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 May 31, 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 July 16, 2009, there were 25,920,296 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 May 31, 2009 (unaudited) and August 31,
      2008
                3Unaudited
      Consolidated Statements of Operations for the three and nine months ended
      May 31, 2009 and  2008
                4Unaudited
      Consolidated Statements of Cash Flows for the  nine months ended
      May 31, 2009 and  2008
                5Unaudited
      Notes to Consolidated Financial Statements
                6Item
      2.  Management’s Discussion and Analysis or Plan of
      Operation
                13Item
      3.  Quantitative and Qualitative Disclosures About Market
      Risk
                20Item
      4T. Controls and Procedures
                20PART
      II – OTHER INFORMATIONItem
      1.  Legal Proceedings
                22Item
      1A. Risk Factors
                22Item
      2.  Unregistered Sales of Equity Securities And Use Of
      Proceeds
                22Item
      3.  Defaults Upon Senior Securities
                23Item
      4.  Submission Of Matters To A Vote Of Security
      Holders
                23Item
      5.  Other Information
                24Item
      6.  Exhibits
                24








2




PART
I – FINANCIAL INFORMATION





OCEAN
      SMART, INC.(FORMERLY
      EDGEWATER FOODS INTERNATIONAL, INC.)CONSOLIDATED
      BALANCE SHEETSMay
      31,
                
                
                August
      31,2009
                
                
                2008(unaudited)ASSETSCurrent
      assets:Cash
                
                $
                26,301
                
                
                $
                712,298Accounts
      receivable, net
                
                
                184,586
                
                
                
                195,402Inventory
                
                
                775,173
                
                
                
                1,290,702Other
      current assets
                
                
                58,778
                
                
                
                80,011Total
      current assets
                
                
                1,044,838
                
                
                
                2,278,413Property,
      plant and equipment, net
                
                
                3,555,702
                
                
                
                3,982,336Long-term
      inventory
                
                
                1,010,949
                
                
                
                986,327Loans
      receivable, related party
                
                
                188,176
                
                
                
                114,079Other
      assets
                
                
                9,975
                
                
                
                3,758Total
      assets
                
                $
                5,809,640
                
                
                $
                7,364,913LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilities:Short
      term debt
                
                $
                162,830
                
                
                $
                109,648Line
      of credit
                
                
                140,181
                
                
                
                124,766Current
      portion of long term debt
                
                
                372,814
                
                
                
                396,885Accounts
      payable and accrued liabilities
                
                
                1,146,492
                
                
                
                991,061Total
      current liabilities
                
                
                1,822,317
                
                
                
                1,622,360Long
      term debt, net current portion
                
                
                506,592
                
                
                
                548,004Total
      liabilities
                
                
                2,328,909
                
                
                
                2,170,364Stockholders'
      equitySeries
      A Preferred  stock, par $0.001, 10,000,000
                
                
                7,774
                
                
                
                7,774authorized,
      7,773,998 issued and outstandingat
      May 31, 2009 and August 31, 2008, respectivelySeries
      B Preferred  stock, par $0.001, 220
                
                
                -
                
                
                
                -authorized,
      207 issued and outstanding  atMay
      31, 2009 and August 31, 2008, respectivelySeries
      C Preferred  stock, par $0.001, 1,000,000
                
                
                748
                
                
                
                748authorized,
      747,870 issued and outstandingat
      May 31, 2009 and August 31, 2008, respectivelySeries
      D Preferred  stock, par $0.001, 380,000
                
                
                305
                
                
                
                305authorized,
      304,558 issued and outstandingat
      May 31, 2009 and August 31, 2008, respectivelyCommon
      stock, par $0.0001, 100,000,000 authorized,
                
                
                2,548
                
                
                
                2,44825,477,777  and
      24,479,150 issued and outstanding atMay
      31, 2009 and August 31, 2008, respectivelyAdditional
      paid in capital
                
