Attached files

file filename
EX-32.1 - CERTIFICATION - OCEAN SMART, INC.ex32one.htm
EX-31.1 - CERTIFICATION - OCEAN SMART, INC.ex31one.htm
EX-32.2 - CERTIFICATION - OCEAN SMART, INC.ex32two.htm
EX-31.2 - CERTIFICATION - OCEAN SMART, INC.ex31two.htm
 
 


 

 
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549

FORM 10-Q
(Mark One)

[x]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended November 30, 2009


[  ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______________ to _______________

Commission File Number
 
Ocean Smart, Inc.
(Exact name of registrant as specified in its charter)

Nevada
 
20-3113571
(State or other jurisdiction
of incorporation or organization)
 
(IRS Employer Identification No.)

US Representative Office
400 Professional Drive, Suite 310, Gaithersburg, Maryland 20878 
(Address of principal executive offices (zip code))

(250) 757-9811
 (Issuer's telephone number)

(Former address)

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X ] No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one)
 
Large Accelerated Filer
   
Accelerated Filer
 
Non-accelerated filer
   
Smaller reporting company
X


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934) Yes [  ] No [X]

As of January 13, 2010, there were 26,370,147 shares of Common Stock, par value $0.001 outstanding, 7,773,998 shares of Series A Preferred Stock, par value is $.001, 207 shares of Series B Preferred Stock, par value is $.001, 747,870 shares of Series C Preferred Stock, par value is $.001 and 304,558 shares of Series D Preferred Stock, par value is $.001.

 


 
 

 


 

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION
  3
   
Item 1.  Financial Statements
  3
   
Consolidated Balance Sheets at November 30, 2009 (unaudited) and August 31, 2009
3
   
Unaudited Consolidated Statements of Operations for the three months ended November 30, 2009 and  2008
4
   
Unaudited Consolidated Statements of Cash Flows for the  three months ended November 30, 2009 and  2008
5
   
Unaudited Notes to Consolidated Financial Statements
6
   
Item 2.  Management’s Discussion and Analysis or Plan of Operation
10
   
Item 3.  Quantitative and Qualitative Disclosures About Market Risk
14
   
Item 4T. Controls and Procedures
14
   
   
PART II – OTHER INFORMATION
  16
   
Item 1.  Legal Proceedings
16
   
Item 1A. Risk Factors
16
   
Item 2.  Unregistered Sales of Equity Securities And Use Of Proceeds
16
   
Item 3.  Defaults Upon Senior Securities
17
   
Item 4.  Submission Of Matters To A Vote Of Security Holders
17
   
Item 5.  Other Information
17
   
Item 6.  Exhibits
17
   



 
2

 


 
PART I – FINANCIAL INFORMATION

OCEAN SMART, INC.
       
CONSOLIDATED BALANCE SHEETS
       
NOVEMBER 30 and AUGUST 31, 2009
       
             
   
November 30,
   
August 31,
 
   
2009
   
2009
 
   
(unaudited)
       
ASSETS
       
             
Current assets:
           
Cash
  $ 17,777     $ 12,356  
Accounts receivable, net
    207,598       233,376  
Inventory
    554,216       553,311  
Other current assets
    47,045       52,056  
                 
  Total current assets
    826,636       851,099  
                 
Property, plant and equipment, net
    3,285,291       3,350,709  
                 
Long-term inventory
    1,099,448       1,075,463  
                 
Investments in other assets
    25,063       9,335  
                 
Total assets
  $ 5,236,438     $ 5,286,606  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
         
                 
Current liabilities:
               
Short term debt
  $ 165,624     $ 161,932  
Line of credit
    76,940       75,194  
Current portion of long term debt
    345,222       354,318  
Accounts payable and accrued liabilities
    1,211,188       1,111,503  
                 
Total current liabilities
    1,798,975       1,702,947  
                 
Long term debt, net of current portion
    615,556       598,306  
                 
Total liabilities
    2,414,531       2,301,253  
                 
Stockholders' equity
               
Series A Preferred  stock, par $0.001, 10,000,000
    7,774       7,774  
  authorized, 7,773,998 issued and outstanding
               
  at November 30 and August 31, 2009, respectively
               
Series B Preferred  stock, par $0.001, 220
    -       -  
  authorized, 207 issued and outstanding  at
               
