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 February 28, 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
      FilerNon-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 April 9, 2009, there were 25,477,777 shares of Common Stock, par value
$0.0001 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
              3Item
      1.  Financial Statements
              3Consolidated
      Balance Sheets at February 28, 2009 (unaudited) and August 31,
      2008
              3Unaudited
      Consolidated Statements of Operations for the three and six months ended
      February 28, 2009 and February 29, 2008
              4Unaudited
      Consolidated Statements of Cash Flows for the  six months ended
      February 28, 2009 and  February 29, 2008
              5Unaudited
      Notes to Consolidated Financial Statements
              6Item
      2.  Management’s Discussion and Analysis or Plan of
      Operation
              12Item
      3.  Quantitative and Qualitative Disclosures About Market
      Risk
              18Item
      4T. Controls and Procedures
              18PART
      II – OTHER INFORMATION
              19Item
      1.  Legal Proceedings
              19Item
      1A. Risk Factors
              19Item
      2.  Unregistered Sales of Equity Securities And Use Of
      Proceeds
              19Item
      3.  Defaults Upon Senior Securities
              20Item
      4.  Submission Of Matters To A Vote Of Security
      Holders
              20Item
      5.  Other Information
              20Item
      6.  Exhibits
              20








2








PART
I – FINANCIAL INFORMATION





OCEAN
      SMART, INC.(FORMERLY
      EDGEWATER FOODS INTERNATIONAL, INC.)CONSOLIDATED
      BALANCE SHEETSFebruary
      28,
                
                
                August
      31,2009
                
                
                2008(unaudited)ASSETSCurrent
      assets:Cash
                
                $
                93,993
                
                
                $
                712,298Accounts
      receivable, net
                
                
                193,342
                
                
                
                195,402Inventory
                
                
                840,199
                
                
                
                1,290,702Other current assets
                
                
                57,427
                
                
                
                80,011Total
      current assets
                
                
                1,184,961
                
                
                
                2,278,413Property,
      plant and equipment, net
                
                
                3,211,435
                
                
                
                3,982,336Long-term
      inventory
                
                
                791,022
                
                
                
                986,327Loans
      receivable, related party
                
                
                155,165
                
                
                
                114,079Other
      assets
                
                
                8,647
                
                
                
                3,758Total
      assets
                
                $
                5,351,230
                
                
                $
                7,364,913LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilities:Short
      term debt
                
                $
                153,776
                
                
                $
                109,648Line
      of credit
                
                
                80,837
                
                
                
                124,766Current portion of long term debt
                
                
                329,713
                
                
                
                396,885Accounts payable and accrued liabilities
                
                
                897,412
                
                
                
                991,061Total
      current liabilities
                
                
                1,461,738
                
                
                
                1,622,360Long
      term debt, net current portion
                
                
                439,167
                
                
                
                548,004Total
      liabilities
                
                
                1,900,905
                
                
                
                2,170,364Stockholders'
      equitySeries
      A Preferred  stock, par $0.001, 10,000,000authorized,
      7,773,998 issued and outstandingat
      February 28, 2009 and August 31, 2008, respectively
                
                
                7,774
                
                
                
                7,774Series
      B Preferred  stock, par $0.001, 100 authorized,207
      issued and outstanding   at
                
                
                -
                
                
                
                -February
      28, 2009 and August 31, 2008, respectivelySeries
      C Preferred  stock, par $0.001, 1,000,000authorized,
      747,870 issued and outstandingat
      February 28, 2009 and August 31, 2008, respectively
                
                
                748
                
                
                
                748Series
      D Preferred  stock, par $0.001, 380,000authorized,
      304,558 issued and outstandingat
      February 28, 2009  and August 31, 2008,
    respectively
                
                
                305
                
                
                
                305Common
      stock, par $0.0001, 100,000,000 authorized,25,327,777  and
      24,479,150 issued and outstanding atFebruary
      28, 2009 and August 31, 2008, respectively
                
                
                2,533
                
                
                
                2,448Additional
      paid in capital
                
                
                27,862,817
                
                
                
                27,497,781Accumulated
      deficit
                
                
                (23,501,360
                )
                
                
                (22,103,314
                )Accumulated
      other comprehensive income (loss) -foreign
      exchange adjustment
                
                
                (922,492
                )
                
                
                (211,193
                )Total
      stockholders' equity
                
                
                3,450,325
                
                
                
                5,194,549Total liabilities and stockholders' equity
                
                $
                5,351,230
                
                
                $
                7,364,913







See
accompanying notes to consolidated financial statements


3







OCEAN
      SMART, INC.(FORMERLY
      EDGEWATER FOODS INTERNATIONAL, INC.)CONSOLIDATED
      STATEMENTS OF OPERATIONSTHREE
      AND SIX MONTHS ENDED FEBRUARY 28, 2009 and FEBRUARY 29,
    2008(unaudited)THREE
      MONTHS ENDED
                    
                    
                    SIX
      MONTHS ENDEDFEBRUARY
      28,
                    
                    
                    FEBRUARY
      29,
                    
                    
                    FEBRUARY
      28,
                    
                    
                    FEBRUARY
      29,2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008Revenue
                    
                    $
                    432,977
                    
                    
                    $
                    365,763
                    
                    
                    $
                    1,010,082
                    
                    
                    $
                    794,965Cost
      of goods sold
                    
                    
                    728,919
                    
                    
                    
                    493,421
                    
                    
                    
                    1,369,238
                    
                    
                    
                    1,028,271Gross
      profit (loss)
                    
                    
                    (295,942
                    )
                    
                    
                    (127,658
                    )
                    
