UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, DC 20549





FORM 10-K





Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.





For the Fiscal Year Ended August 31, 2009





Commission File Number 0-50092





OCEAN SMART, INC.


(Name of Small Business Issuer in Its Charter)








Nevada

20-3113571(State or other jurisdiction of incorporation or organization)

(IRS Employer Identification No.)








400 Professional Drive, Suite 310, Gaithersburg, Maryland
20878(Address of Principal Executive Offices)
(Zip Code)





(250) 757-9811


(Issuer’s Telephone Number, Including Area Code)





Securities registered pursuant to Section 12(b) of the Act:   None


Securities registered pursuant to Section 12(g) of the Act:   Common Stock





Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.





YES
X
NO





Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.





YES
X
NO





Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been  subject to such filing  requirement  for the past 90 days.








X
YES

NO





Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ]



















Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer,” and smaller reporting company” in Rule 12b-2 of the Exchange Act.





Large accelerated filer |_|                                                                Accelerated
Filer |_|


Non-accelerated filer   |_|                                                                Smaller
reporting company |X|








Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).





YES
X
NO





The issuer's revenues for its most recent fiscal year were:  $1,890,536.





The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of December 9, 2009 was $747,662 (computed by multiplying the closing sales price for our common stock on such date by the number of shares of common stock held by persons other than officers, directors or by record holders of
10% or more of the registrant’s outstanding common stock.  This characterization of officers, directors and 10% or more beneficial owners as affiliates is for purposes of computation only and is not an admission for any purposes that such people are affiliates of the registrant).





The number of shares of our common stock outstanding on December 9, 2009 was 25,920,296.















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TABLE OF CONTENTS





PART IItem 1
Description of Business
Page 5Item 2
Description of Property
Page 12Item 3
Legal Proceedings
Page 14Item 4
Submission of Matter to a Vote of Security Holders
Page 14PART IIItem 5
Market for Common Equity, Related Stockholder Matters and Small Business Issuer Purchases of Equity Securities
Page 15Item 6
Selected Financial Data
Page 22Item 7
Management's Discussion and Analysis or Plan of Operation
Page 23Item 8
Financial Statements
Page 38Item 9
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Page 59Item 9A
Controls and Procedures
Page 59PART IIIItem 10
Directors and Executive Officers of the Registrant
Page 62Item 11
Executive Compensation
Page 67Item 12
Security Ownership of Certain Beneficial Owners, and Management and Related Stockholder Matters
Page 71Item 13
Certain Relationships and Related Transactions
Page 74Item 14
Principal Accountants Fees and Services
Page 74Item 15
Exhibit List
Page 75Signatures
Page 77














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CAUTIONARY STATEMENT REGARDING


FORWARD-LOOKING INFORMATION





From time to time, we may make written statements that are "forward-looking," including statements contained in this report and other filings with the Securities and Exchange Commission, reports to our stockholders and news releases. All statements that express expectations, estimates, forecasts or projections are forward-looking statements.
In addition, other written or oral statements which constitute forward-looking statements may be made by us or on our behalf. Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates," "projects," "forecasts," "may," "should," variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions which are difficult to predict. Therefore,
actual outcomes and results may differ materially from what is expressed or forecasted in or suggested by such forward-looking statements. We undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Important factors on which such statements are based are assumptions concerning uncertainties, including but not limited to uncertainties associated with the following:





(a) volatility or decline of our stock price;





(b) potential fluctuation in quarterly results;





(c) our failure to earn revenues or profits;





(d) inadequate capital and barriers to raising the additional capital or to obtaining the financing needed to implement its business plans;





(e) inadequate capital to continue business;





(f) changes in demand for our products and services;





(g) rapid and significant changes in markets;





(h) litigation with or legal claims and allegations by outside parties; or





(i) insufficient revenues to cover operating costs.





There is no assurance that we will be profitable, we may not be able to successfully develop, manage or market our products and services, we may not be able to attract or retain qualified executives and technology personnel, our products and services may become obsolete, government regulation may hinder our business, additional dilution
in outstanding stock ownership may be incurred due to the issuance of more shares, warrants and stock options, or the exercise of warrants and stock options, and other risks inherent in the our businesses.











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We undertake no obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date hereof. Readers should carefully review the factors described in other documents we file from time to time with the Securities and Exchange Commission, including the Quarterly Reports on Form 10-Q and
Annual Report on Form 10-K and any Current Reports on Form 8-K filed by us.  All forward-looking statements attributable to us are expressly qualified in their entirety by the cautionary statement above.





PART I.





Item 1. Description of Business








(A)           We were incorporated under the laws of the State of Nevada on June 12, 2000, with the name Heritage Management Corporation.  In August 2005, we entered into a share
exchange agreement with Edgewater Foods, the parent company of Island Scallops Ltd. (or “Island Scallops”) an aquaculture company located in Vancouver Island, British Columbia. As a result of the Share Exchange, Island Scallops Ltd. became our wholly owned subsidiary and Edgewater’s shareholders became the owners of the majority of our voting stock.  Pursuant to the terms of the Share Exchange Agreement, Edgewater’s officers and directors were appointed as our officers and directors.  Additionally,
we changed our name from Heritage Management, Inc. to Edgewater Foods International, Inc.  Thereafter in March 2009, pursuant to our shareholder’s approval, we changed our corporate name from Edgewater Foods International Inc. to Ocean Smart, Inc. (or “Ocean Smart’).





Ocean Smart, a Nevada Corporation, is the parent company of Island Scallops Ltd., a Vancouver Island aquaculture company. Island Scallops was established in 1989 and for over 20 years has successfully operated a scallop farming and marine hatchery business. Island Scallops is dedicated to the farming, processing and marketing of high
quality, high value marine species: scallops and sablefish.  Scallop farming is relatively new to North America and Island Scallops is the only producer of the  “Qualicum Beach Scallop” .and demonstrated ability to produce sablefish ( blackcod)  Given Island Scallops’ unique hatchery technology and extensive research and development, we believe that there is currently no significant competition
for these marine species.   Island Scallops is committed to rapidly expanding production and profits while continuing to finance the aggressive growth of the company and maintaining a healthy respect for the marine environment.





Ocean Smart acquired Island Scallops in June 2005 through a tax free share exchange. Island Scallops was established in 1989 to commercialize Canadian government research on scallop aquaculture.  Island Scallops’ hatchery operations have diversified to produce other species of shellfish such as mussels, clams, geoducks
and oysters. Island Scallops has also investigated the culture of halibut, spot prawn, sea urchin and abalone. Island Scallops is the first hatchery to successfully produce sablefish juveniles for commercial grow-out.





Currently, Island Scallops’ primary product is farmed “Qualicum Beach Scallop”  for sale throughout North America.  Island Scallops offers a variety of other products and services to the industry including aquaculture
equipment, consulting, research and development, and custom processing and marketing.  Internationally, Island Scallops has collaborated with both Japanese and Moroccan fisheries interests.








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On August 30, 2006, we filed a Form 8-A to register our common stock pursuant to Section 12(g) of the Act and we therefore ceased being a voluntary filer.





Key Corporate Objectives





Our key business development objectives over the next 12 months is to finish the line construction of the Nile Creek and Kanish Bay farms and to move forward with possible joint venture shellfish farmers and  with First Nations1 groups,
investigate strategic acquisitions and/or business opportunities and look for possible partners or additional strategic investors to enable the company to capitalize on its existing black cod technology.  In general, we plan on leveraging our existing hatchery technology and expertise via joint venture and/or acquisitions that will enable us to reach significantly increased sales over the next three years.  Specifically, we plan to expand our business and operations as follows:





●   Expand our sales and marketing relationship 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) to expand overall
scallops and reduce selling costs.  The initial order of 800,000 lbs. the "Qualicum Beach Scallop", has been completed and future sales agreements are being finalized.





●       Continue to move forward with our discussions with various First Nations groups and individuals about possible partnerships or buy sell agreements to expand scallops culture in British Columbia.  This will
provide the company with additional growing areas for scallops and future joint venture revenues.





●      Investigate possible acquisitions of other aquaculture companies, equipment vendors and/or seafood distributors.  We plan to initially focus on companies that we believe could significantly benefit from our hatchery
technology and expertise.  As part of this initiative we recently established an Acquisition/Business Opportunity Board Committee and are currently beginning initial conversions with both North American and Chinese based companies.  Aside from the November 2008 acquisition of Granscal Sea Farms Ltd., a Kanish Bay Company, as of the date of this filing, no new definitive agreements have been signed.





●        Look to indentify either new strategic investors and/or possible joint venture partners who could help us capitalize on existing sablefish (or blackcod) hatchery technology and expertise.   One possible
arrangement would be for us to license our blackcod hatchery technology and expertise to a strategic partner.  As of the date of this filing, we have yet to locate either a strategic investor or a joint venture of licensing partner.  If we do indentify a suitable arrangement,   our goal would be to capitalize on the high demand for sablefish in foreign markets by entering into the blackcod market in the next 2 to 3 years.








Marketing and Distribution





Our marketing and distribution strategy for Island Scallops will focus on developing and maintaining long-term relationships with distribution channel members.  Island Scallops also strives to differentiate its products to achieve consistent supply and quality. Island Scallops believes the scallop market effectively functions
as a commodity market and therefore, relationships with distributors are important. To develop these relationships, Island Scallops has identified key purchasing criteria for the distributors: price, quality and consistent fresh farmed supply.   Over the long term, for the reasons noted below, Island Scallops wants to differentiate its products so that it can command premium prices. Freshness is an important factor for scallops since whole live scallops have a limited shelf life,   while
fresh scallop meat remain fresh for up to 20 days.   Due to this short shelf life, distributors try to offer the freshest products.  Island Scallops believes it is in a favorable position to supply fresh products to United States brokers/distributors, especially those located on the west coast where demand for the product is strong. Currently, these brokers/distributors are supplied for the most part with frozen east coast North American scallops.




1 First Nations commonly refers to the indigenous people 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.


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Traditionally, as described above, we have sold live scallops within the Pacific Northwest market.  We recently completed a $2.0 million order with Fanny Bay Oyster Co., a division of Taylor Shellfish Farms of Shelton, Washington (an international seafood distributor and the largest shellfish company on the West Coast).  The
order includes live scallops, fresh scallop meat and frozen scallops produced at our Qualicum Beach, B.C. operation.  As a result of this order, Fanny Bay has become the effective exclusive distributor of our scallops.  We believe this order (and future orders) will reduce cost and will continue to encourage additional wholesalers within the Taylor network to carry our scallops.





Current Products





Island Scallops currently focuses exclusively on aquaculture products and is not involved in wild fisheries.  All seafood products are produced in private hatcheries and grown on ocean farm sites. Currently, the “Qualicum Beach Scallop” is
the only product that Island Scallops produces, grows, processes and markets.   Island Scallops also produces a variety of other shellfish seed species including the Pacific oyster, Eastern blue mussel, Mediterranean mussel, Geoduck clam, which we sell to third party shellfish farmers.





Island Scallops has been a leader in marine hatchery technology for the past 20 years.  Island Scallops has developed proprietary hatchery techniques for a number of marine species, most notably the hybridizing of the “Qualicum Beach Scallop” and
becoming the first company to produce commercial quantities of sablefish juveniles.   Both of these breakthroughs have required many years of research and considerable investment.  In the case of sablefish, which is a cold-water fish that spawns at depths of 800 - 2400 ft, a variety of techniques were required to successfully mature, spawn, incubate and rear the larvae.  In addition, there were technical difficulties associated with egg and yolk sac incubation (as well as larvae
rearing and weaning) that were resolved using proprietary technology developed at Island Scallops.  We intend to begin significant further commercialization of sablefish in the next two to three years, provided we are able to finance the expansion of this product which we estimate will require at least $5.0 million of capital.





Scallop Overview





Island Scallops’ main product is the “Qualicum Beach Scallop”, which is a hybrid of the imported Japanese scallop and the local weathervane scallop.  Between 1993 and 1999, Island Scallops developed this new scallop using Japanese
scallops that were imported under quarantine in the early 1990’s.  This unique scallop is marketed as the “Qualicum Beach Scallop” and is the largest scallop in the world, reaching sizes of 15 cm and 500 grams.  The scallop species farmed by Island Scallops has a proven record of being disease resistant, with a 95% survival rate during the grow-out phase.  We have the necessary farming infrastructure
to produce up to 15 million scallops annually with an additional capital investment of approximately $1.0 million, we hope to fund this expansion via either increasing cash flow or additional equity or debt financings.    If we are unable to locate financing or develop positive cash flow, we will not be able to continue to expand our production capabilities.





The “Qualicum Beach Scallop” is sold live, fresh shucked and frozen.  Pricing for live scallops is typically US$3.00 per pound and fresh shucked meat at US$11.87 FOR U12 (under 12 pieces per pound).  In the early days of our
business, due to our limited production, our focus was on the sale of live scallops.   As our production has increased our focus has shifted to fresh shucked meat, as this product has a longer shelf life and stronger demand.





In August 2009, the average selling price for live scallops was US$1.58 and shucked US$0.95 per scallop.   The combined average price per scallops was US$1.05 due to the higher amount of shucked scallops being processed.