                
                28,049,313
                
                
                
                27,497,781Accumulated
      deficit
                
                
                (24,183,114
                )
                
                
                (22,103,314
                )Accumulated
      other comprehensive income (loss) -foreign
      exchange adjustment
                
                
                (396,843
                )
                
                
                (211,193
                )Total
      stockholders' equity
                
                
                3,480,731
                
                
                
                5,194,549Total
      liabilities and stockholders' equity
                
                $
                5,809,640
                
                
                $
                7,364,913











See
accompanying notes to consolidated financial statements







3





OCEAN
      SMART, INC.(FORMERLY
      EDGEWATER FOODS INTERNATIONAL, INC.)CONSOLIDATED
      STATEMENTS OF OPERATIONSTHREE
      AND NINE MONTHS ENDED MAY 31(unaudited)THREE
      MONTHS ENDED
                    
                    
                    NINE
      MONTHS ENDEDMAY
      31,
                    
                    
                    MAY
      31,2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008Revenue
                    
                    $
                    319,147
                    
                    
                    $
                    264,942
                    
                    
                    $
                    1,329,229
                    
                    
                    $
                    1,059,907Cost
      of goods sold
                    
                    
                    525,800
                    
                    
                    
                    489,081
                    
                    
                    
                    1,895,038
                    
                    
                    
                    1,517,352Gross
      profit (loss)
                    
                    
                    (206,653
                    )
                    
                    
                    (224,139
                    )
                    
                    
                    (565,809
                    )
                    
                    
                    (457,445
                    )Expenses:General
      and administrative expenses
                    
                    
                    373,862
                    
                    
                    
                    674,196
                    
                    
                    
                    899,395
                    
                    
                    
                    2,158,896Salaries
      and benefits
                    
                    
                    88,413
                    
                    
                    
                    98,130
                    
                    
                    
                    256,347
                    
                    
                    
                    286,622Total
      operating expenses
                    
                    
                    (462,275
                    )
                    
                    
                    (772,326
                    )
                    
                    
                    (1,155,742
                    )
                    
                    
                    (2,445,518
                    )Loss
      from operations
                    
                    
                    (668,928
                    )
                    
                    
                    (996,465
                    )
                    
                    
                    (1,721,551
                    )
                    
                    
                    (2,902,963
                    )Other
      income (expense):Interest
      (expense), net
                    
                    
                    (14,287
                    )
                    
                    
                    (6,762
                    )
                    
                    
                    (37,315
                    )
                    
                    
                    (63
                    )Other
      income (expense)
                    
                    
                    1,461
                    
                    
                    
                    (59,763
                    )
                    
                    
                    1,461
                    
                    
                    
                    31,453Total
      other income (expense), net
                    
                    
                    (12,826
                    )
                    
                    
                    (66,525
                    )
                    
                    
                    (35,854
                    )
                    
                    
                    31,390Net
      loss
                    
                    
                    (681,754
                    )
                    
                    
                    (1,062,990
                    )
                    
                    
                    (1,757,405
                    )
                    
                    
                    (2,871,573
                    )Dividend
      on preferred stock
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (322,395
                    )
                    
                    
                    (310,476
                    )Deemed
      dividend for beneficialconversion
      feature
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (163,386
                    )Net
      loss applicable tocommon
      shareholders
                    
                    
                    (681,754
                    )
                    
                    
                    (1,062,990
                    )
                    
                    
                    (2,079,800
                    )
                    
                    
                    (3,345,435
                    )Foreign
      currency translation
                    
                    
                    525,649
                    
                    
                    
                    (61,950
                    )
                    
                    
                    (185,650
                    )
                    
                    
                    236,385Comprehensive
      loss
                    
                    $
                    (156,105
                    )
                    
                    $
                    (1,124,940
                    )
                    
                    $
                    (2,265,450
                    )
                    