                    
                    (359,156
                    )
                    
                    
                    (233,306
                    )Expenses:General and administrative expenses
                    
                    
                    337,966
                    
                    
                    
                    760,772
                    
                    
                    
                    525,533
                    
                    
                    
                    1,484,699Salaries and benefits
                    
                    
                    83,009
                    
                    
                    
                    93,258
                    
                    
                    
                    167,934
                    
                    
                    
                    188,492Total
      operating expenses
                    
                    
                    (420,975
                    )
                    
                    
                    (854,030
                    )
                    
                    
                    (693,467
                    )
                    
                    
                    (1,673,191
                    )Loss
      from operations
                    
                    
                    (716,917
                    )
                    
                    
                    (981,688
                    )
                    
                    
                    (1,052,623
                    )
                    
                    
                    (1,906,497
                    )Other
      income (expense):Interest income (expense), net
                    
                    
                    (11,788
                    )
                    
                    
                    2,693
                    
                    
                    
                    (23,028
                    )
                    
                    
                    6,699Other income (expense)
                    
                    
                    -
                    
                    
                    
                    (35,798
                    )
                    
                    
                    -
                    
                    
                    
                    28,310Total
      other income (expense), net
                    
                    
                    (11,788
                    )
                    
                    
                    (33,105
                    )
                    
                    
                    (23,028
                    )
                    
                    
                    35,009Net
      loss
                    
                    
                    (728,705
                    )
                    
                    
                    (1,014,793
                    )
                    
                    
                    (1,075,651
                    )
                    
                    
                    (1,871,488
                    )Dividend
      on preferred stock
                    
                    
                    (322,395
                    )
                    
                    
                    (310,476
                    )
                    
                    
                    (322,395
                    )
                    
                    
                    (310,476
                    )Deemed
      dividend for beneficialconversion
      feature
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (163,386
                    )Net
      loss applicable tocommon
      shareholders
                    
                    
                    (1,051,100
                    )
                    
                    
                    (1,325,269
                    )
                    
                    
                    (1,398,046
                    )
                    
                    
                    (2,345,350
                    )Foreign
      currency translation
                    
                    
                    (13,220
                    )
                    
                    
                    50,279
                    
                    
                    
                    (711,299
                    )
                    
                    
                    298,335Comprehensive
      loss
                    
                    $
                    (1,064,320
                    )
                    
                    $
                    (1,274,990
                    )
                    
                    $
                    (2,109,345
                    )
                    
                    $
                    (2,047,015
                    )Net
      loss applicable to common shareholder per shareBasic
      and diluted
                    
                    $
                    (0.04
                    )
                    
                    $
                    (0.06
                    )
                    
                    $
                    (0.06
                    )
                    
                    $
                    (0.10
                    )Weighted
      average shares outstandingBasic
      and diluted
                    
                    
                    25,173,250
                    
                    
                    
                    23,903,501
                    
                    
                    
                    24,890,581
                    
                    
                    
                    23,811,678





See
accompanying notes to consolidated financial statements










4










OCEAN
      SMART, INC.(FORMERLY
      EDGEWATER FOODS INTERNATIONAL, INC.)CONSOLIDATED
      STATEMENTS OF CASHFLOWSSIX
      MONTHS ENDED FEBRUARY 28, 2009 and FEBRUARY 29, 2008(unaudited)2009
                    
                    
                    2008Cash
      flows from operating activities:Net
      loss
                    
                    $
                    (1,075,651
                    )
                    
                    $
                    (1,871,488
                    )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
                    
                    
                    240,858
                    
                    
                    
                    286,956Stock
      option expense
                    
                    
                    10,726
                    
                    
                    
                    1,032,845Common
      stock issued for services
                    
                    
                    -
                    
                    
                    
                    49,900Inventory impairment
                    
                    
                    75,000
                    
                    
                    
                    -Changes
      in current assets and liabilities:Accounts
      receivable
                    
                    
                    2,060
                    
                    
                    
                    (24,187
                    )Prepaid
      expenses
                    
                    
                    22,584
                    
                    
                    
                    -Other
      current assets
                    
                    
                    -
                    
                    
                    
                    (16,587
                    )Loan
      receivable
                    
                    
                    (62,153
                    )
                    
                    
                    (33,887
                    )Inventory
                    
                    
                    282,564
                    
                    
                    
                    (321,797
                    )Accounts
      payable
                    
                    
                    (98,049
                    )
                    
                    
                    172,304Net
      cash used in operating activities
                    
                    
                    (602,061
                    )
                    
                    
                    (725,941
                    )Cash
      flows from investing activities:Other assets
                    
                    
                    (5,473
                    )
                    
                    
                    -Purchase of property, plant and equipment
                    
                    
                    (89,268
                    )
                    
                    
                    (813,761
                    )Net
      cash used in investing activities
                    
                    
                    (94,741
                    )
                    
                    
                    (813,761
                    )Cash
      flows from financing activities:Net proceeds (payments) from line of credit
                    
                    
                    (25,978
                    )
                    
                    
                    32,877Proceeds from short term debt
                    
                    
                    40,813
                    
                    
                    
                    -Payment of short term debt
                    
                    
                    (30,713
                    )
                    
                    
                    (829
                    )Proceeds from long term debt
                    
                    
                    -
                    
                    
                    
                    30,082Payment of long term debt
                    
                    
                    -
                    
                    
                    
                    (96,713
                    )Preferred stock issued for cash
                    
                    
                    -
                    
                    
                    
                    800,648Net
      cash provided (used in) by financing activities
                    
                    
                    (15,878
                    )
                    
                    
                    766,065Foreign
      currency translation effect
                    
                    
                    94,375
                    
                    
                    