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The basis for our recent scallop farming production increase stems from a combination of our tenure expansion, our recent financing, improved grow-out techniques and our transition to a combination of “pearl nets and lantern-style” farming methods.  Scallops culture utilizes two styles of small cages referred
to as “pearl nets and lantern nets.”  Pearl nets are shaped like a pyramid with a 50 by 50 cm square base and grow small scallops from 2-3 mm to 10mm.  The 10-mm scallops are grown in cylindrical nets called lantern nets and are 60 cm in diameter and 1.2 meters deep containing 12 layers.  Our Hindoo Creek and Deep Bay tenures expansion have been completed, and unfortunately our expansion of our Denman tenure has been turned down by the Denman Island Trust and we are considering
re-applying.





As the only hatchery/producer of cultured scallops on the west coast of North America, Island Scallops has the ability to supply fresh scallops (of a predictable quality and quantity) throughout the year.  An increasing demand for local sustainable fresh seafood has also increased sales of the “Qualicum
Beach Scallop”.   Significant exposure of our “Qualicum Beach Scallop,” in trade magazines, newspapers, radio and on television  praising the fresh sweet flavor of our local scallop has increased the demand for our product.   Traditionally slow sales months of July and August showed an unexpected increase in sales surpassing our usual peak demand period of Christmas and
Chinese New Year





The shucked product form is the most significant form for North American scallop markets.  A whole-live scallop although  the most desirable from the farmer’s point of view, has a very limited market due to the short shelf life. Previously, Island Scallops has developed a market for whole live scallops, which
exceeds 5,000 lbs. per week into Vancouver.  As described above, our scallop sales efforts are currently focused on our Fanny Bay (Taylor Seafood) orders.  We believe that these strategic relationships enable us to capitalize on established selling networks and proven distributors to capitalize on demand for quality seafood products.








Sablefish (Blackcod) Overview





Sablefish (Anoplopoma fimbria), often called blackcod although not a member of the cod family, is an elongate fish with two dorsal fins and an anal fin similar to and opposite the second dorsal fin.  Adults are black or greenish gray; usually with slightly paler blotches or
chainlike pattern on the upper back.  At 30-61 cm in size they are often greenish with faint stripes on the back.





Sablefish inhabit shelf and slope waters in depths of greater than 1,500 meters, from Baja California to the Aleutian Islands and the Bering Sea.  The larger populations of sablefish are centered in northern British Columbia and the Gulf of Alaska.  Adults favor mud bottoms and feed on benthic invertebrates, squid
and numerous fish species.  In turn, they are prey for halibut, lingcod, hagfishes and marine mammals such as sea lions.  In addition, killer whales have been known to take sablefish from long line gear as it is being retrieved.





Sablefish spawn from January to March along the continental shelf at depths of 800 to 2400 feet.  Fecundity ranges from 60,000-200,000 eggs up to one million eggs for a 102-cm fish.  Larval sablefish are found in surface waters over the shelf and slope in April and May.  Juveniles are highly migratory
with significant movement from nursery areas in northern B.C. to the Gulf of Alaska and the Bering Sea.  Sablefish move to deeper waters as they mature.  Growth is rapid with sizes at maturity reaching 52-61 cm for five-year-old males and 58-71 cm for five-to-seven year old females.  Sablefish growth appears to be rapid for the first three-to-five years and slow asymptotically thereafter.  Annual natural mortality of adults has been estimated to be about 10 percent.





Island Scallops plans to raise sablefish onshore using shallow ponds or above ground tanks.  This system has been successful in Texas for the culture of catfish.  Tests have shown that sablefish prove to be very hardy when grown in ponds and this has the added advantage of causing sablefish to be parasite free.  Wild
sablefish carry a parasite that does not allow the fish to be eaten raw.








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Over the past nine years, Island Scallops has also developed proprietary hatchery technology for the production of sablefish juveniles. We believe that sablefish will be the next species, after salmon, for successful large-scale commercial farming.  Sablefish, which is a premium-quality whitefish with a delicate texture and
moderate flavor, is an ideal substitute for Chilean sea bass (currently over-fished in all oceans).  To date, Island Scallops has marketed a limited number of live sablefish into the Vancouver market.  Initial response was excellent for a small 1-kilogram live sablefish (~$11/kg).  If we are able to locate suitable funding and/or partners, Island Scallops will be able to capitalize on our breakthrough sablefish hatchery technology by constructing a new sablefish hatchery consisting
of the following:





●                 An expanded Brood Stock facility with larger capacity to hold the various families of selected strains of sablefish.  This new facility will incorporate a
new state-of-the-art water treatment system.





●                 An improved incubation and larval rearing facility incorporating proprietary improvements in tank design and seawater systems.





●                 An upgraded zooplankton culture facility with improved handling and enrichment techniques.





●                 An expanded and improved juvenile rearing facility incorporating proprietary recirculation system designs.





As part of this expansion, we also intend to construct a new onshore tank farm consisting of large and small ponds and tanks complete with associated recirculation systems.  This onshore facility will be used to augment the juvenile rearing area and will house and grow juvenile fish.





At the present time, worldwide “non-farming” sablefish catches are struggling to meet the worldwide demand according to DFOWeb, NPFMCWeb and Pacific Fishery Management Council Website. Currently, there are only two hatchery facilities with very limited production.    Current production is less than 100,000
juveniles per year.   Based on our analysis of present market conditions, increasing worldwide hatchery production tenfold (to roughly 1 million 3 kilo sablefish) would fill less than 10% of the current world demand shortfall. If Island Scallops’ new sablefish facilities are able to reach a production of 3 million sablefish annually, this will only fill less than 30% of the current overall shortfall.  The economic potential for sablefish is therefore considerable. Given these market
conditions and opportunities, Island Scallops, subject to our ability to secure adequate funding, is determined to enter the market for sablefish in a significant manner within the next two to three years.








Other Products





In the pastIsland Scallops sold a variety of shellfish larvae and seed to both international and local customers.  Sales included two species of mussels, manila clams, geoduck clams, oysters, abalone and sea urchins.  Island Scallops has established suppliers
of aquaculture equipment in Japan and China and supplies nets, ropes, floats, and processing equipment into the British Columbia industry.  Currently, Island Scallops is selling oyster and mussel larvae.  The Company is also looking to develop increasing shellfish larvae and seed sales and equipment sales in the near future.  In addition, we will continue to investigate funding sources and/or partners for the development of our sablefish operation with a goal of further commercialization
of sablefish in two to three years.








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General Fisheries Market Overview





The worldwide market for farmed marine species continues to grow. According to personal communications with the National Marine Fisheries Service, Fisheries Statistics Division, Silver Spring, MD, in British Columbia alone, farming production increased from US$44.56 million in 1988 to US$190.24 million in 1998. Although
significant growth occurred in salmon farming and little or no growth occurred in shellfish (oyster) farming.  Island Scallops can only benefit from this recent trend towards shellfish, as training farmers in correct husbandry would only add another revenue stream.





The majority of the world’s current scallop production comes from three species of scallops: the Japanese scallop, the sea scallop and the king scallop.  The Chinese scallop is also selling well, but FDA inspections of China facilities found that the conditions and hygiene were issues as hatcheries were highly polluted.   There
has also been a fishery boom on the east coast of Canada and the United States with the Digby or sea scallop.





In the United States, consumption of scallops exceeded 64 million pounds in 2002.  Various communications between Island Scallops personnel and the National Marine Fisheries Service, Fisheries Statistics Division, Silver Spring, MD and analysis of data from the Fisheries
Statistics & Economics Division of the National Marine Fisheries Service (NMFS) website for annual landings of commercial fisheries (http://www.st.nmfs.noaa.gov/st1/commercial/index.html), tell us that this represented a per capita consumption of 0.22 pounds, with a dollar value of US$342 million. After shrimp, scallops represent one of the most popular shellfish products in the United
States.  In general, per capita consumption of seafood in the United States has remained steady over the last six years ranging from 15.2 to 16.2 pounds per annum.   Based upon Robert Saunders’, our chairman and president, communications with the National Marine Fisheries Service, Fisheries Statistics Division of Silver Spring, MD, and personal observations, given consumers' growing preoccupation with healthier foods and the increasing availability of seafood (due to the recent
successes in aqua farming and improved distribution channels), we expect per capita consumption to continue to increase.





Regulatory Environment





Effect of Government Regulation





There are a limited number of regulations that restrict the fishing, distributing or purchase of scallops in Canada and the United States.  Therefore, the country of origin makes little difference for the pricing or demand of scallops.





A limitation to market supply is paralytic shellfish poisoning (PSP) or "red tide". PSP is a toxin generated by plankton (scallops' food) at particular times of the year.  The toxin is passed to the scallop when plankton is digested, but the toxin does not harm the shellfish. However, the shellfish containing the toxin can
be harmful to humans who consume it. Although only a limited number of human deaths caused by red-tide poisoning have been reported, the public announcement of red tide has a devastating effect on most shellfish sales. The exception is scallop meat, because the adductor muscle of the scallop does not concentrate the toxin; shucked scallops are safe to eat at any time of the year. Nevertheless, public perception could still influence demand over short periods of time. To monitor for PSP, the federal Fisheries
Inspection Branch constantly monitors samples of shellfish production and wild shellfish populations.   In the summer of 2008 Island Scallops experience a prolonged PSP out break and was able to continue processing fresh shucked scallop meat throughout this period with little effect on sales.





Tenure Expansion and Compliance with Environmental Laws





Our planned tenure expansions will require that we undergo an environmental screening from Transport Canada pursuant to Canadian Environmental Assessment Act, which includes a review of factors such as the environmental effects of the planned expansions, including the environmental effects of malfunctions or accidents that may occur
in connection with the planned expansions and any cumulative environmental effects that are likely to result from such planned expansions; the significance of such environmental effects and any comments from the public that are received in accordance with the CEA Act and applicable regulations; and measures that are technically and economically feasible and that would mitigate any significant adverse environmental effects of the planned expansions.








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Island Scallops does not at the present time have any new tenure application underway.    A lengthy  and time consuming process is now further restrained due to overlapping First Nation land claims.   Until the British Columbia government has settled these land claims it is unlikely that
any further crown land tenures will be approved.   If we are unable to expand our tenures, our projected production may be delayed.





Competition





Fisheries Industry in General





Island Scallops is in the farmed seafood business.  The main concentration of marine farming in British Columbia has traditionally been in the salmon sector.  The salmon farming business has developed into a mature industry dominated by Norwegian farmers.  The rest of the British Columbia marine farming
sector is in the shellfish industry, mainly in oysters and Manila clams and more recently mussels.  This sector is rapidly expanding and it accounted for approximately US$16 million in British Columbia in 2002, according to the British Columbia Shellfish Growers Association website. Given Island Scallops’ expertise and significant research and development experience, we believe that there is little or no direct competition in the production
of farmed scallops.




There are no significant direct competitors in the scallop farming business in British Columbia.  The United States will not allow farming this species in their waters, as this species is considered "exotic" without an expensive quarantine facility and lengthy environmental assessment studies, which is both costly and time
consuming.    Island Scallops completed these requirements almost 20 years ago and has a significant advantage over new competitors.  Although scallop farming is a very significant industry in Japan and China, only frozen shucked scallops are currently sold into North America from these countries. Recent examination by the United States and Canadian Food Inspection authorities of the growing waters in China resulted in reduced exports due to high levels of pollution.





Island Scallops is the only hatchery, outside of China, that has successfully produced the Japanese scallop, and the only company that has successfully, hybridized the weathervane and the Japanese scallop. Island Scallops is uniquely positioned as the sole producer of live scallops in North America. There currently are no other hatcheries
in North America that we are aware of that are capable of producing this unique breed.  Although a large commercial scallop fishery exists on the east coast of North America, the majority of the scallops are shucked at sea with only limited quantities sold alive. These scallops are sold as "Digby” or “Sea” scallops. A number of companies have attempted to grow the bay scallop and the sea scallop on the east coast, but these companies have only achieved limited success.





The primary British Columbia participants in scallop farming are Island Scallops joint venture farmers or independent scallop farmers, which receive their supply of seed scallops solely from Island Scallops. These farmers are chronically underfinanced and production from these growers usually totals less than 1,000,000 scallops per
year.  Island Scallops is uniquely positioned to rapidly expand these farms (up to 10 farms) under an exclusive farming and marketing contract.





Due to its large size and small count per pound, the sea scallop is the prime competitor in the United States market. The fishery for this scallop is located primarily on the North American east coast, in particular Georges Bank off New England and the Maritime provinces. This is a limited opportunity fishery, with actual fishing time
being dictated by sea and other environmental conditions.





Island Scallops is currently only one of three hatcheries to produce quantities of juvenile sablefish.  These fish were sold to five commercial salmon farming facilities and the fish have been marketed successfully.  Little demand for a new species has materialized.  Although two hatcheries have been constructed
in British Columbia, neither has successfully produced large quantities of sablefish.   The farming of sablefish is still in its infancy and only limited production has occurred.





This limited production is not a matter of biological barriers but rather a lack of interest by the major producers to venture into a new marine species.