                    $
                    (3,109,050
                    )Net
      loss per ShareBasic
      and diluted
                    
                    $
                    (0.03
                    )
                    
                    $
                    (0.04
                    )
                    
                    $
                    (0.08
                    )
                    
                    $
                    (0.14
                    )Weighted
      average shares outstandingBasic
      and diluted
                    
                    
                    25,127,475
                    
                    
                    
                    24,014,607
                    
                    
                    
                    25,063,189
                    
                    
                    
                    23,880,083





See
accompanying notes to consolidated financial statements







4







OCEAN
      SMART, INC.(FORMERLY
      EDGEWATER FOODS INTERNATIONAL, INC.)CONSOLIDATED
      STATEMENTS OF CASHFLOWSNINE
      MONTHS ENDED MAY 31, 2009 and 2008(unaudited)2009
                        
                        
                        2008Cash
      flows from operating activities:Net
      loss
                        
                        $
                        (1,757,405
                        )
                        
                        $
                        (2,871,573
                        )Adjustments
      to reconcile net income (loss) to net cash used in operating
      activities:Depreciation
      and amortization
                        
                        
                        376,584
                        
                        
                        
                        429,437Stock
      option expense
                        
                        
                        179,737
                        
                        
                        
                        1,486,352Common
      stock issued for services
                        
                        
                        17,500
                        
                        
                        
                        87,151Inventory impairment
                        
                        
                        75,000
                        
                        
                        
                        -Changes
      in current assets and liabilities:Accounts
      receivable
                        
                        
                        10,816
                        
                        
                        
                        (22,377
                        )Prepaid
      expenses
                        
                        
                        21,233
                        
                        
                        
                        -Other
      current assets
                        
                        
                        -
                        
                        
                        
                        (9,994
                        )Loan
      receivable, related party
                        
                        
                        (70,112
                        )
                        
                        
                        (34,728
                        )Inventory
                        
                        
                        432,955
                        
                        
                        
                        (531,039
                        )Accounts
      payable and accrued expenses
                        
                        
                        159,972
                        
                        
                        
                        618,529Net
      cash used in operating activities
                        
                        
                        (553,720
                        )
                        
                        
                        (848,242
                        )Cash
      flows from investing activities:Other
      assets
                        
                        
                        (6,313
                        )
                        
                        
                        -Purchase
      of property, plant and equipment
                        
                        
                        (92,200
                        )
                        
                        
                        (1,460,178
                        )Net
      cash used in investing activities
                        
                        
                        (98,513
                        )
                        
                        
                        (1,460,178
                        )Cash
      flows from financing activities:Net
      proceeds (payments) from line of credit
                        
                        
                        16,927
                        
                        
                        
                        77,798Proceeds
      from short term debt
                        
                        
                        40,546
                        
                        
                        
                        -Payment
      of short term debt
                        
                        
                        (43,764
                        )
                        
                        
                        (827
                        )Proceeds
      from long term debt
                        
                        
                        -
                        
                        
                        
                        30,000Payment
      of long term debt
                        
                        
                        -
                        
                        
                        
                        (110,414
                        )Preferred
      stock issued for cash
                        
                        
                        -
                        
                        
                        
                        800,648Net
      cash provided (used in) by financing activities
                        
                        
                        13,709
                        
                        
                        
                        797,205Foreign
      currency translation effect
                        
                        
                        (47,473
                        )
                        
                        
                        107,246Net
      decrease in cash
                        
                        
                        (685,997
                        )
                        
                        
                        (1,403,969
                        )Cash,
      beginning of period
                        
                        
                        712,298
                        
                        
                        
                        1,656,868Cash,
      end of period
                        
                        $
                        26,301
                        
                        
                        $
                        252,899Supplemental
      disclosure of cash flow informationNon
      cash transactionsIssuance
      of stock for dividends
                        
                        $
                        322,395
                        
                        
                        $
                        310,476Acqusition
      of granscal
                        
                        $
                        87,759
                        
                        
                        $
                        -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 nine months ended May 31,
2009, are not necessarily indicative of the operating results for the full
accounting year or any future period.