 November 30 and August 31, 2009, respectively
               
Series C Preferred  stock, par $0.001, 1,000,000
    748       748  
  authorized, 747,870 issued and outstanding
               
  at November 30 and August 31, 2009, respectively
               
Series D Preferred  stock, par $0.001, 380,000
    305       305  
  authorized, 304,558 issued and outstanding
               
  at November 30 and August 31, 2009, respectively
               
Common stock, par $0.0001, 100,000,000 authorized,
    2,592       2,592  
  25,920,296  issued and outstanding at November 30
               
  and August 31, 2009, respectively
               
Additional paid in capital
    28,378,004       28,372,640  
Accumulated deficit
    (25,274,455 )     (25,008,570 )
Accumulated other comprehensive income (loss) -
               
 foreign exchange adjustment
    (293,061 )     (390,136 )
                 
Total stockholders' equity
    2,821,907       2,985,353  
                 
Total liabilities and stockholders' equity
  $ 5,236,438     $ 5,286,606  

See accompanying notes to consolidated financial statements

 
3

 


OCEAN SMART, INC.
 
CONSOLIDATED STATEMENTS OF OPERATIONS
 
THREE MONTHS ENDED NOVEMBER 30, 2009 and 2008
 
(unaudited)
 
             
   
2009
   
2008
 
             
             
Revenue
  $ 573,088     $ 577,105  
Cost of goods sold
    523,472       640,319  
                 
Gross profit (loss)
    49,616       (63,214 )
                 
Expenses:
               
      General and administrative expenses
    186,211       187,567  
      Salaries and benefits
    109,495       84,925  
                 
Total operating expenses
    (295,706 )     (272,492 )
                 
Loss from operations
    (246,090 )     (335,706 )
                 
Other income (expense):
               
      Interest (expense), net
    (18,061 )     (11,240 )
      Other income (expense)
    (1,734 )     -  
                 
       Total other income (expense), net
    (19,795 )     (11,240 )
                 
Net loss
  $ (265,885 )   $ (346,946 )
                 
Net loss applicable to
               
      common shareholders
  $ (265,885 )   $ (346,946 )
                 
Foreign currency translation
    97,076       (698,079 )
                 
Comprehensive loss
  $ (168,809 )   $ (1,045,025 )
                 
Net loss per Share
               
      Basic and diluted
  $ (0.01 )   $ (0.01 )
                 
Weighted average shares outstanding
               
      Basic and diluted
    25,920,296       24,479,150  

See accompanying notes to consolidated financial statements

 
4

 


OCEAN SMART, INC.
 
CONSOLIDATED STATEMENTS OF CASHFLOWS
 
THREE MONTHS ENDED NOVEMBER 30, 2009 and 2008
 
(unaudited)
 
             
   
2009
   
2008
 
             
Cash flows from operating activities:
           
             
Net loss
  $ (265,885 )   $ (346,946 )
                 
Adjustments to reconcile net loss to net cash used in operating activities:
               
Depreciation and amortization
    139,741       121,713  
Stock option expense
    5,363       5,363  
                 
Changes in current assets and liabilities:
               
Accounts receivable
    25,778       (30,046 )
Prepaid expenses
    5,011       30,835  
Other current assets
    -       -  
Loan receivable, related party
    -       (55,569 )
Inventory
    45,853       41,214  
Accounts payable
    99,685       (111,757 )
                 
Net cash provided by (used in) operating activities
    55,546       (345,193 )
                 
Cash flows from investing activities:
               
Other assets
    (15,728 )     -  
Purchase of property, plant and equipment
    (5,656 )     (80,883 )
                 
Net cash used in investing activities
    (21,384 )     (80,883 )
                 
Cash flows from financing activities:
               
                 
Net proceeds (payments) from line of credit
    (376 )     (1,748 )
Payment of short term debt
    (879 )     -  
Proceeds from long term debt
    -       (10,863 )
                 
Net cash used in by financing activities
    (1,255 )     (12,611 )
                 
Foreign currency translation effect
    (27,486 )     18,801  
                 
Net increase (decrease) in cash
    5,421       (419,886 )
                 
Cash, beginning of period
    12,356       712,298  
                 
Cash, end of period
  $ 17,777     $ 292,412  
                 
Supplemental disclosure of cash flow information
               
                 
Net cash paid:
               
Interest
  $ -     $ -  
Income taxes
  $ -     $ -  
                 
Non cash transactions:                 
Acqusition of granscal        87,759   

 
See accompanying notes to consolidated financial statements
 
5

 

OCEAN SMART, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Note 1.  Basis of Presentation, Organization and Nature of Operations

Ocean Smart, Inc. (or “Ocean Smart”) 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 20 years has 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).

We have evaluated subsequent events through January 13, 2010, the date of the consolidated financial statements were available to be issued.