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Research and Development





Due to changes in Canadian Federal Government’s Research and Development tax credits (SRED) program, which prevents any part of the research to be combined with commercial production, no Research and Development claims were made in fiscal 2007, 2008 and 2009.  Research did continue on the genetic selection of superior
strains of scallops, as did developments in the culture process for both marine algae and developments in re-circulation systems.   Island Scallops contracts research and development with a separate company called RKS Laboratories Ltd., which has  limited commercial production and whose  goal is the genetic improvement in breeds of the,“Qualicum Beach Scallop”  designing
and testing of aquaculture equipment and producing seed of other marine species.  We believe that this will allow the continued support from the SRED program.





Employees





At August 31, 2009, we had 35 full time employees. None of our employees are represented by a labor union and we consider our relationships with our employees to be good.








ITEM 2.               DESCRIPTION OF PROPERTY





For the fiscal year ended August 31, 2009, our U.S. corporate office was located at 400 Professional Drive, Suite 310, Gaithersburg, Maryland 20878.  This space was provided on a rent free basis by one of our shareholders.





Island Scallops’ main office and hatcheries are located on the east side of Vancouver Island in the town of Qualicum Bay at 5552 West Island Highway, Qualicum Beach, British Columbia, Canada V9K 2C8.  The shellfish hatchery is housed in a 930 square meter building.  A 300 square meter shellfish processing
plant is also located at this site. Corporate scallop farms are situated along the east and west coasts of Vancouver Island.  These facilities represent the largest private marine research hatchery and the first fully integrated shellfish producer in Canada.





Island Scallops now has a total of eight farm sites for scallops (up from 5).  These farm sites are located at Island Scallops held tenures (shellfish tenures are government-granted rights that allow use of offshore waters to cultivate shellfish).  Three of those five scallop farms are located in Baynes Sound, 25
minutes north of the main facility. Baynes Sound, the marine waterway situated between eastern Vancouver Island and the western shore of Denman Island, is considered the most productive and highly utilized shellfish growing area in coastal British Columbia.  The area supports extensive beach culture (manila clams and oysters) as well as deepwater culture that produces oysters, scallops and some mussels.




These farms sites total approximately 205 acres and can currently accommodate more than 8 million scallops over a 2 year harvest.   An additional bottom tenure of 926 acres is located 10 minutes north of the main facility (at Bowser) and is capable of producing at least 20 million scallops.  Three new farm sites
located on Quadra Island in Kanish Bay have a combined area of 131 acres and are capable of producing  3 million scallops over a 2 year harvest. The final








12





farm site on the west coast of Vancouver Island near Tofino is capable of producing at least three million scallops, although that site is currently under-developed.











Common Site Name
Lands File No.
Acres
TypeDenman
1406063
38.64
DeepwaterHindoo Creek
1406664
123.32
DeepwaterDeep Bay
1406711
43
DeepwaterTofino
1406061
9.6
DeepwaterNile Creek
1407517
926
DeepwaterGranscal Orchard Bay
1405412
65
DeepwaterGranscal
1406806
15
DeepwaterGranscal K1
1402860
29.7
Deepwater





The three Baynes Sound tenures (Denman, Hindoo Creek and Deep Bay), the Nile Creek off shore farm, the Granscal farms and the Tofino tenure offer unique features, which will add additional value to these properties. These features include differences in exposure to storms  which ease harvesting restriction due to poor weather conditions .   Neither high rainfall
or PSP closures affect the scallop meat and harvesting can occur year round.  The expanded tenures should easily accommodate our increasing scallop harvest in 2009 and beyond. At their current size and with the introduction of sufficient main lines, our tenures have the capacity to accommodate approximately 15 million (depending on size) million scallops without any increase in their footprints over a 2 year harvest.



























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Expansion of our Deep Bay and Hindo Creek have been completed and do not need to be renewed for twenty years.  An amended tenure agreement has been signed with the government of BC to expand the Denman Island site and we are weighing our options on rezoning of the site.    In summer of 2008, we completed
construction of 23, 300 meter culture lines, each of which were stocked with scallops in the fall and spring of 2008 and 2009    A further 60 lines will be constructed in the coming year and will accommodate over 12 million scallops.





Island Scallops’ location has a distinct advantage for producing marine species.  The waters off British Columbia are pristine and unspoiled by large populations or major industries.  The close proximity to major western cities allows us to effectively put our products into the hands of the consumer within
24 hours.





The source of our raw material comes from our own hatchery brood stock.  In the case of the “Qualicum Beach Scallop”, we have been selectively breeding this species for superior growth and survival for the past 20 plus years.  The breeding program
has produced a vigorous, rapid growing, disease resistant scallop with exceptional meat yield.  In the case of sablefish we have been selecting fast growing fish for the past 5 years, these display a high degree of domestication. The spawning season has been extended for both of these species allowing for juvenile production almost year round.  This ability to hold seed stock and select superior strains gives Island Scallops an advantage in the industry.  It also allows Island Scallops
to tailor its production to varying seasonal and market demands.








ITEM  3.               LEGAL PROCEEDINGS


We are not a party to any material legal proceeding and to our knowledge no such proceeding is currently contemplated or pending.








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





We did not submit any matters to a vote of our security holders during the fiscal year covered by this Report.























14








PART II








ITEM 5.
MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES





The common stock is currently quoted on the over–the-counter Bulletin Board under the symbol “OCSM.”





The following table sets forth the quarterly high and low bid prices for the common stock since the quarter ended August 31, 2006.  The prices set forth below represent inter-dealer quotations, without retail markup, markdown or commission and may not be reflective of actual transactions.





High


LowQuarter ended August 31, 2006

$
1.70


$
1.20Quarter ended November 30, 2006

$
1.85


$
1.01Quarter ended February 28, 2007

$
1.70


$
1.10Quarter ended May 31, 2007

$
1.70


$
1.00Quarter ended August 31, 2007

$
1.65


$
1.05Quarter ended November 30, 2007

$
1.45


$
0.75Quarter ended February 28, 2008

$
1.45


$
0.75Quarter ended May 31, 2008

$
1.01


$
0.70Quarter ended August 31, 2008

$
1.00


$
0.26Quarter ended November 30, 2008

$
0.08


$
0.08Quarter ended February 28, 2009

$
0.10


$
0.10Quarter ended May 31, 2009

$
0.19


$
0.19Quarter ended August 31, 2009

$
0.15


$
0.15





At August 31, 2009, the closing bid price of the common stock was $0.15 and we had approximately 25,920,296 shares of our common stock, 7,773,998 shares of our Series A Preferred Stock, 207 shares of our Series B Preferred Stock, 747,870 shares of our Series C Preferred Stock and 304,558 shares of our Series D Preferred Stock
issued and outstanding. This number excludes any estimate by us of the number of beneficial owners of shares held in street name, the accuracy of which cannot be guaranteed.





At November 10, 2009, the closing bid price of the common stock was $0.05 and we had approximately 54 record holders of our common stock, 13 record holders of our Series A Preferred Stock, 3 record holders of our Series B Preferred Stock, 2 record holders of our Series C Preferred Stock and 13 record holders of our Series
D Preferred Stock. This number excludes any estimate by us of the number of beneficial owners of shares held in street name, the accuracy of which cannot be guaranteed.





Dividends





We have not paid cash dividends on any class of common equity since formation and we do not anticipate paying any dividends on our outstanding common stock in the foreseeable future.





Securities Authorized for Issuance Under Equity Compensation Plans








2005 Equity Incentive Plan





Our 2005 Equity Incentive Plan is intended to further our growth and financial success by providing additional incentives to our directors, executives and selected employees and consultants so that such participants may acquire or increase their proprietary interest in us.  The term "Corporation" shall include any parent
corporation or subsidiary corporation of Ocean Smart as those terms are defined in Section 424(e) and (f) of the Internal Revenue Code of 1986, as amended. Stock options granted under the Plan may be either "Incentive Stock Options", as defined in Code section 422 and any regulations promulgated under that Section, or "Nonstatutory Options" at the discretion of our Board of Directors and as reflected in the respective written stock option agreements granted pursuant to this Equity Plan. Stock Appreciation Rights,
Restricted Stock, Restricted Stock Unit, Performance Awards, Dividend Equivalents, or Other Stock-Based Awards may also be granted under the Equity Plan.  The Board believes that the Equity Plan will maintain the flexibility that Ocean Smart needs to keep pace with its competitors and effectively recruit, motivate, and retain the caliber of employees, directors and consultants essential for achievement of our success.







15





Individuals eligible to receive awards under the Equity Plan include officers, directors, employees of and consultants to Ocean Smart and its affiliates.  The number of shares available under the Equity Plan shall be 5,000,000 shares of our common stock, as well as the following:  As of January 1 of each year, commencing
with the year 2006 and ending with the year 2008, the aggregate number of Shares available for granting Awards under the Equity Plan shall automatically increase by a number of Shares equal to the lesser of (x) 5% of the total number of Shares then outstanding or (y) 1,000,000.  The Board may distribute those shares in whatever form of award they so choose within the Equity Plan’s guidelines.  There are no restrictions on the amount of any one type of award that may be granted under
the Equity Plan.





As of August 31, 2009, our Board of Directors had granted 6,292,000 options to employees, directors and consultants under the Equity Plan.  As of August 31, 2008, 400,000 of these options had been canceled and 5,892,000 were outstanding. As of August 31, 2009, there are 5 Directors, 1 executive officer, 1 consultant
and approximately 26 employees other than executive officers, who are eligible to receive awards under the Equity Plan.





The Board may delegate a Committee to administer the Equity Plan.  The Committee shall not consist of fewer than two members, each of whom is a member of the Board and all of whom are disinterested persons, as contemplated by Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as amended and each of whom is
an outside director for purposes of Section 162(m) of the Code, acting in accordance with the provisions of Section 3.





Currently, we do not have any definitive plans for granting further awards under the Equity Plan and no determination has been made as to the number of awards to be granted, or the number or identity of recipients of awards.





Amending the Plan.The Board may amend, alter, suspend, discontinue, or terminate the Equity Plan, including, without limitation, any amendment, alteration, suspension, discontinuation, or termination that would impair the rights of any Participant, or any other holder
or beneficiary of any Award theretofore granted, without the consent of any share owner, Participant, other holder or beneficiary of an Award, or other Person.  The Board may also waive any conditions or rights under, amend any terms of, or amend, alter, suspend, discontinue, or terminate, any Awards theretofore granted, prospectively or retroactively, without the consent of any Participant, other holder or beneficiary of an Award.  Except as provided in the following sentence, the Board is
authorized to make adjustments in the terms and conditions of, and the criteria included in, Awards in recognition of unusual or nonrecurring events affecting the Company, any Affiliate, or the financial statements of the Company or any Affiliate, or of changes in applicable laws, regulations, or accounting principles, whenever the Board determines that such adjustments are appropriate in order to prevent dilution or enlargement of the benefits or potential benefits to be made available under the Equity Plan.  In
the case of any Award that is intended to qualify as performance-based compensation for purposes of Section 162(m) of the Code, the Board will not have authority to adjust the Award in any manner that would cause the Award to fail to meet the requirements of Section 162(m).





Options and Rights.Options and Stock Appreciation Rights may be granted under the Equity Plan.  The exercise price of options granted shall be determined by the Board or the Committee; provided, however, that such exercise price per Share under any Incentive
Stock Option shall not be less than 100% (110% in the case of a "10-percent shareholder as such term is used in Section 422(c)(5) of the Code) of the Fair Market Value of a Share on the date of grant of such Incentive Stock Option.  The Board or Committee shall fix the term of each Option, provided that no Incentive Stock Option shall have a term greater than 10 years (5 years in the case of a "10-percent shareholder” as such term is used in Section 422(c)(5) of the Code).





A Stock Appreciation Right granted under the Equity Plan shall confer on the holder thereof a right to receive, upon exercise thereof, the excess of (1) the Fair Market Value of one Share on the date of exercise or, if the Board or Committee shall so determine in the case of any such right other than one related to any Incentive
Stock Option, at any time during a specified period before or after the date of exercise over (2) the grant price of the right as specified by the Board or Committee.  Subject to the terms of the Plan, the grant price, term, methods of exercise, methods of settlement, and any other terms and conditions of any Stock Appreciation Right shall be as determined by the Board or the Committee.  The Board and the Committee may impose such conditions or restrictions on the exercise of any Stock
Appreciation Right as it may deem appropriate.








16





Federal Income Tax Consequences.The current federal income tax consequences of grants under the Equity Plan are generally described below. This description of tax consequences is not a complete description, and is based on the Internal Revenue Code as presently in
effect, which is subject to change, and is not intended to be a complete description of the federal income tax aspects of options and stock awards under the Equity Plan. Accordingly, the discussion does not deal with all federal income tax consequences that may be relevant to a particular recipient, or any foreign, state or local tax considerations. Accordingly, potential recipients are urged to consult their own tax advisors as to the specific federal, foreign, state and local tax consequences to them as a result
of receiving an Award under the Equity Plan.





Nonqualified Stock Options. A recipient will not be subject to federal income tax upon the grant of a nonqualified stock option. Upon the exercise of a nonqualified stock option, the recipient will recognize ordinary
compensation income in an amount equal to the excess, if any, of the then fair market value of the shares acquired over the exercise price. We will generally be able to take a deduction with respect to this compensation income for federal income tax purposes. The recipient’s tax basis in the shares acquired will equal the exercise price plus the amount taxable as compensation to the recipient. Upon a sale of the shares acquired upon exercise, any gain or loss is generally long-term or short-term capital
gain or loss, depending on how long the shares are held. The required holding period for long-term capital gain is presently more than one year. The recipient’s holding period for shares acquired upon exercise will begin on the date of exercise.