Inventory





Ocean
Smart 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 May 31, 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.


6


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.





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.





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(s) of our shareholders totaling $93,416 and
$33,292 at May 31, 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 May 31, 2009, is an amount of
$120,717 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 May 31, 2009 and August 31, 2008
is $126,875 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 May 31, 2009, are two bank lines of credit.  The
first line is a $75,000 bank line of credit for Island Scallops.  The
interest rate on the line of credit is 12% as of May 31, 2009.  At May
31, 2009, the balance due is $74,887. The second line is a $42,000 bank line of
credit for Island Scallops.  The interest rate on the line of credit
is 4% as of May 31, 2009 and the balance due is $41,197.  This second
line of credit is subject to a personal guarantee by our Chairman and CEO,
Robert Saunders.





7


Note
6. 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 $915 (CDN$1,000) per month through
December 31, 2010.  Commencing January 31, 2010, we will begin paying
$4,577 (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 $9,155 (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 $9,155 (CDN$10,000) per
month.  At May 31, 2009, the balance due is $389,527, of which
$139,275 is reflected in the current portion of long term debt and the remaining
balance of $250,252 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 August 31, 2008,
bear interest at a rate of 1% per month.  At May 31, 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 $126,875 that they claim is owed
under this loan agreement.  As such, at May 31, 2009, $126,875 is
included in accounts payable and accrued liabilities and the remaining full
principal balance of $233,539 is reflected in the current portion of long term
debt. We are seeking to renegotiate the repayment terms with NRC.





These
consolidated financial statements include Island Scallop’s mortgage loan
repayable at $2,609 (CDN$2,850) 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 May 31, 2009, the principal due is
$256,340.





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 $34,333.


8


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 nine months ended May 31, 2009, the company recognized
approximately $16,000 of option expense.







In March
2009, we engaged International Investment Consulting Company S.A (“IICC”) to
provide international investor relations services. As part of this agreement, we
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










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


9




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 incurred stock option expense of approximately $164,000
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
143%.  In the event of termination of unexercised vested options
expire 45 days from termination.







Stock
option activity during the period ending May 31, 2009, was as
follows:





Number
      of Shares
              
              
              Weighted
      Average Exercise PriceOutstanding,
      August 31, 2008
              
              
              2,592,000
              
              
              
              1.23Granted
              
              
              3,300,000
              
              
              
              0.86Exercised
              
              
              --
              
              
              
              --Forfeited
              
              
              --
              
              
              
              --Expired
              
              
              --
              
              
              
              --Outstanding,
      May 31, 2009
              
              
              5,892,000
              
              
              $
              1.04Exercisable,
      May 31, 2009
              
              
              5,792,000
              
              
              $
              1.03











At May
31, 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 with the remaining balance of 220,000 having an expiration date
of August 2015.




Warrant
activity during the period ending May 31, 2009, was as follows:





Number
      of Warrants
              
              
              Weighted
      Average Exercise PriceOutstanding,
      August 31, 2008
              
              
              1,381,952
              
              
              $
              1.33Granted
              
              
              --
              
              
              
              --Exercised
              
              
              --
              
              
              
              --Forfeited
              
              
              --
              
              
              
              --Expired
              
              
              200,000
              
              
              $
              0.5625Outstanding,
      May 31, 2009
              
              
              1,181,952
              
              
              $
              1.46Exercisable,
      May 31, 2009
              
              
              1,381,952
              
              
              $
              1.46





At May
31, 2009, if all options and warrants were exercised and all shares of preferred
stock were converted, we would have 58,451,970 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.


10





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.





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.  The  first 50,000 shares issued vested on
May 31, 2009 and were valued at $0.19 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 $9,500. Going forward the cost of these
shares will be expensed at current market price as they are issued.