Note 2.  Going Concern

Prior to the completion of our initial Preferred Stock Financing, 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 November 30, 2009, we had a cash balance of approximately $17,800 and an accumulated deficit of approximately $25,300,000 including a net loss of roughly $266,000 for the first three months of our 2010 fiscal year.  After the completion of the Series D preferred financing in May 2008, management believed that we had adequate funds to maintain our business operations into our 2010 fiscal year and/or until we become cash flow positive, but we continued to suffer operational losses in our 2009 and 2008 fiscal years. 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 of expanding our operations.  In fact,   based on our current estimates of future sales and capital costs of expanding our farms in order to increase future crop yields, we will require additional financings to continue expand our operations.  Based on these factors, there is substantial doubt about our ability to continue as a going concern.

Note 3.  Significant Accounting Policies

Basis of Presentation

Our unaudited consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America for reporting interim financial information and the rules and regulations of the Securities and Exchange Commission. In management’s opinion, all adjustments necessary for a fair presentation of the financial position and results of operations for the periods presented have been included. All such adjustments are of a normal recurring nature. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended August 31, 2009. Results of operations for the three months ended November 30, 2009, are not necessarily indicative of the operating results for the full accounting year or any future period.

Reclassifications
 
Certain amounts in the 2008 financial statements have been reclassified to conform to the 2009 financial statements presentation.
 
 
 
 
 
6

 

 
Note 4.  Short Term Debt

Included in short-term debt at November 30, 2009 and August 31, 2009 are estimated royalties of US$62,669 and US$60,948 payable to a third party from whom the former sole shareholder of Island Scallops originally acquired the shares of Island Scallops.  The 1992 share purchase agreement (for Island Scallops) provided that the third party was to receive 3% of revenues from Island Scallops 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 our inventory (including broodstock) in the amount of CDN$350,000 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 US$62,669 as a current liability and we plan to pay it with available funds in the near future.
 
 Note 5. Long Term Debt

These consolidated financial statements include a Western Diversification Program non-interest bearing loan to Island Scallops that originally required repayment equal to 12% of gross revenues from our scallop sales, payable semi-annually, with no specified due date.  The repayment terms have been formally amended several times.  Most recently, as of February 28, 2009, we reached an agreement with the Western Diversification Program to revise the repayment terms of the remaining balance of $392,154 (representing $141,902 overdue and a balance of $250,252).  Beginning February 28, 2009, we began repaying the overdue amount at rate of $942 (CDN$1,000) per month and were scheduled to continue through December 31, 2009.  Commencing January 31, 2010, we will begin paying $4,708 (CDN$5,000) per month towards the overdue balance.  Starting January 31, 2011, our monthly repayment amount will be the greater of 4% of Island Scallops’ gross monthly revenues or $9,416 (CDN$10,000) per month.  Under the terms of the modified agreement, the overdue amount will also bear interest at an annual rate of 3%.  Starting January 31, 2012, we will begin repaying the balance of $250,252 at the greater of 4% of Island Scallops gross monthly revenues or $9,416 (CDN$10,000) per month.  At November 30, 2009 and August 31, 2009, the balance due is $US397,892 and US$388,428, of which US$ 140,151 and US$138,107 is reflected in the current portion of long term debt and the remaining balance of US$257,741 and US$250,321 is reflected as long term debt.

These consolidated financial statements include Island Scallops’ unsecured 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 revenues of Island Scallops until the earlier of full repayment or December 1, 2012.  If at December 1, 2012, Island Scallops has not earned sufficient revenues to repay the original loan amount, the remaining portion of the loan is to be forgiven.  Amounts currently due at November 30, 2009, bear interest at a rate of 1% per month.  At November 30, 2009, 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 $144,303 that they claim is owed under this loan agreement.  As such, at November 30, 2009, US$165,627 is included in accounts payable and accrued liabilities and the remaining principal balance of US$205,071 is reflected in the current portion of long term debt. We are seeking to renegotiate the repayment terms with NRC.

Note 6.  Contingent Liabilities

Neither we nor our wholly owned subsidiary maintain insurance covering the replacement of our inventory. Consequently, we are exposed to financial losses or failure as a result of this risk.

 
7

 

Note 7.   Stock Option and Warrants

Stock Options
 
In August 2005, our Board of Directors approved the “Edgewater Foods International 2005 Equity Incentive Plan.” The Board of Directors originally 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 Ocean Smart. Per the terms of the plan, the aggregate number of shares available for granting awards has increased to 8,000,000 shares. As of November 30, 2009, our Board of Directors had authorized the issuance of 5,892,000 options to employees.
 