Incentive Stock Options.A recipient who receives incentive stock options generally incurs no federal income tax liability at the time of grant or upon exercise of the options. However, the spread will be an item of tax preference, which may give rise to alternative minimum tax
liability at the time of exercise. If the recipient/optionee does not dispose of the shares before the date that is two years from the date of grant and one year from the date of exercise, the difference between the exercise price and the amount realized upon disposition of the shares will constitute long-term capital gain or loss, as the case may be. Assuming both holding periods are satisfied, no deduction will be allowable to us for federal income tax purposes in connection with the option. If, within two
years of the date of grant or within one year from the date of exercise, the holder of shares acquired upon exercise of an incentive stock option disposes of the shares, the recipient/optionee will generally realize ordinary compensation income at the time of the disposition equal to the difference between the exercise price and the lesser of the fair market value of the stock on the date of exercise or the amount realized on the disposition. The amount realized upon such a disposition will generally be deductible
by us for federal income tax purposes.





Stock Awards.If a recipient receives an unrestricted stock award, he/she will recognize compensation income upon the grant of the stock award.
If a recipient receives a restricted stock award, he/she normally will not recognize taxable income upon receipt of the stock award until the stock is transferable by the recipient or no longer subject to a substantial risk of forfeiture, whichever occurs earlier. When the stock is either transferable or no longer subject to a substantial risk of forfeiture, the recipient will recognize compensation income in an amount equal to the fair market value of the shares (less any amount paid for such shares) at that
time. A recipient may, however, elect to recognize ordinary compensation income in the year the stock award is granted in an amount equal to the fair market value of the shares (less any amount paid for the shares) at that time, determined without regard to the restrictions. We will generally be entitled to a corresponding deduction at the same time, and in the same amount, as the recipient recognizes compensation income with respect to a stock award. Any gain or loss recognized by the recipient upon subsequent
disposition of the shares will be capital gain or loss.





Tax Deductibility under Section 162(m).Section 162(m) of the Internal Revenue Code disallows a public company’s deductions for employee compensation exceeding $1,000,000 per year for the chief executive officer and the four other most highly compensated executive
officers. Section 162(m) contains an exception for performance-based compensation that meets specific requirements. The Equity Plan is intended to permit all options to qualify as performance-based compensation at the Board of Directors or Committee’s discretion.  If an Award is to qualify as such, it shall clearly state so in the award agreement.














17











Withholding.We have the right to deduct any taxes required to be withheld with respect to grants under the Equity Plan. We may require that the participant pay to us the amount of any required withholding. The Compensation Committee may permit the participant to elect
to have withheld from the shares issuable to him or her with respect to an option or restricted stock the number of shares with a value equal to the required tax withholding amount.








The following table provides information as of August 31, 2009 with respect to compensation plans (including individual compensation arrangements) under which our securities are authorized for issuance:








Plan Category
Number of securities
to beissued upon
exercise of
outstanding options,
warrants and rights


(a)
Weighted average
exercise price of
outstanding options,
warrants and rights



(b)
Number of securities
remaining available
for future issuanceunder
equity compensationplans
(excluding securities
reflected in column (a))

(c)Equity Compensation plans approved by security holders
5,892,000
$1.03
6,408,000*Equity compensation plans not approved by security holders
N/A
N/A
N/ATotal
5,892,000
$1.03
6,408,000








*As of January 1 of each year, commencing with the year 2006 and ending with the year 2009, the aggregate number of shares available for granting Awards under the Equity Plan shall automatically increase by a number of Shares equal to the lesser of (x) 5% of the total number of Shares then outstanding or (y) 1,000,000.





Recent Sales of Unregistered Securities








On October 31, 2007, we issued 25,000 shares of common stock to Pacific Crab Seafood Company, Inc. as part of the 100,000 shares of our common stock that our Board of Directors previously approved for the consulting and marketing services that they will provide to us.  The remaining 35,000 shares will be issued in equal monthly
installments of 5,000 shares during the remaining term of the agreement.  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 25,000 shares issued were valued at $1.28 per share, the closing bid of our common stock on the date of issue.  Therefore, total aggregate value of the transaction recognized by the company
was $32,000. Going forward the cost of these shares will be expense at current market price as they are issued.








18











On November 30, 2007 we issued 5,000 shares of common stock to Pacific Crab Seafood Company, Inc. as part of the 100,000 shares of our common stock that our Board of Directors previously approved for the consulting and marketing services that they will provide to us.  The remaining 30,000 shares will be issued in equal monthly
installments of 5,000 shares during the remaining term of the agreement.  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 5,000 shares issued were valued at $1.25 per share, the closing bid of our common stock on the date of issue.  Therefore, total aggregate value of the transaction recognized by the company
was $6,250. Going forward the cost of these shares will be expense at current market price as they are issued.





On December 31, 2007, we issued 172,750 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 (8% per annum) per the terms of the Certificate of Designation of the Relative Rights and Preferences of the Series A Convertible Preferred Stock. The 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 $223,500 and the total aggregate value of the transaction was recorded as a preferred stock dividend.





On December 31, 2007, we issued 45,999 shares of common stock to the investors of our January 16, 2007 financing as payment of the semi-annual dividend (6% per annum) 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 $62,600 and the total aggregate value of the transaction was recorded as a preferred stock
dividend.





On December 31, 2007, we issued 17,883 shares of common stock to the investors of our November 5, 2007 financing as payment of the semi-annual dividend (6% per annum) 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 $24,300 and the total aggregate value of the transaction was recorded as a
preferred stock dividend.





On January 1, 2008 we issued 5,000 shares of common stock to Pacific Crab Seafood Company, Inc. as part of the 100,000 shares of our common stock that our Board of Directors previously approved for the consulting and marketing services that they will provide to us.  The remaining 25,000 shares will be issued in equal monthly
installments of 5,000 shares during the remaining term of the agreement.  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 5,000 shares issued were valued at $1.35 per share, the closing bid of our common stock on the date of issue.  Therefore, total aggregate value of the transaction recognized by the company
was $6,750. Going forward the cost of these shares will be expense at current market price as they are issued.








19











On February 1, 2008 we issued 5,000 shares of common stock to Pacific Crab Seafood Company, Inc. as part of the 100,000 shares of our common stock that our Board of Directors previously approved for the consulting and marketing services that they will provide to us.  The remaining 20,000 shares will be issued in equal monthly
installments of 5,000 shares during the remaining term of the agreement.  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 5,000 shares issued were valued at $0.98 per share, the closing bid of our common stock on the date of issue.  Therefore, total aggregate value of the transaction recognized by the company
was $4,900. Going forward the cost of these shares will be expense at current market price as they are issued.





On March 4, 2008 we issued 5,000 shares of common stock to Pacific Crab Seafood Company, Inc. as part of the 100,000 shares of our common stock that our Board of Directors previously approved for the consulting and marketing services that they will provide to us.  The remaining 15,000 shares will be issued in equal monthly
installments of 5,000 shares during the remaining term of the agreement.  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 5,000 shares issued were valued at $0.95 per share, the closing bid of our common stock on the date of issue.  Therefore, total aggregate value of the transaction recognized by the company
was $4,750. Going forward the cost of these shares will be expense at current market price as they are issued.





On April 1, 2008, we issued 5,000 shares of common stock to Pacific Crab Seafood Company, Inc. as part of the 100,000 shares of our common stock that our Board of Directors previously approved for the consulting and marketing services that they will provide to us.  The remaining 10,000 shares will be issued in equal monthly
installments of 5,000 shares during the remaining term of the agreement.  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 5,000 shares issued were valued at $0.95 per share, the closing bid of our common stock on the date of issue.  Therefore, total aggregate value of the transaction recognized by the company
was $4,750. Going forward the cost of these shares will be expense at current market price as they are issued.





On April 1, 2008, we issued 25,000 shares of common stock to Consulting for Strategic Growth, Inc. as part of the 25,000 shares of our common stock that our Board of Directors previously approved for the consulting and investor relations 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 25,000 shares issued were valued at $0.95 per share, the closing bid of our common stock on the date of issue.  Therefore, total aggregate value of the transaction recognized by the company was $23,750. Going forward the cost of these shares will be expense at current market price as they are issued.














20










On May 19, 2008, we issued 5,000 shares of common stock to Pacific Crab Seafood Company, Inc. as part of the 100,000 shares of our common stock that our Board of Directors previously approved for the consulting and marketing services that they will provide to us.  The remaining 5,000 shares will be issued in equal monthly
installments of 5,000 shares during the remaining term of the agreement.  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 5,000 shares issued were valued at $0.80 per share, the closing bid of our common stock on the date of issue.  Therefore, total aggregate value of the transaction recognized by the company
was $4,000. Going forward the cost of these shares will be expense at current market price as they are issued.





On June 20, 2008, we issued the final 5,000 share installment of common stock to Pacific Crab Seafood Company, Inc. as part of the 100,000 shares of our common stock that our Board of Directors previously approved for the consulting 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 5,000 shares issued were valued at $0.80 per share, the closing bid of our common stock on the date of issue.  Therefore, total aggregate value of the transaction recognized by the company was $4,000. Going forward the cost of these shares will be expense at current market price as they are issued.





On June 30, 2008, we issued 322,228 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 $231,100 and the total aggregate value of the transaction was recorded as a preferred stock dividend.





On June 30, 2008, we issued 85,515 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 $61,800 and the total aggregate value of the transaction was recorded as a preferred stock dividend.





On June 30, 2008, we issued 37,075 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.  (See Note10 – Series C Preferred Shares
Financing for additional information on 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 $26,800 and the total aggregate value of the transaction was recorded as a preferred stock dividend.





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 $232,900 and the total aggregate value of the transaction was recorded as a preferred stock dividend.









21





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 $27,000 and the total aggregate value of the transaction was recorded as a
preferred stock dividend.





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 $229,700 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 $61,600 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 $26,700 and the total aggregate value of the transaction was recorded as a preferred stock
dividend.





ITEM 6.
SELECTED FINANICAL DATA





Not required for smaller reporting companies.











22






ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION




The following discussion should be read in conjunction with our financial statements and the notes thereto which appear elsewhere in this report.  The results shown herein are not necessarily indicative of the results to be expected in any future periods.  This discussion contains forward-looking
statements based on current expectations, which involve uncertainties.  Actual results and the timing of events could differ materially from the forward-looking statements as a result of a number of factors.  Readers should also carefully review factors set forth in other reports or documents that we file from time to time with the Securities and Exchange Commission.





Overview





During the our 2009 fiscal year, we continued the harvesting, processing and sale of our 2005 and 2006 year classes of scallops and transferring our 2007 and 2008 year-class scallops to larger grow-out nets on our farm sites.  We also completed the spawning and started transferring our 2009 scallop class to our farm sites (from
onshore nursery ponds).  We refer to the year-class of scallops based on when the scallops were spawned.





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.  This order has reduced costs and encouraged additional wholesalers within the Taylor network to carry our scallops.




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





We are continuing our discussions with various individuals and First Nations groups about possible partnerships or joint ventures.  Originally, management believed that we would be able to formalize our first joint venture with a First Nations group as early as the start of the 2009 calendar year.  To date, we have
yet to finalize a revenue producing First Nations joint venture.







23







Despite the increased revenues for our 2009 fiscal year (as compared to 2008), we were not able to achieve positive operational cash flows during this year. 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 Chief Accounting Officer(CAO) 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.  Given our recent operational history, it is likely that we will continue to struggle to achieve positive cash flows in the near future. Additionally, 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 year ended August 31, 2009, we conduct our principal research and development activities via 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 approximately an additional $119,000 that is secured by all assets of RKS and a total of $199,000.  Originally, we carried this amount as loan related party loan receivable, but given that lack of any repayments to date, we expensed the entire amount in 2009.


During the continued harvesting of our 2005 class and 2006 scallops classes and transfer and handling of our 2007 and 2008 scallop classes, we were able to continue to review our mortality rates and update our class size projections.  Based on this review and recent sales, we expect to bring the remaining 160,000 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.   As of our most recent review of our scallop inventory, we currently believe that our 2007 year class should yield up to 3.2 million scallops at full maturity/harvest. Although this is significantly lower than initial estimates, it will still represent our largest year class to date.





During 2009, we continued to grow the 2008 scallop class in pearl nets.  We originally expected to produce up to 24 million full-size scallops in this year class, but due to survival problems associated with our hatchery spawns and funding limitations, we now expect to produce as few as 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 above 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.  We transferred more than 7 million 3-5 mm scallop seed into our ocean farms during the summer of 2009.  As of August 31, 2009, an additional 1.2 million of our 2009 scallop class was being housed in our on-shore nursery ponds.