                    141,031Net
      decrease in cash
                    
                    
                    (618,305
                    )
                    
                    
                    (632,606
                    )Cash,
      beginning of period
                    
                    
                    712,298
                    
                    
                    
                    1,656,868Cash,
      end of period
                    
                    $
                    93,993
                    
                    
                    $
                    1,024,262Supplemental
      disclosure of cash flow informationNon
      cash transactionsIssuance
      of stock for dividends
                    
                    $
                    322,395
                    
                    
                    $
                    310,476Acqusition
      of Granscal assets for debt and common stock
                    
                    $
                    85,759
                    
                    
                    $
                    -Net
      cash paidInterest
                    
                    $
                    -
                    
                    
                    $
                    -Income
      taxes
                    
                    $
                    -
                    
                    
                    $
                    -





See
accompanying notes to consolidated financial statements









5







OCEAN
SMART, INC.




(FORMERLY
EDGEWATER FOODS INTERNATIONAL, INC.)




NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





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





Ocean
Smart, Inc. (formerly 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 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).





On
January 12, 2009, we held our annual shareholder meeting where our shareholders
voted by proxy to approved changing our corporate name to Ocean Smart,
Inc.  The name change became effective on March 3, 2009 however we
were not notified by the state of Nevada until March 30,
2009.  Accordingly, we reported the name change
on a Current Report on Form 8-K with the Securities and Exchange
Commission and filed it on March 30, 2009.





Note
2.  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, 2008. Results of operations for the three and six months ended February 28,
2009, are not necessarily indicative of the operating results for the full
accounting year or any future period.




Inventory
 
 Edgewater
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.
 
 In
accordance with SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived
Assets, the Company evaluates the carrying value of its inventory for
impairment whenever events or changes in circumstances indicate that such
carrying values may not be recoverable.  The Company uses its best
judgment based on the current facts and circumstances relating to its business
when determining whether any significant impairment factors
exist.  The Company’s management performs an undiscounted cash flow
analysis to determine if impairment exists. If impairment exists, the Company
measures the impairment based on the difference between the inventory’s carrying
amount and its fair value, and the impairment is charged to operations in the
period in which the inventory impairment is determined by management. Based on
its analysis, the Company believes that impairment of $75,000 of the carrying
value of its current inventory assets existed at February 28, 2009. There can be
no assurance, however, that market conditions will not change or demand for the
Company’s products will continue or allow the Company to realize the value of
its long-lived assets and prevent future impairment.
 
 Management
has classified the costs of crops expected to be sold beyond a 12-month cycle
from the date of the financial statements as noncurrent.
 
 At
February 28, 2009 and February 29, 2008, inventory consisted of the Biomass
(Scallops).
 Reclassifications





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





Note
3.  Acquisition of Granscal





Granscal
Tenure





On
October 31, 2008, our wholly owned subsidiary – Island Scallops, Ltd., finalized
a Share Exchange Agreement with Granscal Sea Farms Ltd., a Kanish Bay Company
and Granscal’s sole shareholder.  Pursuant to the Agreement,
Granscal’s sole shareholder assigned and transferred all of his Granscal shares
to Island Scallop in exchange for: (i) 400,000 restricted shares of our common
stock; (ii) a sum equal to 50% of the gross revenue Island Scallops earns on
account of the sale of Granscal’s 2004, 2005 and 2006 brood year inventory
currently in the water – to be paid when Island Scallops consummates the sale of
inventory; and (iii) an aggregate cash fee of CDN$30,000.  Pursuant to
the Agreement; Island Scallops also agreed to pay the CDN$35,000 that Granscal
owes to the Bank of Montreal.  The 400,000 shares issued were valued
at $0.08 per share, the closing bid of our common stock on the date the merger
closed.  Therefore, total aggregate value of the shares recognized by
the company was $32,000.








6





The
CDN$30,000 cash fee shall be paid in CDN$5,000 monthly installments beginning on
September 30, 2008 and continuing until the cash fee is fully
paid.  The cash fee is secured by a Promissory Note between Island
Scallop and Granscal’s sole shareholder, who is also Granscal’s Chief Executive
Officer.  The Promissory Note does not contain any interest, but is
immediately due and payable if Island Scallop remains in default of the
Promissory Note after a 10 day cure period.





Note
4.  Accounts Payable and Accrued Liabilities





Included
in accounts payable and accrued liabilities are balances outstanding related to
credit cards held in the name of one of our shareholders totaling $49,217 and
$33,292 at February 28, 2009 and August 31, 2008, respectively.  We
used these credit cards as a means of short term financing and incur interest
charges on such unpaid balances.





Included
in accounts payable and accrued liabilities at February 28, 2009, is an amount
of $104,650 in respect to an agreement to purchase geoduck seed from us (for
additional information see Note 7 – Contingent Liabilities).





Included
in accounts payable and accrued liabilities at February 28, 2009 and August 31,
2008 is $104,955 and $95,065 of principal due and interest accrued in respect to
the loan from the National Research Council of Canada Industrial Research
Assistance Program (see Note 6 – Long Term Debt for additional
information).





Note
5.  Line of Credit





Included
in line of credit at February 28, 2009, are two bank lines of
credit.  The first line is a $67,000 bank line of credit for Island
Scallops.  The interest rate on the line of credit is 7.5% as of
February 28, 2009.  At February 28, 2009, the balance due is $65,027.
The second line is a $40,000 bank line of credit for Island
Scallops.  The interest rate on the line of credit is 6.5% as of
February 28, 2009 and  February 28, 2009, the balance due is
$15,810.  This second line of credit is subject to a personal
guarantee by our Chairman and CEO, Robert Saunders.





