10-KSB for the fiscal
year ended August 31, 2006 (the "Report") by Edgewater Foods International, Inc.
("Registrant"), the undersigned hereby certifies that, to the best of his
knowledge:
1. The Report fully complies with the requirements of section 13(a) or 15(d) of
the Securities Exchange Act of 1934, as amended, and
2. The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
Registrant.
Date: November 28, 2006
/s/ Robert Saunders
- -------------------
Robert Saunders
Chief Executive Officer
/s/ Michael Boswell
- -------------------
Michael Boswell
Acting Chief Accounting Officer
A signed original of this written statement required by 18 U.S.C. Section 1350
has been provided to Edgewater Foods International, Inc and will be retained by
Edgewater Foods International, Inc and furnished to the Securities and Exchange
Commission or its staff upon request.