As a result of a review of our business plan and sales and marketing efforts to date, we currently plan to harvest and sell approximately 3.2 million full-size 2007 scallops over the 16months ending December 2010.  In addition, we estimate that our 2008 year class will produce roughly 1.2 million full-size scallops. Given our
lower than expected revenues and negative cash flows during 2009, the size of our 2009 and 2010 year classes will (in many ways) be determined by our ability to generate positive cash flows and/or our ability to locate additional financing.  As a result of our lower than expected sales and yields, we are still evaluating the cash available for farming and infrastructure costs related to transferring the remaining portion of the 2009 scallop class and to expanding our future yields.  Based
on our current review of sales and marketing conditions, we believe that in the best case scenarios our scallops will yield as much $1.00 of revenue per scallop.  In 2009 our yield was approximately  US$1.05 per scallop.  The yield per scallop may increase if we are able to sell a greater percentage of live scallops.  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 scallop seed in the near future.  As described above, our current estimated inventory size and projected sales cycle is summarized in the following table as of August 31, 2009.






24








Estimated Inventory (value) to be SoldYear-class
Accumulated Cost to Date
next 12 months
next 24 months
beyond 24 months2005
69,902
$             69,902
$                      -
$                      -2006
127,237
127,237
-
-2007
783,664
274,281
509,383
-2008
343,452
-
-
343,4522009
304,519
-
-
304,519Totals
$         1,628,774
$          471,420
$           509,383
$           647,971











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





We periodically evaluate the carrying value of our inventory for impairment whenever events or changes in circumstances indicate that such carrying values may not be recoverable.  Management uses its best judgment based on the current facts and circumstances relating to its business when determining whether any significant impairment
factors exist.  As of 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 year ended August 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 2007 and 2008 scallop class could be higher; conversely, if our mortality rates are worse than we anticipate our revenues for this period could be lower than we anticipate.  In addition, changes in the anticipated growth rates, projected
harvesting cycles and large fluctuations in the price of scallops or the US-Canadian exchange rate could impact our current projections.  Furthermore, if we cannot achieve our estimated product mixture (live/fresh/frozen) than our average sales price per scallop will be lower.  Alternatively, if we are able to sell a large percentage of high yield products (live or frozen on the half shells) than our average price per scallop will be higher.  Given our failure to achieve positive
cash flows in 2009, the size of our future crops could be smaller than originally projected.  If so, our future revenues and yields could be adversely impacted.





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





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





25







Significant Accounting Policies





FASB Establishes Accounting Standards Codification TM




In June 2009, the FASB issued Accounting Standards Update No. 2009-01, “Generally Accepted Accounting Principles” (ASC Topic 105) which establishes the FASB Accounting Standards Codification (“the Codification” or “ASC”) as the official single source of authoritative U.S. generally accepted accounting
principles (“GAAP”). All existing accounting standards are superseded. All other accounting guidance not included in the Codification will be considered non-authoritative. The Codification also includes all relevant Securities and Exchange Commission (“SEC”) guidance organized using the same topical structure in separate sections within the Codification.




Following the Codification, the Financial Accounting Standards Board will not issue new standards in the form of Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts. Instead, it will issue Accounting Standards Updates (“ASU”) which will serve to update the Codification, provide background information about
the guidance and provide the basis for conclusions on the changes to the Codification.




The Codification is not intended to change GAAP, but it will change the way GAAP is organized and presented. The Codification is effective for our first-quarter 2010 financial statements and the principal impact on our financial statements is limited to disclosures as all future references to authoritative accounting literature will be
referenced in accordance with the Codification.  In order to ease the transition to the Codification, we are providing the Codification cross-reference alongside the references to the standards issued and adopted prior to the adoption of the Codification.





Principles of Consolidation





The accompanying consolidated financial statements include the accounts of the acquired entities since their respective dates of acquisition.  All significant inter-company amounts have been eliminated.





Cash and equivalents





Cash and equivalents include cash and highly liquid short term market investments with  original maturity terms of three months or less.   We have not experienced any losses, in such accounts and believe it is not exposed to any significant credit risk on cash and cash equivalents.





Accounts receivable





Accounts receivable is presented net of allowance for doubtful accounts.  The allowance for doubtful accounts reflects estimates of probable losses in accounts receivable.  The allowance is determined based on balances outstanding for over 90 days at the period end date, historical experience and other current information.





Loans receivable





Loans receivable is presented net of an allowance for loan losses, as necessary.  The loans are written off when collectability becomes uncertain.





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.








26





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 August 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.





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.





Long term investments





Long term investments are recorded at cost.  We review our investments periodically to assess whether there is an “other than temporary” decline in the carrying value of the investment.  We consider whether there is an absence of an ability to recover the carrying value of the investment by reference to projected
undiscounted future cash flows for the investment.  If the projected undiscounted future cash flow is less than the carrying amount of the asset, the asset is deemed impaired.  The amount of the impairment is measured as the difference between the carrying value and the fair value of the asset.





Property, plant, and equipment





Property, plant and equipment are carried at cost, less accumulated depreciation.  Depreciation is included with general and administrative expenses and in some cases cost of goods sold in the accompanying statement of operations and calculated by using the straight-line method for financial reporting and accelerated methods for income
tax purposes.  The recovery classifications for these assets are listed as follows:





YearsFacility and operating plant
20Manufacturing equipment
3–7Furniture and fixtures
2–7Office equipment
5Leasehold improvements
Life of leaseProperty and equipment
5Vehicles
5





Expenditures for maintenance and repairs are charged against income as incurred whereas major improvements are capitalized.







27







Impairment of long-lived assets





We monitor the recoverability of long-lived assets, including property, plant and equipment, inventory and intangible assets, based upon estimates using factors such as expected future asset utilization, business climate, and undiscounted cash flows resulting from the use of the related assets or to be realized on sale. Our policy
is to write down assets to the estimated net recoverable amount, in the period in which it is determined likely that the carrying amount of the asset will not be recoverable.  At August 31, 2009, management performed an undiscounted cash flow analysis of our long-lived assets ando determined that an 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 year ended August 31,
2009.


Government assistance





Government assistance we receive, such as grants, subsidies, and tax credits, is recorded as a recovery of the appropriate related expenditure in the period that the assistance is received.





We have received government assistance in the form of loans, for which repayment may not be required if we fail to meet sufficient future revenue levels to repay these loans based on a percentage of gross sales for certain products over a defined period of time. Such assistance, if  received, is initially recorded as a liability,
until such time as all conditions for forgiveness are met, and is then recognized as other income in that period.





Farm license costs





We must pay annual license costs in respect to government-granted tenures that it holds, which gives us the right to use certain offshore ocean waters for the purpose of aquaculture farming. Such license costs are recognized as an expense over the period of the license.





Research and development costs





Development costs include costs of materials, wages, and reasonably attributable indirect costs incurred by us which are directly attributable to the development of hatchery techniques for sablefish and shellfish.  These costs are expensed when incurred.





Research costs are expensed when incurred.





Income taxes





We calculate our provision for income taxes in accordance with Statement of Financial Accounting Standards No. 109 (Accounting for Income Taxes) (“SFAS 109”), which requires an asset and liability approach to financial accounting for income taxes. This approach recognizes the amount of taxes payable or refundable for the current
year, as well as deferred tax assets and liabilities attributable to the future tax consequences of events recognized in the financial statements and tax returns. Deferred income taxes are adjusted to reflect the effects of enacted changes in tax laws or tax rates. Deferred income tax assets are recorded in the financial statements if realization is considered more likely than not.





Revenue recognition





We recognize revenue when it is realized or realizable, and earned.  We consider revenue realized or realizable and earned when there is persuasive evidence of a contract, the product has been delivered or the services have been provided to the customer, the sales price is fixed or determinable, and collectability is reasonably
assured.








28





Our revenue is derived principally from the sale of scallops we produce or purchase from third parties, and from the sale of seed and farm supplies to other aquaculture farms.





Cost of goods





Cost of goods sold consists primarily of farming, harvesting and processing costs associated with the growth, transfer and sales preparation of our products (principally scallops).  These costs consist primarily of salaries and benefits and allocated overhead costs for consulting and support personnel engaged in the farming, harvesting
and processing of our products.  All costs are recognized at time of delivery.





Financial instruments





The carrying amount of our financial instruments, which includes cash, accounts receivable, loans receivable, accounts payable and accrued liabilities, short term debt, shareholder debt, and long term debt, approximate fair value based on either i) the short-term nature of the instrument or ii) the reasonableness of the interest rate as
compared to market rates for the long-term instruments. It is management’s opinion that we are not exposed to significant interest, currency or credit risk arising from these financial instruments unless otherwise noted.





Derivative Financial Instruments





In connection with the sale of debt or equity instruments, we may sell options or warrants to purchase our common stock. In certain circumstances, these options or warrants may be classified as derivative liabilities, rather than as equity. Additionally, the debt or equity instruments may contain embedded derivative instruments, such as
embedded derivative features, which in certain circumstances may be required to be bifurcated from the associated host instrument and accounted for separately as a derivative instrument liability.





We account for all derivatives financial instruments in accordance with SFAS No. 133. Derivative financial instruments are recorded as liabilities in the consolidated balance sheet, measured at fair value.  When available, quoted market prices are used in determining fair value.  However, if quoted market prices are
not available, we estimate fair value using either quoted market prices of financial instruments with similar characteristics or other valuation techniques.





The identification of, and accounting for, derivative instruments is complex. Our derivative instrument liabilities are re-valued at the end of each reporting period, with changes in the fair value of the derivative liability recorded as charges or credits to income, in the period in which the changes occur. For options, warrants and bifurcated
embedded derivative features that are accounted for as derivative instrument liabilities, we estimate fair value using either quoted market prices of financial instruments with similar characteristics or other valuation techniques. The valuation techniques require assumptions related to the remaining term of the instruments and risk-free rates of return, our current common stock price and expected dividend yield, and the expected volatility of our common stock price over the life of the option. The identification
of, and accounting for, derivative instruments and the assumptions used to value them can significantly affect our financial statements.





Derivative financial instruments that are not designated as hedges or that do not meet the criteria for hedge accounting under SFAS No. 133 are recorded at fair value, with gains or losses reported currently in earnings.  All derivative financial instruments we held as of August 31, 2009, were not designated as hedges.





Foreign exchange





The functional currency of our foreign subsidiary is the local foreign currency (Canadian dollars). All assets and liabilities denominated in foreign currencies are translated into U.S. dollars at the exchange rate prevailing on the balance sheet date. Revenues, costs and expenses are translated at average rates of exchange prevailing during
the period. Translation adjustments resulting from translation of the subsidiaries' accounts are accumulated as a separate component of shareholders' equity. Gains and losses resulting from foreign currency transactions are included in the consolidated statements of operations and have not been significant.








29





Use of estimates





The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and disclosure of contingent assets and liabilities. Such estimates include providing for amortization
of property, plant, and equipment, and valuation of inventory. Actual results could differ from these estimates.





Concentration of risk





We operate in the regulated aquaculture industry.  Material changes in this industry or the applicable regulations could have a significant impact on our business.





The quality and quantity of the aquaculture products we cultivate, harvest and process could be impacted by biological and environmental risks such as contamination, parasites, predators, disease and pollution.  These factors could severely restrict our ability to successfully market our products.





During the year ended August 31, 2009, one customer, Fanny Bay Oysters, accounted for 65% of our revenues, and we therefore are materially dependent upon Fanny Bay Oysters.   During the year ended August 31, 2008, three customers, Sea World Fisheries, Turning Point and Organic Ocean Seafood, Inc., individually accounted for
12%, 12% and 10% of our revenues, respectively.   These remain our customers; however we now sell through a single distributor, Fanny Bay Oysters.





Location risk





Most, if not all, of our aquaculture are concentrated in one growing region off the coast of Vancouver Island, British Columbia.  As such, if there were a major environmental disaster, our ongoing operations could be materially impacted.





Stock-based compensation





We account for stock-based employee compensation arrangements using the fair value method in accordance with the provisions of the FASB issued Statement of Financial Accounting Standards No, 123 (revised 2004) (Share-Based Payment) (“SFAS 123R”). SFAS 123R is a revision of SFAS 123 (Accounting for Stock-Based Compensation),
and supersedes Accounting Principles Beard (“APB”) Opinion No. 25 (Accounting for Stock Issued to Employees). SFAS 123R requires that the fair value of employees awards issued, modified, repurchased or cancelled after implementation, under share-based payment arrangements, be measured as of the date the award is issued, modified, repurchased or cancelled. The resulting cost is then recognized in the statement of earnings over the service period.





We periodically issue common stock for acquisitions and services rendered.  Common stock issued is valued at the estimated fair market value, as determined by our management and board of directors.  Management and the board of directors consider market price quotations, recent stock offering prices and other factors
in determining fair market value for purposes of valuing the common stock.  The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model with the various weighted average assumptions, including dividend yield, expected volatility, average risk-free interest rate and expected lives.








30





Basic and diluted net loss per share





Basic income or loss per share includes no dilution and is computed by dividing net income or loss by the weighted-average number of common shares outstanding for the period.  Diluted income or loss per share includes the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted
into common stock (using the treasury stock method for stock options and using the if-converted method for convertible notes), if dilutive.





Off-Balance Sheet Arrangements





We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to our investors.