During the three months ended November 30, 2009, $5,363 in stock option expenses was recognized.  An additional $5,363 will be recognized in the three month period ending February 28, 2010.
 
Stock option activity during the three months ended November 30, 2009, was as follows:
 
 
Number of Shares
 
Weighted Average Exercise Price
Outstanding, August 31, 2009
 
5,892,000
 
$
1.03
    Granted
 
--
   
--
    Exercised
 
--
   
--
    Forfeited
 
--
   
--
    Expired
 
--
   
--
Outstanding, November 30, 2009
 
5,892,000
 
$
1.03
Exercisable, November 30, 2009
 
5,892,000
 
$
1.03
 
At November 30, 2009, 62,000 of the exercisable options expire in August 2010, 3,200,000 of the exercisable options expire in March 2012, 190,000 of exercisable options expire in April of 2012, 2,120,000 of the exercisable options expire in August 2012, 100,000 of the exercisable options expire in September 2014 with the remaining balance of 220,000 having an expiration date of August 2015.
 
Warrant activity during the three months ended November 30, 2009, was as follows:
 
 
Number of Warrants
 
Weighted Average Exercise Price
Outstanding, August 31, 2009
 
803,285
 
$
1.88
    Granted
 
--
   
--
    Exercised
 
--
   
--
    Forfeited
 
--
   
--
    Returned and exchanged
 
--
   
--
    Expired
 
--
   
--
Outstanding, November 30, 2009
 
803,285
 
$
1.88
Exercisable, November 30, 2009
 
803,285
 
$
1.88

At November 30, 2009, if all options and warrants were exercised and all shares of preferred stock were converted, the company would have 58,908,486 shares of common stock outstanding.

Note 8. Subsequent Events

On December 31, 2009, we issued an aggregate of 449,851shares of common stock, as dividends, to the holders our Series A Convertible Preferred Stock, Series B Convertible Preferred Stock and Series C Convertible Preferred Stock. The number of shares issued was calculated at a rate of 8% for the Series A and 6% for the Series B and Series C Preferred Stock, per annum (subject to a pro rata adjustment) of the liquidation preference amount payable in shares equal to 90% of the quotient of (i) the dividend payment divided by (ii) the average of the VWAP for the 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 $324,800 and the total aggregate value of the transaction was recorded as a preferred stock dividend.
 
 
 
 
 
8

 
 

 
Preferred Stock Dividends Issued on December 31, 2009

Date
 
Preferred Stock
Common Shares Issued
 Dividend Value
         
12/31/2009
 
Series A
325,575
 $                  233,500
12/31/2009
 
Series B
86,691
 $                    62,600
12/31/2009
 
Series C
37,585
 $                    27,100

 
 
 
 
 
 
 
 
 


 
 
9

 

Item 2
MANAGEMENT’S DISCUSSION AND ANALYSIS

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.

Overview

During the first quarter of our 2010 fiscal year, we continued the harvesting, processing and sale of our remaining 2005 and 2006 year classes of scallops and began the harvesting, processing and sale of our 2007 scallops.  In addition, we continued the transfer of 2008 year-class scallops to larger grow-out nets on our farm sites.  We also continued the process of transferring our 2009 scallop class to our farm sites (from onshore nursery ponds).  We refer to the year-class of scallops based on when the scallops were spawned.

In addition to scallop sales, we plan on generating additional revenues via the sale of scallop and other shellfish seed (including mussels and oysters).  In the future, management may place emphasis on generating additional revenues via equipment sales to other aquaculture businesses.  

As was the case in the previous fiscal year, we continued to struggle to achieve positive operational cash flows during the first quarter of 2010.  Given our recent operational history, it is likely that we will continue to struggle to achieve positive cash flows in the near future. As a result, management continued to investigate a variety of methods to either increase sales or develop new business lines or joint ventures to improve our margins.  As part of this process, we are still searching for strategic acquisitions and/or business opportunities with seafood industry partners or additional strategic investors to enable the company to capitalize on our existing hatchery technology and expertise. Part of this process may involve locating opportunities to increase near-term revenues via the sale of shellfish seed or shellfish larvae produced in our hatchery.  Our initial focus is on companies that we believe could significantly benefit from our hatchery technology and expertise and that would add additional revenue and/or have a geographically desirable location.  We are evaluating both potential acquisitions and partnerships and/or assets sales or purchases with such companies to reach our goal of capitalizing on our hatchery technology, which should increase cash flows.   We are currently focusing our efforts on Chinese companies.  Aside from the November 2008 acquisition of Granscal Sea Farms Ltd., as of the date of this filing, no new definitive agreements have been signed.   Management currently plans to fund any future acquisition via either debt financing or additional equity financings, although we cannot guarantee that such financing will be available when it is required or on terms that we consider to be favorable.  Alternatively, management believes that opportunities exist where we could provide our technology and knowledge to a joint venture that is funded by the other party.