Note
6. 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 our scallop sales, payable semi-annually, with no
specified due date.  The repayment terms have been formally amended
several times.  Most recently, in June 2008, the Western
Diversification Program agreed to allow Island Scallops to suspend repayment of
the roughly $340,000 loan until October 2008.  Starting in October
2008, Island Scallops was to begin repaying the loan at a rate of $7,937 per
month for five months.   Once these five months of loan payments
were completed, the Western Diversification Program had  agreed to
base quarterly repayments on 3% of the gross scallop sales (as opposed to the
originally agreed upon 4%) or $19,841 whichever is
greater.    As of February 28, 2009, we reached an agreement
with the Western Diversification Program to revise the repayment terms of the
remaining balance of $339,167 (representing $122,222 overdue and a balance of
$216,945).  Beginning February 28, 2009, we began repaying the overdue
amount at rate of $794 per month through December 31,
2010.  Commencing January 31, 2011, we will begin paying $3,968 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 $7,937 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
$216,945 at the greater of 4% of Island Scallops gross monthly revenues or
$7,937 per month.  At February 28, 2009, the balance due is $339,167,
of which $122,222 is reflected in the current portion of long term debt and the
remaining balance of $216,945 is reflected as long term debt.








7





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 August 31, 2008,
bear interest at a rate of 1% per month.  At February 28, 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 $104,955 that they claim is owed
under this loan agreement.  As such, at February 28, 2009, $104,955 is
included in accounts payable and accrued liabilities and the remaining full
principal balance of $207,491 is reflected in the current portion of long term
debt. We are seeking to renegotiate the repayment terms.





These
consolidated financial statements include Island Scallop’s mortgage loan
repayable at $2,262 per month (currently interest only calculated at 10.5% per
annum).  The loan is secured by a first charge on the real property of
Island Scallops. At February 28, 2009, the principal due is
$222,222.





Note
7.  Contingent Liabilities





Our
wholly owned subsidiary, Island Scallops, entered into an agreement in 1998 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 2002 of approximately $64,140 and recognized related revenue of
$43,705 in respect to seed delivered in 2002. The balance of the deposits
received (advance payments), net of sales, totaling $104,650, is included in
accounts payable and accrued liabilities.





Management’s
position is that the two parties violated the terms of the agreement and we are
therefore entitled to retain the balance of the deposits.  Per the
terms of the original agreement, Island Scallops 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 made claims that Island Scallops owed it
an amount 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 Scallops 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 $29,762.





Any
additional liability to us, 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
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.





Note
8.  Stock Option and Warrants





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,
2008, our Board of Directors had authorized the issuance of 3,062,000 options to
employees.




On
September 8, 2008, our board of directors authorized the issuance of an
aggregate of 100,000 options to purchase our common stock to one of our
directors pursuant to the “Edgewater Foods International 2005 Equity Incentive
Plan.”  The options vest in two equal installments over the next two
years (on September 8, 2009 and 2010).  Each option is exercisable for
a period of five years from the issuance date and has an exercise price of $0.45
respectively.  Pursuant to these options, we will incur approximately
an additional $43,000 through August 31, 2010. We used the Black Scholes
option-pricing model with the following assumptions: an expected life equal to
the contractual term of the options (five), underlying stock price of $0.45 per
share, no dividends; a risk free rate of 2.96%, which equals the one, three and
six-year yield on Treasury bonds at constant (or fixed) maturity and volatility
of 175%. During the first six months ended February 28, 2009, the company
recognized approximately $10,700 of option expense.








8







Stock
option activity during the period ending February 28, 2009, was as
follows:





Number
      of Shares
              
              
              Weighted
      Average Exercise PriceOutstanding,
      August 31, 2008
              
              
              2,592,000
              
              
              
              1.23Granted
              
              
              100,000
              
              
              
              0.45Exercised
              
              
              --
              
              
              
              --Forfeited
              
              
              --
              
              
              
              --Expired
              
              
              --
              
              
              
              --Outstanding,
      February 28, 2009
              
              
              2,692,000
              
              
              $
              1.20Exercisable,
      February 28, 2009
              
              
              2,592,000
              
              
              $
              1.23











At
February 28, 2009, 62,000 of the exercisable options expire in August 2010,
190,000 of exercisable options expire in April of 2012, 2,120,000 of the
exercisable options expire in August 2012 with the remaining balance of 220,000
having an expiration date of August 2015.




Warrant
activity during the period ending February 28, 2009, was as
follows:





Number
      of Warrants
              
              
              Weighted
      Average Exercise PriceOutstanding,
      August 31, 2008
              
              
              1,381,952
              
              
              $
              1.33Granted
              
              
              --
              
              
              
              --Exercised
              
              
              --
              
              
              
              --Forfeited
              
              
              --
              
              
              
              --Expired
              
              
              --
              
              
              
              --Outstanding,
      February 28, 2009
              
              
              1,381,952
              
              
              $
              1.33Exercisable,
      February 28, 2009
              
              
              1,381,952
              
              
              $
              1.33





At
February 28, 2009, if all options and warrants were exercised and all shares of
preferred stock were converted, we would have 58,851,970 shares of common stock
outstanding.





Note
9.  Common Stock





On
December 31, 2008, we issued 324,691 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.  As such, the shares were valued at approximately $233,500 and
the total aggregate value of the transaction was recorded as a preferred stock
dividend.








9





On
December 31, 2008, we issued 86,454 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.  As
such, the shares were valued at approximately $62,500 and the total aggregate
value of the transaction was recorded as a preferred stock
dividend.