Investments in Tenures as Compared to Estimated Market Value of Tenures





We currently carry our investment in Island Scallops’ tenures at $3,663.  This amount represents the initial carrying costs of certain tenures acquired by Island Scallops’ subsidiary.  These tenures do not expire until various dates ranging from 2021 – 2024, however, we believe that they have an indefinite
useful life because renewal on expiration is anticipated.  The area available for shellfish aquaculture within Baynes Sound is fully subscribed, and as a result new tenures for new companies are not available through the Canadian Provincial application and review process.  The shellfish companies within the Sound are also well established and sales of tenures are quite rare, making the assessment of the market value for the Island Scallops tenures difficult.  Historical sales and
government auction of tenures have received as much as $300,000 (CDN) for a small beach tenure (less than 4 acres) and $65,000 CDN) for a small deepwater tenure without infrastructure.  The few tenures on the market over the previous 36 months suggest that the current market value is approximately $10,000 to $25,000 (CDN) per acre.  Based on listings of tenures on the coast of British Columbia, discussions with local shellfish growers and individuals from the BC Assets and Land Corporation,
and an independent appraisal (commissioned by Island Scallops in 2007) that estimated the value of 1018 acres of scallop tenures was estimated at approximately $8,600,000.  As a result of the recently approved tenure expansions from 1018 to 1270 acres the estimated market value of our overall tenures could be roughly as high as $10,600,000.  The estimated market value is based on the size, location and whether they are beach or deepwater in nature.   To further complicate the issue
of value is the requirement for government approval for transfer of ownership of these tenures. Given the variable nature of the shellfish tenure markets, the lack of any recent sales, and ownership transfer issues, the actual value that we receive from the sale of a scallop farming tenure could vary significantly from these estimated values.  This non-ownership of ocean-farm land is the single largest impediment to  successful ocean farming in British Columbia.





Although we cannot determine the exact amount we would ultimately receive from the sale of our tenure(s), based upon the information stated above we expect to receive more than the carrying cost ($3,663) from such sale.  Accordingly, the carrying cost of our tenures is not indicative of their actual value.












31











Comparison of results for the fiscal year ended August 31, 2009, to the fiscal year ended August 31, 2008.





Revenues.Revenues for the year August 31, 2009, were approximately $1,891,000.  We had revenues of approximately $1,584,000 for the year ended August 31, 2008.  This is an increase of approximately $307,000 or 19%.  If not for the recent improvement
of the US dollar relative to the Canadian dollar for the twelve months ended August 31, 2009 (as compared to the same period in 2008), our overall sales increase would have been greater.  Revenue generated by scallops sales (only) increased almost 40% (in terms of Canadian dollars).  This increase in scallops sales represented almost 67% of our overall sales increase (in terms of Canadian dollars).  Although our overall volume of scallops sales increased over the previous fiscal
year, our average price per scallop decreased slightly due to the agreement with Fanny Bay, however our administration and shipping cost decreased.    In 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 slightly increased equipment sales as compared to the previous fiscal
year.  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 year ended August 31, 2009 was approximately $686,000, an increase of approximately $207,000 as compared to gross loss of roughly $479,000, for the year ended August 31, 2008.  The increase in gross loss for the year ended August 31, 2009 (as
compared to 2008) 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 we are correcting in future classes.   The increase in the cost of scallop seed inventory was the result of certain older inventory that was deemed too small for processing and was therefore sold as seed.  In
addition, as of February 28, 2009, management performed an undiscounted cash flow analysis to determine that impairment of $75,000 existed in carrying value our 2006 scallop year class inventory.   As such, the impairment of $75,000 was charged against operations for 2009.





Although our gross loss increased for the year ended August 31, 2009, our gross loss actually slightly decreased (as compared to the previous period) for the second and third quarters of our 2009 fiscal year.  As such, despite the increase in gross loss for the year, 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 is continuing to attempt to address issues that resulted in higher cost of inventory and seed costs.  Management believes that in the future our sales may continue to increase while costs of goods sold will only increase slightly. As a result, we are hopeful that our margins will improve in future
years.  Despite our continuing losses, 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 if we are able to locate adequate working capital that we can continue to see additional benefits from our efforts in developing larger crops and expanding our seed sales in the 2010 fiscal year and
beyond.  If we are unable to locate adequate working capital and/or generate positive cash flow that can be used for overall business development, we may not be able to capitalize on recent developments and gross losses could further increase in future periods.





General and administrative.  General and administrative expenses for the year August 31, 2009, were approximately $1,641,000.  Our general and administrative expenses were approximately $3,185,000 for the year ended August 31, 2008.  This is a decrease
of approximately $1,544,000 or 48%. This decrease was directly attributable to a reduction in stock option expense of roughly $1,596,000 as compared to 2008.  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 $21,000 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 an expansion into scallop crops to more than 20 million.








32





Stock compensation and stock option expense.  During the year ended August 31, 2009, we had stock compensation expenses of $17,500.  During the year ended August 31, 2008, we had stock compensation expense of approximately $91,000.





We issued 3,300,000 new options during the year ended August 31, 2009.  As a result, we have stock option expense of roughly $185,000 for the year ended August 31, 2009.  We did not issue any new options during 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 $1,781,000 during the year ended August 31, 2008.





Other income (expense), net.  Interest expense for the year ended August 31, 2009, was approximately $57,000.  Interest expense for the year ended August 31, 2008 was roughly $11,000. Other income for the year ended August 31, 2009, was approximately $120,000 as
opposed to other expense of approximately $6,000 for the year ended August 31, 2008.





Net loss.As a result of the above, the net loss for year ended August 31, 2009 was approximately $2,265,000 as compared to a net loss of approximately $3,681,000 for the year ended August 31, 2008.








Risk Factors





You should carefully consider the risks described below before making an investment in us.    All of these risks may impair our business operations.  If any of the following risks actually occur our business, financial condition or results of operations could be materially adversely affected.  In such
case, the trading price of our common stock could decline, and you may lose all or part of your investment.







Risks Relating to Aquaculture





We are subject to a number of biological and environmental risks.





Our business would be adversely affected if our scallop crop is infected by Perkinsus Quagwadi.  Perkinsus affects a variety of scallops.  In 1992, mortality due to Perkinsus infection was large and mortality was high, but Island Scallops was able to overcome this disease by breeding the remaining stock.  Eight
years of successfully breeding hardy individuals resulted in the remaining populations of scallops being Perkinsus-free.  Although there is a chance that other diseases may occur, the Island Scallops hybrid scallop has proven resistant to Perkinsus disease for the last ten years.







Paralytic Shellfish Poisoning (PSP or Red Tide) could limit the amount of scallops available for sale.




Paralytic Shellfish Poisoning (PSP or red tide) is another concern when farming scallops.  The adductor muscle can be processed for sale to the traditional scallop meat market even when there is a PSP closure.  On the other hand, the live animal market is stopped by PSP toxicity.  Sewage Contamination (fecal
coliform) is also monitored by the Canadian Food Inspection Agency (CFIA) to avoid this problem.  These types of contaminants do not threaten the crop, it only causes a temporary displacement to the marketing of the live product .  Island Scallops’ aquaculture is not without total risk; however, the development program over the last decade has reduced the risk of disease and increased the historical grow-out survival rate to 95% over the past six years.  Despite these advances,
however, an outbreak of PSP, even if it did not affect Island Scallops’ stock, could have a depressive effect on the shellfish market in general, which could then adversely affect our business.








33





Aquaculture and scallop farming is subject to a variety of general disease risks.





Bacteria are almost always associated with mortalities in the larval stages of growth.  Control of disease outbreaks in the hatchery consists of regular inspection, growth rates, color and larvae is checked for proper shape.  Proper hygiene practices within the hatchery minimize problems with Bacteria.  In
general, scallops are harder to handle and transport and care needs to be taken when moving them.  Scallops can develop a stress related disease that can be avoided by proper handling conditions such as temperature, moisture rates and time before getting back in the water (maximum time being 24 hours).





Boring sponges and worms can adversely impact our scallop yield.





Boring sponges and worms are organisms that make holes in the scallop’s shell, weakening it and requiring the scallop to make repairs.  Secreting additional layers of shell material to mend these holes directs energy away from growth and maintenance of the scallop.  In cases of severe infestation, the adductor
muscle may be reduced in weight by up to 50%, and the meat may be discolored.




Our business would be adversely affected if our scallop crop is infected by flatworm.





Flatworms can be devastating, destroying all seed within 2 weeks.  Island Scallops has managed to minimize this problem and keep mortalities down by keeping the seeds in the pond a little longer so it becomes larger, making the time spent in the first net culture less.  We then move the seeds to a larger mesh net culture,
which causes the flatworms to fall off and no longer pose a problem.  This husbandry technique alleviates the problem to a large degree.





Scallops raised in the open ocean are subject to a variety of predators that could adversely impact crop yield.





Starfish are a major predator of scallops, particularly in bottom culture.  If the hanging techniques are far enough from the bottom, even during extreme low tides, then this is not problematic.  Since starfish and crabs have a free-swimming larval stage as part of their life cycle, it is possible that these larvae can
settle within the “grow-out” nets and settle there and prey on these scallops.  However, with proper husbandry techniques these effects can be minimized.





Our business would be adversely affected if a majority of our scallop crop experiences fouling.





Fouling is caused by settlement and growth of several organisms such as macroalgae, bryozoans, barnacles and mussels on the nets.  Heavy fouling of culture nets and scallops impedes growth of the scallops.  Since most fouling occurs in shallower waters, hanging scallops at deeper depths can reduce fouling. If culture
systems are managed properly, fouling is not a problem.





Aquaculture can be subject to a variety of growing conditions that can adversely affect product growth and development.





Certain growing conditions and sea conditions can affect the quality and quantity of scallops produced, decreasing the supply of our products and negatively impacting profitability. Extreme wave actions tend to make scallops seasick.  In cases of extreme seasickness, scallops stop feeding and growth is reduced.  This
may create mortality by weakening the scallops and making them susceptible to other problems and diseases.  Currently, the water leases owned by Island Scallops are located in areas where this will prove to be less problematic.  Additionally, if other environmental conditions are unfavorable, growing conditions in the ocean can greatly inhibit scallop growth.  Generally this risk is mitigated by year-to-year variations in growing conditions.  However, we cannot guarantee
that we will not be negatively affected, at least in the short term, if we experience poor growing conditions.





Increased mortality rates would adversely impact our business.





In general, increased mortality rates in juveniles are due to improper feeding and hatchery husbandry. Once scallops are introduced to the ocean, increased mortality rates are caused by the above factors as well as fluctuations in salinity and currents.  Given the location of Island Scallops’ current farming areas, the salinity
and currents should not be problematic.  Mortality rates can also increase due to overcrowding problems.  In cases of extreme overcrowding scallops actually bite each other and their shells become damaged.








34





If we are unable to expand our tenures, our projected production may be delayed.





To increase our production capacity, we must expand our tenures.  However, expanding tenures requires local and national government approval, which can be a timely and costly process. Expansion of two of our tenures, Hindoo Creek and Deep Bay, was approved and the expansion of these sites is complete.  Another tenure,
Bowser, was recently approved for partial conversion (one-third or 308 acres) to the off-bottom (suspended) culture and construction of this off bottom farm is now underway.    Our Denman tenure, although approved for expansion by all national government agencies, requires zoning approval from the local Islands Trust.   Our initial zoning application was denied, but we are considering our options for appeal.   The capacity to be gained by expanding the Denman
tenure is small, but valuable nevertheless.  Based on our current estimates of near-term sales and capital costs of expanding our farms to increase future crop yields, we will require additional financings to continue our expansion.  As we have yet to raise additional capital and our sales have increased at a slower than expected pace, we have already scaled back some of our expansion plans and may have to further scale back the plans outlined
herein.If expansion of our tenures is denied or delayed due to lack of available funds, it will limit our production capacity.





Business Risks





We will require additional capital to fund our current business plan.





Our success is dependent   on   future   financings. The   aquaculture or marine farming   industry   is a capital-intensive business, which requires substantial capital expenditures to develop and acquire farms and to improve or expand current production.
Further, the farming of marine life and acquisition of additional farms may require substantial amounts of working capital.  We project the need for significant capital spending and increased working capital requirements over the next several years.  There can be no assurance that we will be able to secure such financing on terms, which are acceptable, if at all.  The failure to secure future financing with favorable terms could have a material adverse effect on our business and
operations.





We are dependent on certain key existing and future personnel.





Our success will depend, to a large degree, upon the efforts and abilities of our officers and key management employees such as Mr. Saunders, Ms. Lisa Vernon, Mr. Bruce Evans andBrenden Frehlich. The loss of the services of one or more of these or other key employees could have a material
adverse effect on our operations. We currently maintain key man life insurance on Mr. Saunders for a value of $1,000,000.  We have an employment agreement with Mr. Saunders that expired in June 2008, but we are currently operating as if this employment agreement is still in effect while we discuss the terms of a new agreement with him.We do not maintain key man insurance for, nor do we currently have employment agreements with, any of our other
key employees.  In addition, as our business plan is implemented, we will need to recruit and retain additional management and key employees in virtually all phases of our operations.  Key employees will require a strong background in the marine aquaculture industry.  We cannot assure that we will be able to successfully attract and retain key personnel.





The fact that our directors and officers own approximately 28% of our capital stock and 56% of our voting capital stock may decrease your influence on shareholder decisions.





Our executive officers and directors, in the aggregate, beneficially own approximately 28% of our capital stock and 56% of our voting capital stock.  As a result, our officers and directors, will have the ability to influence our management and affairs and the outcome of matters submitted to shareholders for approval, including
the election and removal of directors, amendments to our bylaws and any merger, consolidation or sale of all or substantially all of our assets.