We are also continuing our discussions with various individuals and First Nations groups about possible partnerships or joint ventures.  Originally, management believed that we would be able to formalize our first joint venture with a First Nations group as early as the start of the 2010 calendar year.  To date, we have yet to finalize a revenue producing First Nations joint venture.
 
During 2009, we completed a sales agreement with Fanny Bay Oyster Co., a division of Taylor Shellfish Farms of Shelton, Washington (an international seafood distributor and the largest shellfish company on the West Coast).  The order includes live scallops, fresh scallop meat and frozen scallops that will be packaged and delivered in various scallop products (including live in-the-shell, frozen half-shell and fresh meat).   As a result of this order, Fanny Bay has effectively become the exclusive distributor of our scallops outside the European market.  This order has reduced costs and encouraged additional wholesalers within the Taylor network to carry our scallops.
 
 
 
 
10

 

 
During the harvesting of our 2005, 2006 and 2007 scallops classes and transfer and handling of our 2008 scallop classes, we were able to continue to review our mortality rates and update our class size projections.  Based on this review and recent sales, we expect to bring the remaining 47,574 of our 2005 and 2006 year class scallops to reach market in the 2010 calendar year.  As of our most recent review of our scallop inventory, we currently believe that our 2007 year class should yield up to 3 million scallops at full maturity/harvest. Although this is significantly lower than initial estimates, it will still represent our largest year class to date.

During 2009, we continued to grow the 2008 scallop class in pearl nets.  We originally expected to produce up to 24 million full-size scallops in this year class, but due to survival problems associated with our hatchery spawns and funding limitations, we now expect to produce as few as 1.2 million full-size scallops.   Based on our initial review of the hatchery spawn, we believe the mortality problems were the result of large blooms of toxic marine algae at the critical stage prior to metamorphosis of approximately 600 million scallop larvae.   These blooms corresponded to high levels of Paralytic Shellfish Poisoning in our ocean farms and although it did not harm any of our juvenile or mature scallops, it is believed that pre-metamorphic larvae are particularly susceptible. Procedures are now in place to prevent the introduction of toxic algae into the hatchery system in the coming years.

During the 2009 spawning season (February and March 2009), a total of roughly 780 million pre metamorphic larvae were produced.  As a result of a colder than normal seawater temperatures, onshore nursery growth was delayed in April and May.  We transferred more than 7 million 3-5 mm scallop seed into our ocean farms during the summer of 2009. As of November 30, 2009, 6 million 2009 scallops (of all sizes) were growing in our ocean farms.
 
As a result of a review of our business plan and sales and marketing efforts to date, we currently plan to harvest and sell approximately 3 million full-size scallops over the 12 months ending December 2010.  In addition, we estimate that our 2008 year class will produce roughly 1.2 million full-size scallops. Given our lower than expected revenues and negative cash flows during 2009 and the first quarter of 2010, the size of our 2009 and 2010 year classes will (in many ways) be determined by our ability to generate positive cash flows and/or our ability to locate additional financing.  As a result of our lower than expected sales and yields, we are still evaluating the cash available for farming and infrastructure costs related to transferring the remaining portion of the 2009 scallop class and to expanding our future yields.  Based on our current review of sales and marketing conditions, we believe that in the best case scenarios our scallops will yield as much as USD$1.00 of revenue per scallop; in 2009 our yield was approximately  US$1.05 per scallop.  The yield per scallop may increase if we are able to sell a greater percentage of live scallops.  We are beginning to place a greater emphasis on scallop seed sales and it is possible, although we cannot make any assurances, that we will be able to produce and/or sell a significantly larger amount of scallop seed in the near future.  As described above, our current estimated inventory size and projected sales cycle is summarized in the following table as of November 30, 2009.
 
  
 
 
 
 
 
 
11

 

 

   
Estimated Inventory (value) to be Sold
Year-class
Accumulated Cost to Date
next 12 months
next 24 months
beyond 24 months
2005
             14,843
 $             14,843
$                      - 
$                      - 
2006
            86,031
           86,031
 -
2007
            755,569
            453,342
            302,227
2008
            403,668
            403,668
2009
             393,552
 -
            393,552
         
Totals
$         1,653,663
$          554,216
$           302,227
$           797,220



Please note that the above table represents estimates of inventory to be sold over the next 12 months, 24 months and beyond.  It is possible that actual results could differ significantly from our estimates.