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.









11


Note
10.  Board of Directors Reorganization





Since we
were unable to meet certain performance targets as set forth in the Series D
Convertible Preferred Stock Purchase Agreement, Series D Preferred Stockholders
invoked their right to demand that our Board of Directors be reduced from seven
members to five members and their right to appoint a majority of such
directors.  We held a special board meeting on May 21, 2009, during
which the Board approved reducing our board to five members and appointing the
two Series D nominees, Christopher Wall and Michael Ross to our Board; the Board
also resolved that Mr. Robert Saunders, our CEO, Mr. Michael Boswell, our Acting
CFO and Javier Idrovo will remain on the Board.





Note
11.  Subsequent Events





In June
2009, we modified the terms of the Island Scallop’s mortgage loan repayable and
loan was re-written and increased the principal amount to approximately $347,900
(CDN$380,000).  The additional CDN$100,000 provided by the refinancing
will be used as working capital at Island Scallops.  Going forward,
the loan will be repayable at $3,044 (CDN$3,325) 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.





On
June 30, 2009, we issued 320,269 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 $230,000 and
the total aggregate value of the transaction was recorded as a preferred stock
dividend.





On June
30, 2009, we issued 85,278 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 $62,000 and the total aggregate value of
the transaction was recorded as a preferred stock dividend.





On June
30, 2009, we issued 36,972 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 $27,000 and
the total aggregate value of the transaction was recorded as a preferred stock
dividend.
















12


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 nine months 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 and the
initial grow-out in onshore nursery ponds.  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 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.  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 hope
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 European based demand for our
seafood products.





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 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.   As a result of initial conversions and a review of
certain opportunities, 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.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.


13





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 this partnership could begin producing new revenue sometime in our
2011 fiscal year.





Despite
the increased revenues for the first nine months of our 2009 fiscal year (as
compared to 2008), we were not able to achieve positive operational cash flows
during this period. In fact, since we were unable to meet certain performance
targets as set forth in the Series D Convertible Preferred Stock Purchase
Agreement, Series D Preferred Stockholders invoked their right to demand that
our Board of Directors be reduced from seven members to five members and their
right to appoint a majority of such directors.  We held a special
board meeting on May 21, 2009, during which the Board approved reducing our
board to five members and appointing the two Series D nominees, Christopher Wall
and Michael Ross to our Board; the Board also resolved that Mr. Robert Saunders,
our CEO, Mr. Michael Boswell, our Acting CFO and Javier Idrovo will remain on
the Board.





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 hopes to achieve positive cash flows in
the  near future.  Management initially expected to achieve
positive cash flows in the second half of 2009, but now hopes to achieve them at
some point in our 2010 fiscal year.  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 nine months ended May 31, 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 $77,000 that is secured by all assets of
RKS.  As a result, we currently have five secured notes receivable
from RKS that total approximately $188,000.  To date, RKS has yet to
begin repaying a portion of these loans, but management expects repayments
beginning 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 480,000 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 4.6 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 indigenous peoples 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.


14





During
the first nine months of 2009, we continued 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 2.0 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 in February 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.  During March 2009, an additional
380 million larvae was produced using the new techniques and were
transferred to our onshore nursery.  As a result of a colder than normal
seawater temperatures, onshore nursery growth was delayed in April and
May.  Management believes that 10-15 million 5mm scallops seed will be
available for ocean entry in the months of June and July.




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 4.6 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 2.0 million
full-size scallops. Given our lower than expected revenues and negative cash
flows during 2009, 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 that in the best
case scenarios our scallops will yield as much $1.00 of revenue per
scallop.  The yield per scallop may 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
                      
                      $
                      136,006
                      
                      
                      $
                      136,0062006
                      
                      $
                      384,612
                      
                      
                      $
                      384,6122007
                      
                      $
                      727,302
                      
                      
                      $
                      254,555
                      
                      
                      $
                      472,7472008
                      
                      $
                      342,022
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      $
                      342,0222009
                      
                      $
                      196,180
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      $
                      196,180Totals
                      
                      $
                      1,786,122
                      
                      
                      $
                      775,173
                      
                      
                      $
                      472,747
                      
                      
                      $
                      538,202











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.