Our acquisitions and potential future acquisitions involve a number of risks.





Our potential future acquisitions involve risks associated with assimilating these operations into our company; integrating, retaining and motivating key personnel; integrating and managing geographically-dispersed operations integrating the technology and infrastructures of disparate entities; and risks inherent in the husbandry and farming
of marine species.








35





We may have difficulty competing with larger and better-financed companies in our sector.





In general, the aquaculture industry is intensely competitive and highly fragmented. Many of our competitors have greater financial, technical, marketing and public relations resources than we presently have. Our sales may be harmed to the extent we are not able to compete successfully against such seafood producers.





Contamination of our seafood would harm our business.





Because our products are designed for human consumption, our business is subject to certain hazards and liabilities related to food products, such as contamination.  A discovery of contamination in any of our products, through tampering or otherwise, could result in a recall of our products.  Any such recall would significantly
damage our reputation for product quality, which we believe is one of our principal competitive assets, and could seriously harm our business and sales.  Although we maintain insurance to protect against such risks, we may not be able to maintain such insurance on acceptable terms and such insurance may not be adequate to cover any resulting liability.




We may experience barriers to conducting business due to potential government regulations.





There are no hatchery/producer competitors in the scallop farming business in British Columbia.  The United States presently will not allow the farming of this hybrid species  in their waters, without an Environmental Review.   If new quarantine facilities are constructed in British Columbia or the United
States this may have a material adverse affect on our business.




Our business may be adversely affected price by volatility.





If market prices for Island Scallops’ products decrease, we will incur a loss of profits.  However, our operational costs will increase because we will have to produce the same quantity to meet the current demand, which will decrease profit margin.  This form of price volatility would be detrimental for our business.




Foreign exchange rates risks, political stability risk, and/or the imposition of adverse trade regulations could harm our business.





We conduct some of our business in foreign currencies.  Our profitability depends in part on revenues received in United States dollars as a result of sales into the United States.  A decline in the value of the United States dollar against the Canadian dollar would adversely affect earnings from sales in the United
States. As part of our plans to acquire other businesses we may expand our operations to other countries, operate those businesses in foreign currencies, and export goods from those countries.   Thus far, we have not engaged in any financial hedging activities to offset the risk of exchange rate fluctuations.  We may in the future, on an as-needed basis, engage in limited financial hedging activities to offset the risk of exchange rate fluctuations.  There is a risk that a shift
in certain foreign exchange rates or the imposition of unforeseen and adverse political instability and/or trade regulations could adversely impact the costs of these items and the liquidity of our assets, and have an adverse impact on our operating results.  In addition, the imposition of unforeseen and adverse trade regulations could have an adverse effect on our exported seafood operations. We expect the volume of international transactions to increase, which may increase our exposure to future exchange
rate fluctuations.





We have one major customer and any disagreement with that customer could have a material adverse affect on our business.





As a result of our recent sales agreement with Fanny Bay, Fanny Bay has effectively become the sole distributor of our scallops outside of the European market.  Such a large customer will account for a significant portion of our sales and, as a result, any disagreements or problems with Fanny Bay could have a material adverse
effect on our business and operations.








36





There may not be sufficient liquidity in the market for our securities in order for investors to sell their securities.





There is currently only a limited public market for our common stock, which is listed on the Over-the-Counter Bulletin Board, and there can be no assurance that a trading market will develop further or be maintained in the future.   During the month of November 2009, our common stock traded an average of approximately 1,500
shares per day.  As of December 9, 2009, the closing bid price of our common stock was $0.05 per share.  As of August 31, 2009, we had approximately 56 shareholders of record of our common stock, 13 shareholders of record of our Series A Preferred Stock, 3 shareholders of record of our Series B Preferred Stock, 2 shareholder of record of our Series C Preferred Stock and 9 shareholders of record of our Series D Preferred Stock not including shares held in street name.  In addition,
during the past two years our common stock has had a trading range with a low price of $010 per share and a high price of $1.45 per share.





The market price of our common stock may be volatile.





The market price of our common stock has been and will likely continue to be highly volatile, as is the stock market in general, and the market for OTC Bulletin Board quoted stocks in particular. Some of the factors that may materially affect the market price of our common stock are beyond our control, such as changes in financial estimates
by industry and securities analysts, conditions or trends in the industry in which we operate or sales of our common stock.  These factors may materially adversely affect the market price of our common stock, regardless of our performance.  In addition, the public stock markets have experienced extreme price and trading volume volatility.  This volatility has significantly affected the market prices of securities of many companies for reasons frequently unrelated to the operating
performance of the specific companies.  These broad market fluctuations may adversely affect the market price of our common stock.





The outstanding warrants may adversely affect us in the future and cause dilution to existing shareholders.





There are currently 802,285 warrants outstanding.  The terms of these warrants expire as early as 2010 and as late as 2011.  The exercise price of these warrants range from $1.15 to $2.25 per share, subject to adjustment in certain circumstances.  Exercise of the warrants may cause dilution in the interests
of other shareholders as a result of the additional common stock that would be issued upon exercise.  In addition, sales of the shares of our common stock issuable upon exercise of the warrants could have a depressive effect on the price of our stock, particularly if there is not a coinciding increase in demand by purchasers of our common stock.   Further, the terms on which we may obtain additional financing during the period any of the warrants remain outstanding may be adversely affected
by the existence of these warrants as well.





The outstanding options may adversely affect us in the future and cause dilution to existing shareholders.





There are currently 5,892,000 options outstanding.  The terms of these options expire as early as 2010 and as late as 2015.  The exercise price of these options range from $0.15 to $1.50 per share, subject to adjustment in certain circumstances.  Exercise of the options may cause dilution in the interests of
other shareholders as a result of the additional common stock that would be issued upon exercise.  In addition, sales of the shares of our common stock issuable upon exercise of the options could have a depressive effect on the price of our stock, particularly if there is not a coinciding increase in demand by purchasers of our common stock.   Further, the terms on which we may obtain additional financing during the period any of the options remain outstanding may be adversely affected
by the existence of these options as well.




Our common stock may be considered a “penny stock” and may be difficult to sell.





The SEC has adopted regulations which generally define a “penny stock” to be an equity security that has a market price of less than $5.00 per share or an exercise price of less than $5.00 per share, subject to specific exemptions. The market price of our common stock is less than $5.00 per share and, therefore, it may be designated
as a “penny stock” according to SEC rules.  This designation requires any broker or dealer selling these securities to disclose certain information concerning the transaction, obtain a written agreement from the purchaser and determine that the purchaser is reasonably suitable to purchase the securities.  These rules may restrict the ability of brokers or dealers to sell our common stock and may affect the ability of investors to sell their shares.





Our Auditors have given the Company a “Going Concern” opinion, raising substantial doubt about our ability to continuing to fund our operations.





Prior to the completion of our initial Preferred Stock Financing, working capital had been primarily financed with various forms of debt.  We have suffered operating losses since inception in our efforts to establish and execute our business strategy.  As of August 31, 2009, we had a cash balance of approximately $12,000.  After
the completion of the recent Series D preferred 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 continued to suffer operational losses in our 2009 and 2008 fiscal year. Until our operations are able to demonstrate and maintain positive cash flows, we may require additional working capital to fund our ongoing operations and execute our business strategy of expanding our operations.  In
fact,  based on our current estimates of future sales and capital costs of expanding our farms in order to increase future crop yields, we will require additional financings to continue expand our operations.  Based on these factors, there is substantial doubt about our ability to continue as a going concern.














37








ITEM 8.               FINANCIAL STATEMENTS





Report of Independent Registered Public Accounting Firm
 
 
 To the Board of Directors of
 Ocean Smart, Inc. (formerly Edgewater Foods International, Inc.)
 Qualicum Beach, British Columbia, Canada
 
 
 We have audited the accompanying consolidated balance sheets of Ocean Smart, Inc. (the “Company”) as of August 31, 2009 and 2008, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years then ended. These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based on our audits.
 
 We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
 In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Ocean Smart, Inc. as of August 31, 2009 and 2008, and the results of its operations and its cash flows for each of the years then ended in conformity with accounting principles generally accepted in
the United States of America.
 
 As discussed in Note 2 to the consolidated financial statements, the Company's absence of significant revenues, recurring losses from operations, and its need for additional financing in order to fund its projected loss in 2010 raise substantial doubt about its ability to continue as a going concern. The 2009 consolidated financial statements
do not include any adjustments that might result from the outcome of this uncertainty.
 
 
 /s/  LBB & Associates Ltd., LLP LBB & Associates Ltd., LLP
 
 Houston, Texas
 December 11, 2009











38






OCEAN SMART, INC.(FORMERLY EDGEWATER FOODS INTERNATIONAL, INC.)CONSOLIDATED BALANCE SHEETSAUGUST 31, 2009 and 20082009


2008ASSETSCurrent assets:Cash

$
12,356


$
712,298Accounts receivable, net


233,376



195,402Inventory


553,311



1,290,702Other current assets


52,056



80,011Total current assets


851,099



2,278,413Property, plant and equipment, net


3,350,709



3,982,336Long-term inventory


1,075,463



986,327Loans receivable, related party


-



114,079Other assets


9,335



3,758Total assets

$
5,286,606


$
7,364,913LIABILITIES AND STOCKHOLDERS' EQUITYCurrent liabilities:Short term debt

$
161,932


$
109,648Line of credit


75,194



124,766Current portion of long term debt


354,318



396,885Accounts payable and accrued liabilities


1,111,503



991,061Total current liabilities


1,702,947



1,622,360Long term debt, net current portion


598,306



548,004Total liabilities


2,301,253



2,170,364Commitments and contingenciesStockholders' equitySeries A Preferred  stock, par $0.001, 10,000,000


7,774



7,774authorized, 7,773,998 issued and outstandingat August 31, 2009 and 2008, respectivelySeries B Preferred  stock, par $0.001, 100


-



-authorized, 207 issued and outstanding  atAugust 31, 2009 and 2008, respectivelySeries C Preferred  stock, par $0.001, 1,000,000


748



748authorized, 747,870 issued and outstandingat August 31, 2009 and 2008, respectivelySeries D Preferred  stock, par $0.001, 380,000


305



305authorized, 304,558 issued and outstandingat August 31, 2009 and 2008, respectivelyCommon stock, par $0.0001, 100,000,000 authorized,


2,592



2,44825,920,296  and 24,479,150 issued and outstanding atAugust 31, 2009 and 2008, respectivelyAdditional paid in capital


28,372,640



27,497,781Accumulated deficit


(25,008,570
)


(22,103,314
)Accumulated other comprehensive income (loss) -foreign exchange adjustment


(390,136
)


(211,193
)Total stockholders' equity


2,985,353



5,194,549Total liabilities and stockholders' equity

$
5,286,606


$
7,364,913







See accompanying notes to consolidated financial statements







39










OCEAN SMART, INC.(FORMERLY EDGEWATER FOODS INTERNATIONAL, INC.)CONSOLIDATED STATEMENTS OF OPERATIONSYEARS ENDED AUGUST 31, 2009 and 20082009


2008Revenue

$
1,890,536


$
1,584,027Cost of goods sold


2,576,938



2,062,758Gross profit (loss)


(686,402
)


(478,731
)Expenses:General and administrative expenses


1,641,470



3,185,460Total operating expenses


(1,641,470
)


(3,185,460
)Loss from operations


(2,327,872
)


(3,664,191
)Other income (expense):Interest expense, net


(57,285
)


(10,993
)Other income (expense)


120,304



(5,938
)Total other income (expense), net


63,019



(16,931
)Net loss


(2,264,853
)


(3,681,122
)Dividend on preferred stock


(640,403
)


(630,142
)Deemed dividend for beneficialconversion feature


-



(163,386
)Deemed dividend for exchange ofwarrants for series D preferred


-



(100,360
)Net loss applicable tocommon shareholders


(2,905,256
)


(4,575,010
)Foreign currency translation


(178,943
)


(105,649
)Comprehensive loss

$
(3,084,199
)

$
(4,680,659
)Net loss per ShareBasic and diluted

$
(0.12
)

$
(0.19
)Weighted average shares outstandingBasic and diluted


25,242,856



23,993,935


See accompanying notes to consolidated financial statements







40










OCEAN SMART, INC.
(FORMERLY EDGEWATER FOODS INTERNATIONAL, INC.)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS'
EQUITY FOR THE YEARS ENDED AUGUST 31, 2000 and 2008




Other ComprehensivePreferred Stock

















Income -Series A


Series B


Series C


Series D


Common Stock


Additional
Paid in


Foreign Exchange


AccumulatedNumber


Value


Number


Value


Number


Value


Number


Value


Number


Value


Capital


Adjustment


Deficit


TotalBalance at August 31, 2007


7,773,998


$
7,774



207


$
-



-


$
-



-


$
-



23,712,700


$
2,371


$
22,471,315


$
(105,544
)

$
(17,528,303
)

$
4,847,613Comprehensive lossNet income (loss)


















































(3,681,122
)


(3,681,122
)Foreign














































(105,649
)