On
December 31, 2008, we issued 37,482 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.  As such, the shares were valued at approximately $24,000
and the total aggregate value of the transaction was recorded as a preferred
stock dividend.





In
January, 2009, we issued 400,000 restricted shares of our common stock to Leslie
Rombough  as  part of the purchase of Granscal Sea Farms
Ltd., a Kanish Bay Company, by our wholly owned subsidiary – Island Scallops,
Ltd.  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.  The 400,000 shares issued were valued at $0.08 per share,
the closing bid of our common stock on the date the merger was
closed.  Therefore, total aggregate value of the transaction
recognized by the company was $32,000.





Note
10.  Subsequent Events





In March
2009, we engaged International Investment Consulting Company S.A (“IICC”) to
provide international investor relations services. The initial term of the
agreement is for two years.  Pursuant to the consulting agreement, after
120 days if certain terms and conditions are met, we will begin paying IICC
$10,000 per month for the term of the agreement.  As additional
compensation, we agreed to issue IICC 200,000 shares of restricted stock
thatvest
50,000 per quarter. 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.  We also agreed to immediately issue IICC options to
purchase 3,200,000 shares of our common stock at various exercise prices between
$0.15 and $1.20.  The pricing and vesting schedule of these options is
as follows:




Amount
                  
                  Strike
      Price
                  
                  Vesting
      Schedule50,000
                  $
                  0.15
                  
                  Vests
      immediately50,000
                  $
                  0.20
                  
                  Vests
      immediately50,000
                  $
                  0.25
                  
                  Vests
      immediately50,000
                  $
                  0.30
                  
                  Vests
      immediately75,000
                  $
                  0.35
                  
                  Vests
      immediately75,000
                  $
                  0.40
                  
                  Vests
      immediately75,000
                  $
                  0.45
                  
                  Vests
      immediately75,000
                  $
                  0.50
                  
                  Vests
      immediately200,000
                  $
                  0.55
                  
                  Vests
      immediately200,000
                  $
                  0.60
                  
                  Vests
      immediately500,000
                  $
                  0.80
                  
                  Vests
      immediately800,000
                  $
                  1.00
                  
                  Vests
      immediately1,000,000
                  $
                  1.20
                  
                  Vests
      immediately








10






The
shares underlying the options have registration rights that require us to
register the shares in our next registration statement.  The options
and the shares underlying 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.  We will incur stock option expense of approximately
$220,000 in the quarter ending May 31, 2009. We used the Black Scholes
option-pricing model with the following assumptions: an expected life equal to
the contractual term of the options (three years), underlying stock price of
$0.10 per share, no dividends; a risk free rate of 1.28%, which equals the
three-year yield on Treasury bonds at constant (or fixed) maturity and
volatility of 175%.  In the event of termination of unexercised vested
options expire 45 days from termination.







On March
23, 2009 we issued 100,000 shares of common stock to Gallatin Consulting, Inc.
that our Board of Directors previously approved for the investor relations and
marketing services that they will provide to us.  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.  The 100,000 shares
issued were valued at $0.08 per share, the closing bid of our common stock on
the date of issue.  Therefore, total aggregate value of the
transaction that we will recognize is $8,000. Going forward the cost of these
shares will be expensed at current market price as they are issued.

































































11





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
our the first and second quarter of our 2009 fiscal year, we continued the
harvesting, processing and sale of our 2005 and 2006 year classes of scallops
and transferring our 2007 year-class scallops (which were still maturing in our
tenured growing sites and on-shore ponds) to larger grow-out nets on our farm
sites.  We also began the spawning of our 2009 scallop
class.  We refer to the year-class of scallops based on when the
scallops were spawned.  Generally, the harvest begins approximately 22
to 24 months after spawning of the scallops. For example, we plan to begin
harvesting our 2009 scallop class (that was initially spawned in February of
2009) in December 2010.





During
the first quarter of our 2009 fiscal year, we completed a large purchase order
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 will effectively
become the exclusive distributor of our scallops outside the European
market.  We believe this order will reduce cost and encourage
additional wholesalers within the Taylor network to carry our
scallops.  In addition to the Taylor sales agreement, we finalized an
order to provide frozen scallop meat with roe to the European
market.  Due to problems with the cadmium levels in our frozen
product, we were unable to complete the initial portion of this
order.  We believe we have identified and solved this problem and
should be able to begin European shipments in summer of 2010.  Despite
the initial problem fulfilling this European order, we believe this order could
represent an important first step towards establishing a large European based
demand for our seafood products.





Management
believes that these new sales agreements, coupled with the improved processing
plant will yield increased revenues in our 2009 fiscal year and
thereafter.  Management believes that the combination of the Fanny Bay
(Taylor) sales and marketing network and the Island Scallop processing plant and
product will result in both improved sales and margins in 2009 and
beyond.





In
addition to scallop sales, we plan on generating additional revenues via the
sale of scallop and other shellfish seed (including clams and
oysters).  In the future, Management may place emphasis on generating
additional revenues via equipment sales to other aquaculture
businesses.  Additionally, we recently started the process of
investigating 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. As part of this
initiative, we recently established an Acquisition/Business Opportunity Board
Committee and are currently beginning initial, informal, conversations with both
North American and Chinese based companies.  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.  We are
initially focusing 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 with such companies in order to
reach our goal of capitalizing on our hatchery technology in order to increase
cash flows.   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.Additionally, we have not
yet located and/or finalized financing sources for any possible
acquisition.  Management currently plans to fund any future
acquisition via either debt financing or additional equity
financings.  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.