15


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 during the nine months ending May 31, 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.  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 negative margin.    Part of this
problem was associated with operational inefficiencies that were identified
during our recently completed top-down operational 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 sold.





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 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.  As a result of our failure to achieve positive
cash flows in 2009 we may 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 2009 and
2010.





16








Comparison
of results for the three and nine months ended May 31, 2009 to the three and
nine months ended May 31, 2008.





Revenues.Revenues
for the three months ended May 31, 2009, were approximately
$319,000.  We had revenues of approximately $265,000 for the three
months ended May 31, 2008.  This is an increase of approximately
$54,000 or 20%.  If not for the recent improvement of the US dollar
relative to the Canadian dollar for the three months ended May 31, 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 46%
over the prior three month period.  Revenues for the nine months ended
May 31, 2009, were approximately $1,329,000.  We had revenues of
approximately $1,060,000 for the nine months ended May 31, 2008.  This
is an increase of approximately $269,000 or 25%.  If not for the
recent improvement of the US dollar relative to the Canadian dollar for the nine
months ended May 31, 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 prior nine month
period.  Although our overall volume of scallops sales increased over
the previous nine 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 nine
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 nine 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
2010 fiscal year and beyond.





Gross loss.Gross loss for
the three months ended May 31, 2009 was approximately $207,000, a decrease of
approximately $17,000 as compared to gross loss of roughly $224,000, for the
three months ended May 31, 2008. For the nine months ended May 31, 2009, gross
loss was roughly $566,000.  Gross loss for the nine months ended May
31, 2008 was approximately $457,000.  This is an increase of $109,000
or roughly 23%. The increase in gross loss for the nine months ended May 31,
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 results 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 nine months ending May 31,
2009.  Although our gross loss increased for the nine months ending
May 31, 2009, our gross loss actually slightly decreased for the three months
ended May 31, 2009.  This represented the second time in the last
three quarters that we experienced a reduction of gross loss for the previous
quarters.  As such, despite the increase in gross loss for the nine
months ended May 31, 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 sold will only increase slightly. As a result,
we expect our margins to improve in future years.  Despite our
continuing losses, 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 increased seed sales and that with
adequate working capital can continue to see additional benefits from our
efforts in developing larger crops and expanding our seed sales in the 2009
fiscal year and beyond.


17





General and
administrative.  General and administrative expenses for the
three months ended May 31, 2009, were approximately $374,000.  Our
general and administrative expenses were approximately $674,000 for the three
months ended May 31, 2008.  This is a decrease of approximately
$300,000 or 45%. This decrease was directly attributable to a reduction in stock
option expense of roughly $283,000 as compared to the three months ended May 31,
2008.  For the nine months ended May 31, 2009, our general and
administrative expenses were roughly $899,000.  As compared to roughly
$2,159,000 for the nine months ended May 31, 2008.  This decrease of
approximately $1,260,000 was mainly the result of a reduction of roughly
$1,306,000 in stock option expense.  To date, we have already expensed
the majority of the stock option costs related to the 5,892,000 outstanding
options and are currently scheduled to only incur approximately an additional
$27,000 through August 31, 2010.  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 our expansion into scallop
crops to approximately 30 million.





Stock compensation and stock option
expense.  During the three and nine months ended May 31, 2009,
we have stock compensation expenses of $17,500 for both
periods.  During the three and nine months ended May 31, 2008, we had
stock compensation expense of approximately $37,000 and $87,000,
respectively.