We periodically evaluate the carrying value of our inventory for impairment whenever events or changes in circumstances indicate that such carrying values may not be recoverable.  Management uses its best judgment based on the current facts and circumstances relating to its business when determining whether any significant impairment factors exist.  As of November 30, 2009, management performed an undiscounted cash flow analysis to determine that there was no impairment in the carrying value our scallop inventory.    There can be no assurance, however, that market conditions will not change or demand for our products will continue or allow us to realize the value of our long-lived assets and prevent future impairment.

 If our mortality rates are better than our current projections, our yield and revenues from the 2007 and 2008 scallop class could be higher; conversely, if our mortality rates are worse than we anticipate our revenues for this period could be lower than we anticipate.  In addition, changes in the anticipated growth rates, projected harvesting cycles and large fluctuations in the price of scallops or the US-Canadian exchange rate could impact our current projections.  Furthermore, if we cannot achieve our estimated product mixture (live/fresh/frozen) than our average sales price per scallop will be lower.  Alternatively, if we are able to sell a large percentage of high yield products (live or frozen on the half shells) than our average price per scallop will be higher.  Given our failure to achieve positive cash flows in 2009, the size of our future crops could be smaller than originally projected.  If so, our future revenues and yields could be adversely impacted.

Despite our efforts to improve our cost of goods relative to our selling price, we are still operating at a low or negative margin.    Although we conducted a top-down operations review and originally believed that we had indentified certain operational inefficiencies that contributed to this low or negative operating margin, we have yet to successfully reduce our cost of goods and achieve positive cash flow.  Management is hopeful that we could achieve positive cash flow at some point in our 2010 fiscal year.  However, given our recent operational history, it is likely that we will continue to struggle to achieve positive cash flows in the near future.

Based on our current estimates of near-term sales, capital costs of expanding our farms to increase future crop yields and capital requirement for near-term operations, we will require additional financings to continue our expansion.  As we have yet to raise additional capital and our sales have increased at a slower than expected pace, we have scaled back some of our expansion plans and will likely have to further scale back the plans outlined herein.  We now plan to try and align our future expansions with our ability to generate positive cash flows from our current scallop crops and/or our ability to locate additional financing.  As a result of our failure to achieve positive cash flows in 2009, we will require additional capital to complete our expansion plans.  Additionally, management intends to place a greater emphasis on increasing scallop and other shellfish seed sales in 2010 in order to generate additional cash that could be used in operations.  If we are unable to generate more cash from sales and/or financings, we may need to further modify our business plans.
 
 
 
 
12

 

 
Comparison of results for the three months ended November 30, 2009 and 2008.

Revenues.  Revenues for the three months ended November 30, 2009, were approximately $573,000.  We had revenues of approximately $577,000 for the three months ended November 30, 2008.  This is a decrease of approximately $4,000 or 0.70%.   Revenue generated by scallop sales (only) increased almost 49% (in terms of Canadian dollars).  In the first quarter of 2009, scallop sales represented 90% of our overall sales.  Although our overall volume of scallops sales increased over the previous fiscal year, our average price per scallop remained relatively unchanged due to the agreement with Fanny Bay.  During the three months ended November 30, 2008, management placed a greater emphasis on equipment sales to other aquaculture companies and shellfish seed sales.  Revenue from non-scallop sales represented almost 44% of revenue in 2008 as compared to roughly 10% in 2009.

Gross profit (loss). Gross profit for the three months ended November 30, 2009 was approximately $50,000, an increase of approximately $113,000 as compared to gross loss of roughly $63,000 for the three months ended November 30, 2008.  We believe that we are beginning to capitalize on management’s continued focus on both the expansion and development of larger scallop crops and larger scallop yields for future years as well as our sales and marketing agreement with Fanny Bay.  Additionally, management is continuing to attempt to address issues that resulted in higher cost of inventory and seed costs.  Management believes that in the future our sales may continue to increase while costs of goods sold will only increase slightly. As a result, we are hopeful that our margins will improve in future years.  Despite our continuing losses over the previous fiscal years, we are attempting to continue to focus resources on maintaining, developing and tending to our scallop crops and shellfish seed.  We believe that we have already seen the initial benefits in increased sales of our own scallops and if we are able to locate adequate working capital, than we can continue to see additional benefits from our efforts in developing larger crops and expanding our seed sales in the 2010 fiscal year and beyond.  If we are unable to locate adequate working capital and/or generate positive cash flow that can be used for overall business development, we may not be able to capitalize on recent developments and gross losses could further increase in future periods.  Additionally,  given our recent operational history, it is likely that we will continue to struggle to achieve positive cash flows in the near future.