12





We are
also moving forward with our discussions with various First Nations1 groups about possible partnerships or joint
ventures on potential farm sites on First Nation owned
lands.  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 2009 calendar year.  To date, we have yet to finalize a
revenue producing First Nations joint venture.  Despite these delays,
management believes that the initial joint ventures will soon be
finalized.  This will provide us with additional growing areas for
scallops and we believe that such a partnership will begin producing significant
new revenue sometime in our 2010 fiscal year.





Despite
the increased revenues for the first six months of our 2009 fiscal year (as
compared to 2008), we were not able to achieve positive operational cash flows
during this period.  As a result of our new sales agreements, improved
processing plant and increasing shellfish seed sales,Management expects our
sales and margins to improve and to achieve positive cash flows in the second
half of 2009.  Management is still in the process of evaluating the
impact of the recent global economic downturn and is unsure of the direct impact
it will have on our sales and projects.  It is possible that the North
American recession could materially impact future revenues and
growth.





During
the six months ended February 28, 2009, we continued working with RKS
Laboratories, Inc., a Vancouver research and development company that is working
towards developing superior strains of scallops with beneficial traits such as
higher meat yield and rapid growth.  Robert Saunders, our President and
CEO, owns 100% of RKS.    As part of this relationship, we
loaned RKS an additional approximately $57,000 that is secured by all assets of
RKS.  As a result, we currently have five secured notes receivable
from RKS that total approximately $155,000.  Management, originally
expected RKS to begin repaying at least a portion of these loans as early as the
second quarter of 2009.  To date, RKS has yet to begin repaying a
portion of these loans, but we are hopeful that initial repayment will begin in
the upcoming quarter as RKS begins to realize repayment of government R&D
credits.





During
the continued harvesting of our 2005 class and 2006 scallops classes and
transfer of our 2007 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 1.1 million of our
2005 and 2006 year class scallops to market in the 2009 calendar
year.  Originally, we believed that our 2006 spawning would yield
between 5 and 10 million scallops at full maturity/harvest.  However,
mortality rates were at the higher end of our projections due to the handling
and sorting learning curve associated with the roll-out of our new longline and
anchor system.  Additionally, problems associated with the timing of
moving scallops to large nets (also known as “ocean timing”) and the density
(i.e. number of scallops per net level) contributed to additional mortality
problems.  We anticipate that survival rates for the future classes,
will improve due to the addition of more lines and anchors, better spacing and
sorting within each lantern net, experience gained from the sorting and farming
of both the 2005 and 2006 year classes and lessons learned on ocean timing and
scallop density during the handling of our 2006 scallop class. We noticed gains
in animal survival rates and individual scallop size in the 2007 class as
compared to the 2006 class at a similar point in its development.  As
of our most recent review of our scallop inventory, we currently believe that
our 2007 year class should yield up to 6 million scallops at full
maturity/harvest. Although this is lower than initial estimates, it will still
represent our largest year class to date.














1 First
Nations commonly refers to the indigenouspeoples in what is
now Canada.
There are currently over 600 recognized First Nations governments or
bands in Canada, roughly half of which are in the provinces of Ontario and British Columbia.




13





During
the first and second quarter of 2009, we continued to the transfer of our 2008
scallop class from our hatchery ponds and into the ocean farms.  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 2.2 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.





The  spawning
season started on February 10, 2009 with a total of 400 million pre metamorphic
larvae produced.  New larval husbandry methods increase overall larval
survival and corresponding larval competency or the ability of the larvae to
successfully undergo metamorphosis.   Anticipated larval
settlement in early March was expected to be over 350 million
larvae.    Management believed that this could produce a
minimum of 35 million 3-5 mm scallop for ocean entry in mid
May.   The second scallop spawn was scheduled for the first week
of March with an additional 250 million larvae expected to be
produced.





As a
result of a recent review of our business plan and sales and marketing efforts
to date, we currently plan to harvest and sell approximately 6 million
full-size 2007 scallops over the 12 months ending December 2010.  In
addition, we estimate that our 2008 year class will produce at least 2.2
 million full-size scallops. The size of our 2009 and 2010 year classes
will (in some 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 expanding our future
yields.  These classes will be harvested and sold in subsequent 12
month periods following the sales our 2007 year class.  Based on our
current review of sales and marketing conditions, we believe our scallops will
yield as much $1 of revenue per scallop.  The yield per scallop could
increase significantly if we are able to sell a greater percentage of live
scallops.  Additionally, 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 produce and/or sell a significantly larger amount of
2009 and 2010 scallop seed.  As described above, our current estimated
inventory size and projected sales cycle is summarized in the following
table.








Estimated
      Inventory (value) to be SoldYear-class
                    
                    Accumulated
      Cost to Date
                    
                    
                    next
      12 months
                    
                    
                    next
      24 months
                    
                    
                    beyond
      24 months2005
                    
                    $
                    118,084
                    
                    
                    $
                    118,0842006
                    
                    $
                    577,861
                    
                    
                    $
                    577,8612007
                    
                    $
                    577,014
                    
                    
                    $
                    144,254
                    
                    
                    $
                    432,7602008
                    
                    $
                    306,721
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $
                    306,7212009
                    
                    $
                    51,541
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $
                    51,541Totals
                    
                    $
                    1,631,221
                    
                    
                    $
                    840,199
                    
                    
                    $
                    432,760
                    
                    
                    $
                    358,262





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 for 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 February 28,
2009, management performed an undiscounted cash flow analysis to determine that
impairment of $75,000 existed in carrying value our 2006 scallop year class
inventory.   As such, the impairment of $75,000 was charged
against operations for the period ending February 28, 2009.  There can
be no assurance, however, that market conditions will not change or demand for
the Company’s products will continue or allow the Company to realize the value
of its long-lived assets and prevent future impairment.