We,
issued 3,300,000 new options during the nine months ended May 31,
2009.  As a result, we have stock option expense of roughly $180,000
for the nine months ended May 31, 2009.  We did not issue any new
options during the nine months ended May 31, 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
$454,000 and $1,486,000 during the three and nine months ended May 31, 2008,
respectively.





Other income (expense),
net.  Interest expense for the three months ended May 31, 2009,
was approximately $14,000.  Interest expense for the three months
ended May 31, 2008, was approximately $7,000.  Other income for
the three months ended May 31, 2009, was roughly $1,000 as opposed to other
expense of approximately $60,000 for the three months ended May 31,
2008.





Interest
expense for the nine months ended May 31, 2009, was approximately
$37,000.  Interest income for the nine months ended May 31, 2008, was
approximately nil.  Other income for the nine months ended May 31,
2009, was approximately $1,000 as opposed to other income of approximately
$31,000 for the nine months ended May 31, 2008.





Net loss.As a
result of the above, the net loss for three months ended May 31, 2009 was
approximately $682,000 as compared to a net loss of approximately $1,063,000 for
the three months ended May 31, 2008. Net loss for nine months ended May 31, 2009
was approximately $1,757,000 as compared to a net loss of approximately
$2,872,000 for the nine months ended May 31, 2008.




Liquidity
and Cash Resources. At May
31, 2009, we had a cash balance of approximately $26,000.  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
     18


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. As such,
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.  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.  In addition, until our operations are able to
generate additional profits to cover our corporate overhead cost, we will
require additional financings to fund our public company
expenses.  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.  To date, we have been unable to achieve positive cash flows
or locate additional financings in 2009.



































19


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.  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.


20





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.





































21





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.





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.


22





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.  The first 50,000 shares issued vested on May 31, 2009 and
were valued at $0.19 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 $9,500. Going forward the cost of these shares will be
expensed at current market price as they are issued.





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.




(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




Pursuant
to Section 3.21 of the Series D Convertible Preferred Stock Purchase Agreement
that we entered into on May 29, 2008, as previously disclosed in a Form 8-K that
we filed with the Securities and Exchange Commission on May 30, 2008, since we
did not meet our required performance targets as set forth in the Purchase
Agreement, the Series D Preferred Stockholders invoked their right to demand
that our Board of Directors be reduced from seven members to five members and
their right to appoint a majority of such directors.  The Series D
preferred Stockholders informed us that they intended to appoint Michael Ross
and Christopher Wall to the Board and would like to continue to have Javier
Idrovo serve as one of our board members.





We held a
special board meeting on May 21, 2009, during which the Board approved reducing
our board to five members and appointing Mr. Ross and Mr. Wall to our Board; the
Board also resolved that Mr. Robert Saunders, our CEO, Mr. Michael Boswell, our
Acting CFO and Javier Idrovo will remain on the Board.  Mr. Victor
Bolton, Mr. Douglas MacLellan, Mr. Darryl Horton and Mr. Mark Elenowitz tendered
their resignations, each of which the Board accepted and approved, to be
effective immediately; each of their resignations are solely a result of the
purchasers’ invocation of Section 3.21 of the Purchase Agreement and not as a
result of any disagreement with us nor were any of these directors removed for
cause.  Accordingly, our new Board of Directors consists of Robert
Saunders, Michael Boswell, Javier Idrovo, Christopher Wall and Michael
Ross.


23








Christopher Wall is an employee ofVision Opportunity Master Fund, Ltd., one of our significant
shareholders.








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
      2002.99.1
            Letter
      to Ocean Smart, Inc. (Incorporated by Reference on our Current Report 8-K
      filed on March 21, 2009)








24







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:  
      July 17, 2009
                OCEAN
      SMART, INC.By:   /s/  Robert
      SaundersRobert
      Saunders,Chief
      Executive Officer & PresidentBy:  /s/  Michael
      BoswellMichael
      Boswell,
                  Acting
      Chief Accounting
Officer























25