Operating expenses.  Operating expenses for the three months ended November 30, 2009, were approximately $296,000.  Our operating expenses were approximately $273,000 for the three months ended November 30, 2008.   Management expects that general and administrative expenses (excluding stock options expense) may slightly rise as we continue to expand our operations.  However, if adequate working capital is available, we believe that we now have the necessary general and administrative staff in place to maintain an expansion into scallop crops to more than 20 million.

Other income (expense), net.  Interest expense for the three months ended November 30, 2009, was approximately $18,000.  Interest expense for the three months ended November 30, 2008, was approximately $11,000.  Other income for the three months ended November 30, 2009, was roughly $2,000 as opposed to other expense of nil for the three months ended November 30, 2008.

Net loss.  As a result of the above, the net loss for three months ended November 30, 2009, was approximately $266,000 as compared to a net loss of approximately $347,000 for the three months ended November 30, 2008.
 
Liquidity and Cash Resources.  At November 30, 2009, we had a cash balance of approximately $18,000.   Prior to the completion of our initial preferred stock financing, 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.   After the completion of the Series D preferred financing in May 2008, management believed that we had adequate funds to maintain our business operations into our 2010 fiscal year and/or until we become cash flow positive, but we continued to suffer operational losses in our 2009 and 2008 fiscal years. Until our operations are able to demonstrate and maintain positive cash flows, we will require additional working capital to fund our ongoing operations and execute our business strategy of expanding our operations.  As we have yet to raise additional capital and our sales have increased at a slower than expected pace, we have scaled back some of our expansion plans and will likely have to further scale back the plans outlined herein.  We now plan to try and align our future expansions with our ability to generate positive cash flows from our current scallop crops and/or our ability to locate additional financing.  As a result of our failure to achieve positive cash flows in 2009, we will require additional capital to complete our expansion plans.  If we are unable to generate more cash from sales and/or financings, we may need to further modify our business plans.  Based on these factors, there is substantial doubt about our ability to continue as a going concern.  Management plans to address this situation by utilizing our new sales agreements, improved processing plant, recent harvesting and sorting experience and increasing scallop and shellfish seed sales to increase our revenues and to try to begin achieving cash flow positive operations.  In addition, Management believes that opportunities exist with other aquaculture companies, equipment vendors, seafood distributors and/or First Nations groups that could result in possible partnerships, joint ventures, financings and/or acquisitions that could result in significantly improved cash flows or additional working capital.  Part of this process may involve locating opportunities to increase near-term revenues via the sale of shellfish seed or shellfish larvae produced in our hatchery.  Our initial focus is on companies that we believe could significantly benefit from our hatchery technology and expertise and that would add additional revenue and/or have a geographically desirable location.  We are evaluating both potential acquisitions and partnerships and/or assets sales or purchases with such companies in order to reach our goal of capitalizing on our hatchery technology in order to increase cash flows, but as of the date of this Report, have not entered into any formal agreements or conducted any formal negotiations with any such companies.   To date, we have been unable to achieve positive cash flows over any one fiscal year or locate additional financings in the first three months of our 2010 fiscal year.
 
 
 
13

 


ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable

ITEM 4T. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

We maintain disclosure controls and procedures designed to provide reasonable assurance that material information required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that the information is accumulated and communicated to our management, including our Chief Executive Officer and Acting Chief Accounting Officer, as appropriate to allow timely decisions regarding required disclosure. We performed an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Acting Chief Accounting Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on their evaluation, our management, including our Chief Executive Officer and Acting Chief Accounting Officer, concluded that our disclosure controls and procedures are effective in giving us reasonable assurance that the information we are required to disclose in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms and to ensure that such information is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

We do not expect that our disclosure controls and procedures will prevent all errors and all instances of fraud. Disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Further, the design of disclosure controls and procedures must reflect the fact that there are resource constraints, and the benefits must be considered relative to their costs. Because of the inherent limitations in all disclosure controls and procedures, no evaluation of disclosure controls and procedures can provide absolute assurance that we have detected all our control deficiencies and instances of fraud, if any. The design of disclosure controls and procedures also is based partly on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

Changes in Internal Control Over Financial Reporting

In our Management’s Report on Internal Control Over Financial Reporting included in the Company’s Form 10-K for the year ended August 31, 2009, management concluded that our internal control over financial reporting was effective as of August 31, 2009.