If our
mortality rates are better than our current projections, our yield and revenues
from the 2005, 2006 and 2007 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.








14





Despite
our efforts to improve our cost of goods relative to our selling price, we are
still operating at a negative margin.    Part of this
problem was associated with operational inefficiencies that were identified
during our recently completed top-down operation review.  As a result,
we expect our cost of goods sold to  improve for our 2006 and 2007
year classes and in the coming years we expect to see continued improvements in
cost of goods.





Based on
our current estimates of near-term sales and capital costs of expanding our
farms to increase future crop yields, 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 already
scaled back some of our expansion plans and may have to further scale back the
plans outlined herein.  We originally anticipated that we would need
approximately $1.0 million over the next 12 months to continue our originally
planned expansion activities, however, we now plan to 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.  Additionally, management intends to place a greater
emphasis on increasing scallop and other shellfish seed sales in 2009 and
2010.


































15







Comparison
of results for the three and six months ended February 28, 2009 to the 
three and six months ended February 29, 2008.





Revenues.Revenues
for the three months ended February 28, 2009, were approximately
$433,000.  We had revenues of approximately $366,000 for the three
months ended February 29, 2008.  This is an increase of approximately
$67,000 or 18%.  If not for the recent improvement of the US dollar
relative to the Canadian dollar for the three months ended February 28, 2009 (as
compared to the same period in 2008), our overall sales increase would have been
greater.  In fact, sales in absolute Canadian dollars improved by 47%
over the three month period.  Revenues for the six months ended
February 28, 2009, were approximately $1,010,000.  We had revenues of
approximately $795,000 for the six months ended February 29,
2008.  This is an increase of approximately $215,000 or
27%.  If not for the recent improvement of the US dollar relative to
the Canadian dollar for the six months ended February 28, 2009 (as compared to
the same period in 2008), our overall sales increase would have been
greater.  In fact, sales in absolute Canadian dollars improved by 50%
over the six month period.  Although our overall volume of scallops
sales increased over the previous six month period, our average price per
scallop slightly decreased from the previous periods.  As a result,
revenue generated by scallops sales increased slightly from the previous
period.  In the first six months of our 2009 fiscal year, management
also continued to place a greater emphasis on equipment sales to other
aquaculture companies and continued their efforts to increase revenues generated
from both scallop and shellfish seed sales. This resulted in increased seed
sales and new equipment sales as compared to the previous fiscal
year.  In fact, the majority of increased revenue was directly related
to increase seed and equipment sales.  As was the case in the previous
six month period, management continued its emphasis on the development and
production of larger scallop crops.  Management believes that our
emphasis on expansion of future crops coupled with our new sales agreements will
yield increased revenues in our 2009 fiscal year and beyond.





Gross loss.Gross
loss for the three months ended February 28, 2009 was approximately $296,000, an
increase of approximately $168,000 as compared to gross loss of roughly
$128,000, for the three months ended February 29, 2008. For the six months ended
February 28, 2009, gross loss was roughly $359,000.  Gross loss for
the six months ended February 29, 2008 was approximately
$233,000.  This is an increase of $126,000 or roughly 54%. The
increase in gross loss for the three and six months ended February 28, 2009 (as
compared to the same period in the previous year) was  attributable to
increased cost of inventory and cost of scallop seed relative to the previous
periods.  The increase in the cost of inventory (per scallop) was the
result of certain inventory downgrades related to mortality and survivability
issues that we believe have been corrected in future
classes.   The increase in the cost of scallop seed inventory was
the result of certain older inventory that was deemed too small for processing
and was therefore sold as seed.  In addition, as of February 28, 2009,
management performed an undiscounted cash flow analysis to determine that
impairment of $75,000 existed in carrying value our 2006 scallop year class
inventory.   As such, the impairment of $75,000 was charged
against operations for the three and six ending February 28,
2009.  This increase in gross losses reversed the one-time reduction
of gross loss that we experience for the previous quarter.  Despite
this increase in gross loss for the three and six months ended February 28,
2009, 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 an increased emphasis on seed
sales.  Additionally, Management believes that we have addressed
issues that resulted in higher cost of inventory and seed
costs.  Management believes that in the future our sales will continue
to increase while costs of goods will only increase slightly. As a result, we
expect our margins to improve in future years.  In the future, as we
capitalize on our new sales agreements, we expect our sales to increase more
rapidly and for these costs and margins to quickly improve.  We
continued to focus resources on maintaining, developing and tending to our
scallop crops and shellfish seed and believe that we have already seen the
initial benefits in increased sales of our own scallops and increased seed sales
and that we will continue to see additional benefits from our efforts in
developing larger crops and expanding our seed sales in the 2009 fiscal year and
beyond.




General and
administrative.  General and administrative expenses for the
three months ended February 28, 2009, were approximately
$338,000.  Our general and administrative expenses were approximately
$761,000 for the three months ended February 29, 2008.  This is a
decrease of approximately $423,000 or 56%. This decrease was directly
attributable to a reduction in stock option expense of roughly $510,000 as
compared to the third months ended February 29, 2008.  For the six
months ended February 28, 2009, our general and administrative expenses were
roughly $526,000.  As compared to roughly $1,485,000 for the six
months ended February 29, 2008.  This decrease of approximately
$959,000 was mainly the result of a reduction of roughly $1,021,000 in stock
option expense.