Management did however identify a significant deficiency; a significant deficiency is a deficiency, or a combination of deficiencies, that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of the registrant’s financial reporting.  Currently we do not have sufficient in-house expertise in US GAAP reporting.  Instead, we rely very much on the expertise and knowledge of external financial advisors in US GAAP conversion.  External financial advisors have helped prepare and review the consolidated financial statements.  Although we have not identified any material errors with our financial reporting or any material weaknesses with our internal controls, no assurances can be given that there are no such material errors or weaknesses existing.  To remediate this situation, we are seeking to recruit experienced professionals to augment and upgrade our financial staff to address issues of timeliness and completeness in US GAAP financial reporting.  In addition, we do not believe we have sufficient documentation with our existing financial processes, risk assessment and internal controls.  We plan to work closely with external financial advisors to document the existing financial processes, risk assessment and internal controls systematically.
 
 
 
 
14

 
 

We believe that the remediation measures we are taking, if effectively implemented and maintained, will remediate the significant deficiency discussed above.

Except as described above, there have been no changes in our internal controls over financial reporting that occurred during our last fiscal quarter to which this Quarterly Report on Form 10-Q relates that have materially affected, or are reasonably likely to materially affect our internal controls over financial reporting.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
15

 

 

PART II - OTHER INFORMATION
 
 
ITEM 1.   Legal Proceedings

None.

Item 1A. Risk Factors

Not applicable to smaller reporting companies.

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
 
(a)             Unregistered Sales of Equity Securities

 On December 31, 2009, we issued 325,575 shares of common stock to the investors of our April 12, May 30, June 30 and July 11, 2006 financings as payment of the semi-annual dividend per the terms of the Certificate of Designation of the Relative Rights and Preferences of 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, 1,500,000 for the May 30 financing, $1,550,000 for the June 30 financing and $1,450,000 for the July 11 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 20 trading days immediately preceding the date the dividend payment is due, but in no event less than $0.65.   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.


On December 31, 2009, we issued 86,691 shares of common stock to the investors of our January 16, 2007 financing as payment of the semi-annual dividend per the terms of the Certificate of Designation of the Relative Rights and Preferences of the Series B Convertible Preferred Stock.  The number of shares issued was based on the dividend payment at a rate of 6% per annum (subject to a pro rata adjustment) of the Liquidation Preference Amount ($1,416,000) payable in shares equal to 90% of the quotient of (i) the dividend payment divided by (ii) the average of the VWAP for the 20 trading days immediately preceding the date the dividend payment is due, but in no event less than $0.65.   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.


On December 31, 2009, we issued 37,585 shares of common stock to the investors of our November 5, 2007 financing as payment of the semi-annual dividend per the terms of the Certificate of Designation of the Relative Rights and Preferences of the Series C Convertible Preferred Stock.  The number of shares issued was based on the dividend payment at a rate of 6% per annum (subject to a pro rata adjustment) of the Liquidation Preference Amount (approximately $897,000) payable in shares equal to 90% of the quotient of (i) the dividend payment divided by (ii) the average of the VWAP for the 20 trading days immediately preceding the date the dividend payment is due, but in no event less than $0.65.   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.


(b)             Not Applicable.

(c)             Not Applicable
             
 
 
 
 
16

 

 

ITEM 3. Defaults upon Senior Securities

(a)             Not Applicable.

(b)             Not Applicable.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
None.


ITEM 5. OTHER INFORMATION
 
(a)             Not applicable.

(b)             Not applicable.

ITEM 6.  EXHIBITS

(a) The following exhibits are filed as part of this report.
           
 Exhibit No.
          Document
3.1
Articles of Incorporation, as amended.
   
3.2
Amended and Restated Bylaws (Incorporated by reference to Exhibit 3.2 to the Company’s Quarterly Report on Form 10-QSB filed on April 13, 2007).
   
31.1
Certification  of  Chief  Executive  Officer and Acting Chief Accounting Officer  required  by Rule 13a-14/15d-14(a) under the Exchange Act
   
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.
   



 
17

 


 

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date:   January 13, 2010
OCEAN SMART, INC.
   
 
By:   /s/  Robert Saunders
 
Robert Saunders,
 
Chief Executive Officer & President
   
 
By:   /s/  Michael Boswell
 
Michael Boswell,
Acting Chief Accounting Officer
 
 
 
 
 
 
 
 
 
 

 
 
18