16







To date,
we have already expensed the majority of the stock option costs related to the
2,692,000 outstanding options and are currently scheduled to only incur
approximately an additional $32,000 through August 31, 2010.  However, we
will incur an additional $220,000 of stock option expense in our next fiscal
quarter as a result of new stock option grants.  As such, management
expects that general and administrative expenses (excluding stock options
expense) may slightly rise as we continue to expand our
operations.  However, we believe that we now have the necessary
general and administrative staff in place to maintain our expansion into scallop
crops of 30 million and beyond.  In addition, as our overall stock
option and stock compensation expenses are reduced to pre-2007 levels, our
overall general and administrative expenses will significantly
drop.





Stock compensation and stock option
expense.  During the three and six months ended February 28,
2009, our Board of Directors did not authorize the issuance of any shares of our
restricted common stock for compensation.  As a result, we did not
incur any stock compensation expense for the three and six months ended February
28, 2009.  During the three and six months ended February 29 2008, we
had stock compensation expense of approximately $12,000 and $50,000,
respectively. We did however, issue 100,000 new options during the six months
ended February 28, 2009.  As a result, we have stock option expense of
roughly $11,000 for the six months ended February 28, 2009.  We did
not issue any new options during the six months ended February 29,
2008.  However, due to options issued to employees, consultants and
directors during 2007 and based upon the common stock trading price at the times
of issuance, vesting schedules and FASB rules, we incurred stock option
compensation expenses of approximately $516,000 and $1,033,000 during the three
and six months ended February 29, 2008, respectively.





Other income (expense),
net.  Interest expense for the three months ended February 28,
2009, was approximately $12,000.  Interest income for the three months
ended February 29, 2008, was approximately $3,000.  Other expense for
the three months ended February 28, 2009, was nil as opposed to other expense of
approximately $36,000 for the three months ended February 29, 2008.





Interest
expense for the six months ended February 28, 2009, was approximately
$23,000.  Interest income for the six months ended February 29, 2008,
was approximately $7,000.  Other expense for the six months ended
February 28, 2009, was nil as opposed to other income of approximately $28,000
for the six months ended February 29, 2008.





Net profit
(loss).As a result of the above, the net loss for three
months ended February 28, 2009 was approximately $729,000 as compared to a net
loss of approximately $1,015,000 for the three months ended February 29, 2008.
Net loss for six months ended February 28, 2009 was approximately $1,076,000 as
compared to a net loss of approximately $1,871,000 for the six months ended
February 29, 2008.





Liquidity and Cash Resources.
At February 28, 2009, we had a cash balance of approximately
$94,000.  During the year ending August 31, 2007, we completed one
private equity financing and had investors exercise various warrants that
resulted in net proceeds of approximately $3,075,000.  During the year
ending August 31, 2006, we relied on four private equity financings that
resulted in net proceeds of approximately $5,140,000.  Prior to the
completion of our initial Preferred Stock Financing, our initial expansion had
been largely funded by a short term note with a maximum limit of approximately
$1,451,000.   This short term note was repaid with proceeds from
the 2006 preferred stock financings and is no longer available to
us.  These 2006 and 2007 financings formerly contained warrants, which
if fully exercised, could have raised approximately an additional
$49,350,000.  To date, the exercise of these warrants resulted in net
proceeds of roughly $1,200,000; however, the financing we completed in June
2008, resulted in a warrant exchange that eliminated most of the remaining
warrants from the 2006 and 2007 financings.  We have suffered
operating losses since inception in our efforts to establish and execute our
business strategy.   After the completion of the June 2008
financing, management believed that we had adequate funds to maintain our
business operations into our 2009 fiscal year and/or until we become cash flow
positive, but we continue to suffer operational losses in our 2009 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 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 expanding our
operations.  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 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
and/or acquisitions that could result in significantly improved cash
flows.  To date, we have been unable to achieve positive cash
flows.


17


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/A for the year ended August 31, 2008, management concluded
that our internal control over financial reporting was effective as of August
31, 2008.


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.  C





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.


18





PART
II - OTHER INFORMATION









ITEM
1.   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, 2004, 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
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, 2008, we issued 324,691 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
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, 2008, we issued 86,454 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 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, 2008, we issued 37,482 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 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.








19





In
January, 2009, we issued 400,000 restricted shares of our common stock to Leslie
Rombough’s part of the purchase of Granscal Sea Farms Ltd., a Kanish Bay
Company, by our wholly owned subsidiary – Island Scallops, Ltd.  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.  The
400,000 shares issued were valued at $0.08 per share, the closing bid of our
common stock on the date the merger was closed.  Therefore, total
aggregate value of the transaction recognized by the company was
$32,000.





(b)             Not
Applicable.





(c)             Not
Applicable











ITEM
3. Defaults upon Senior Securities





(a)             Not
Applicable.





(b)             Not
Applicable.





ITEM
4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS





On
January 12, 2009, we held our annual shareholder meeting where our shareholders
voted by proxy to re-elect all of our current directors and approved changing
our corporate name to Ocean Smart, Inc.  The full results of the
meeting are disclosed in our Quarterly Report on Form 10-Q/A for the quarter
ending November 30, 2008, which was filed on March 9, 2009.  The name
change became effective on March 3, 2009; however Nevada’s Secretary of State
did not notify us that the change was implemented until March 30,
2009.  Accordingly, we reported the name change
on a Current Report on Form 8-K with the Securities and Exchange
Commission and filed it on March 30, 2009.





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.
            Document3.1
            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 Act32.1
            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.








20











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:  
      April 14, 2009
                  OCEAN
      SMART, INC.By:  /s/  Robert
      SaundersRobert
      Saunders,Chief
      Executive Officer & PresidentBy:  /s/  Michael
      BoswellMichael
      Boswell,
                    Acting
      Chief Accounting Officer


21