(105,649
)Total comprehensive loss






















































(3,786,771
)Stock option expense










































1,780,882











1,780,882Stock Issued for services


































85,000



9



90,591











90,600Common stock issued for dividends


































681,450



68



630,075







(630,143
)


-Preferred Series C Stock issued in connection with financing


















747,870



748



















799,900











800,648Deemed Dividend










































163,386







(163,386
)


-Preferred Series D Stock issued in connection with financing


























37,500



38



-







1,461,539











1,461,577Preferred Series D Stock issued in connection with warrant exchange


























267,058



267



-







100,093







(100,360
)


-Balance at August 31, 2008


7,773,998



7,774



207



-



747,870



748



304,558



305



24,479,150



2,448



27,497,781



(211,193
)


(22,103,314
)


5,194,549Comprehensive lossNet income (loss)


















































(2,264,853
)


(2,264,853
)Foreign














































(178,943
)






(178,943
)Total comprehensive loss






















































(2,443,796
)Stock issued in Granscal acquisition


































400,000



40



31,960











32,000Stock option expense










































185,100











185,100Stock Issued for services


































150,000



15



17,485











17,500Stock issued for dividends


































891,146



89



640,314







(640,403
)


-Balance at August 31, 2009


7,773,998


$
7,774



207


$
-



747,870


$
748



304,558


$
305



25,920,296


$
2,592


$
28,372,640


$
(390,136
)

$
(25,008,570
)

$
2,985,353







See accompanying notes to consolidated financial statements







41








OCEAN SMART, INC.(FORMERLY EDGEWATER FOODS INTERNATIONAL, INC.)CONSOLIDATED STATEMENTS OF CASHFLOWSYEARS ENDED AUGUST 31, 2009 and 20082009


2008Cash flows from operating activities:Net loss

$
(2,264,853
)

$
(3,681,122
)Adjustments to reconcile net income (loss) to net cash used in operating activities:Depreciation and amortization


570,617



563,456Stock option expense


185,100



1,780,882Common stock issued for services


17,500



90,600Inventory impairment


75,000



-Changes in current assets and liabilities:Accounts receivable


(37,974
)


(121,979
)Prepaid expenses


27,955



-Other current assets


-



(18,769
)Loan receivable, related party


117,624



(31,819
)Inventory


472,804



(449,516
)Accounts payable


123,447



269,769Net cash used in operating activities


(712,780
)


(1,598,498
)Cash flows from investing activities:Other assets


(5,672
)


-Purchase of property, plant and equipment


(84,179
)


(1,592,581
)Net cash used in investing activities


(89,851
)


(1,592,581
)Cash flows from financing activities:Net proceeds (payments) from line of credit


(42,591
)


131,917Proceeds from short term debt


41,293



-Payment of short term debt


(45,444
)


(821
)Proceeds from long term debt


84,895



29,798Payment of long term debt


-



(114,224
)Common stock issued for cash


-



-Proceeds from exercise of warrants


-



-Preferred stock issued for cash


-



2,262,225Net cash provided (used in) by financing activities


38,153



2,308,895Foreign currency translation effect


64,536



(62,386
)Net decrease in cash


(699,942
)


(944,570
)Cash, beginning of period


712,298



1,656,868Cash, end of period

$
12,356


$
712,298Supplemental disclosure of cash flow informationNon cash transactionsAcquisition of Granscal

$
85,759


$
-Issuance of stock for dividends

$
640,403


$
630,142Net cash paidInterest

$
-


$
42,059Income taxes

$
-


$
-





See accompanying notes to consolidated financial statements













42










OCEAN SMART, INC.


(FORMERLY EDGEWATER FOODS INTERNATIONAL, INC.)




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





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





Ocean Smart, Inc. (or “Ocean Smart” 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.





We have evaluated subsequent events through December 11, 2009, the date the financial statements were available to be issued.








Note 2.  Going Concern





Prior to the completion of our initial Preferred Stock Financing, working capital had been primarily financed with various forms of debt.  We have suffered operating losses since inception in our efforts to establish and execute our business strategy.  As of August 31, 2009, we had a cash balance of approximately $12,000.  After
the completion of the recent Series D preferred financing (see Note 13 – Series D Preferred Stock Financing for additional information), management believed that we had adequate funds to maintain our business operations into our 2010 fiscal year and/or until we become cash flow positive, but we continued to suffer operational losses in our 2009 and 2008 fiscal years. Until our operations are able to demonstrate and maintain positive cash flows, we may require additional working capital to fund our ongoing
operations and execute our business strategy of expanding our operations.  In fact,   based on our current estimates of future sales and capital costs of expanding our farms in order to increase future crop yields, we will require additional financings to continue expand our operations.  Based on these factors, there is substantial doubt about our ability to continue as a going concern.





Note 3.  Significant Accounting Policies








Principles of Consolidation





The accompanying consolidated financial statements include the accounts of the acquired entities since their respective dates of acquisition.  All significant inter-company amounts have been eliminated.





Cash and equivalents





Cash and equivalents include cash and highly liquid short term market investments with  original maturity terms of three months or less.   We have not experienced any losses, in such accounts and believe it is not exposed to any significant credit risk on cash and cash equivalents.








43





Accounts receivable





Accounts receivable is presented  net of $392 allowance for doubtful accounts.  The allowance for doubtful accounts reflects estimates of probable losses in accounts receivable.  The allowance is determined based on balances outstanding for over 90 days at the period end date, historical experience and
other current information.





Loans receivable





Loans receivable is presented net of an allowance for loan losses, as necessary.  The loans are written off when collectability becomes uncertain.





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 August 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.





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.





Long term investments





Long term investments are recorded at cost.  We review our investments periodically to assess whether there is an “other than temporary” decline in the carrying value of the investment.  We consider whether there is an absence of an ability to recover the carrying value of the investment by reference to projected
undiscounted future cash flows for the investment.  If the projected undiscounted future cash flow is less than the carrying amount of the asset, the asset is deemed impaired.  The amount of the impairment is measured as the difference between the carrying value and the fair value of the asset.








44





Property, plant, and equipment





Property, plant and equipment are carried at cost, less accumulated depreciation.  Depreciation is included with general and administrative expenses and in some cases cost of goods sold in the accompanying statement of operations and calculated by using the straight-line method for financial reporting.  The recovery classifications
for these assets are listed as follows:





YearsFacility and operating plant
20Manufacturing equipment
3–7Furniture and fixtures
2–7Office equipment
5Leasehold improvements
Life of leaseProperty and equipment
5Vehicles
5





Expenditures for maintenance and repairs are charged against income as incurred whereas major improvements are capitalized.





Impairment of long-lived assets





We monitor the recoverability of long-lived assets, including property, plant and equipment, inventory and intangible assets, based upon estimates using factors such as expected future asset utilization, business climate, and undiscounted cash flows resulting from the use of the related assets or to be realized on sale. Our policy
is to write down assets to the estimated net recoverable amount, in the period in which it is determined likely that the carrying amount of the asset will not be recoverable.  At August 31, 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 year ended August 31, 2009.





Government assistance





Government assistance we receive, such as grants, subsidies, and tax credits, is recorded as a recovery of the appropriate related expenditure in the period that the assistance is received.





We have received government assistance in the form of loans, for which repayment may not be required if we fail to meet sufficient future revenue levels to repay these loans based on a percentage of gross sales for certain products over a defined period of time. Such assistance, if  received, is initially recorded as a liability,
until such time as all conditions for forgiveness are met, and is then recognized as other income in that period.





Farm license costs





We must pay annual license costs in respect to government-granted tenures that it holds, which gives us the right to use certain offshore ocean waters for the purpose of aquaculture farming. Such license costs are recognized as an expense over the period of the license.





Research and development costs





Development costs include costs of materials, wages, and reasonably attributable indirect costs incurred by us which are directly attributable to the development of hatchery techniques for sablefish and shellfish.  These costs are expensed when incurred.





Research costs are expensed when incurred.









45




Income taxes





We calculate our provision for income taxes in accordance with Statement of Financial Accounting Standards No. 109 (Accounting for Income Taxes) (“SFAS 109”), which requires an asset and liability approach to financial accounting for income taxes. This approach recognizes the amount of taxes payable or refundable for the current
year, as well as deferred tax assets and liabilities attributable to the future tax consequences of events recognized in the financial statements and tax returns. Deferred income taxes are adjusted to reflect the effects of enacted changes in tax laws or tax rates. Deferred income tax assets are recorded in the financial statements if realization is considered more likely than not.





Revenue recognition





We recognize revenue when it is realized or realizable, and earned.  We consider revenue realized or realizable and earned when there is persuasive evidence of a contract, the product has been delivered or the services have been provided to the customer, the sales price is fixed or determinable, and collectability is reasonably
assured.





Our revenue is derived principally from the sale of scallops we produce or purchase from third parties, and from the sale of seed and farm supplies to other aquaculture farms.





Cost of goods





Cost of goods sold consists primarily of farming, harvesting and processing costs associated with the growth, transfer and sales preparation of our products (principally scallops).  These costs consist primarily of salaries and benefits and allocated overhead costs for consulting and support personnel engaged in the farming, harvesting
and processing of our products.  All costs are recognized at time of delivery.





Financial instruments





The carrying amount of our financial instruments, which includes cash, accounts receivable, loans receivable, accounts payable and accrued liabilities, short term debt, shareholder debt, and long term debt, approximate fair value based on either i) the short-term nature of the instrument or ii) the reasonableness of the interest rate
as compared to market rates for the long-term instruments. Nonfinancial assets and liabilities that the Company measures at fair value on a non-recurring basis consist primarily of property and equipment, goodwill, and intangible assets, which are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).It is management’s opinion that we are not exposed to significant interest, currency or credit
risk arising from these financial instruments unless otherwise noted.


Fair value
  Effective September 1, 2008, the Company adopted changes issued by the Financial Accounting Standards Board (“FASB”) to fair value accounting. This guidance defines fair value as the price that would be received to sell an asset or the price paid to transfer a liability in an orderly transaction between market participants
at the measurement date and establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the
assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy is broken down into three levels based on the reliability of inputs as follows:
  Level 1—Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date. Examples of the assets carried at Level 1 fair value generally are equities listed in active markets and investments in publicly traded mutual funds with quoted market prices.
  Level 2—Inputs (other than quoted prices included in Level 1) are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the asset/liability’s anticipated life.
  Level 3—Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.
  The availability of observable inputs can vary and is affected by a wide variety of factors, including, for example, the type of a security, whether the security is new and not yet established in the marketplace, and other characteristics particular to a transaction. To the extent that valuation is based on models or inputs that are
less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level 3. When observable prices are not available, the Company either uses implied pricing from similar instruments or valuation models based on net present value of estimated future cash flows, adjusted as appropriate for liquidity, credit, market and/or other risk factors. Fair
value is a market-based measure considered from the perspective of a market participant rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, the Company’s own assumptions are set to reflect those it believes market participants would use in pricing the asset or liability at the measurement date. As noted above the Company’s financial instruments approximate their fair value due to the short-term nature of these instruments.


Derivative Financial Instruments





In connection with the sale of debt or equity instruments, we may sell options or warrants to purchase our common stock. In certain circumstances, these options or warrants may be classified as derivative liabilities, rather than as equity. Additionally, the debt or equity instruments may contain embedded derivative instruments, such as
embedded derivative features, which in certain circumstances may be required to be bifurcated from the associated host instrument and accounted for separately as a derivative instrument liability.







46


We account for all derivatives financial instruments in accordance with SFAS No. 133. Derivative financial instruments are recorded as liabilities in the consolidated balance sheet, measured at fair value.  When available, quoted market prices are used in determining fair value.  However, if quoted market prices are
not available, we estimate fair value using either quoted market prices of financial instruments with similar characteristics or other valuation techniques.




The identification of, and accounting for, derivative instruments is complex. Our derivative instrument liabilities are re-valued at the end of each reporting period, with changes in the fair value of the derivative liability recorded as charges or credits to income, in the period in which the changes occur. For options, warrants and bifurcated
embedded derivative features that are accounted for as derivative instrument liabilities, we estimate fair value using either quoted market prices of financial instruments with similar characteristics or other valuation techniques. The valuation techniques require assumptions related to the remaining term of the instruments and risk-free rates of return, our current common stock price and expected dividend yield, and the expected volatility of our common stock price over the life of the option. The identification
of, and accounting for, derivative instruments and the assumptions used to value them can significantly affect our financial statements.





Derivative financial instruments that are not designated as hedges or that do not meet the criteria for hedge accounting under SFAS No. 133 are recorded at fair value, with gains or losses reported currently in earnings.  All derivative financial instruments we held as of August 31, 2009 and 2008 were not designated as hedges.





Foreign exchange





The functional currency of our foreign subsidiary is the local foreign currency (Canadian dollars). All assets and liabilities denominated in foreign currencies are translated into U.S. dollars at the exchange rate prevailing on the balance sheet date. Revenues, costs and expenses are translated at average rates of exchange prevailing during
the period. Translation adjustments resulting from translation of the subsidiaries' accounts are accumulated as a separate component of shareholders' equity. Gains and losses resulting from foreign currency transactions are included in the consolidated statements of operations and have not been significant.





Use of estimates





The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and disclosure of contingent assets and liabilities. Such estimates include providing for amortization
of property, plant, and equipment, and valuation of inventory. Actual results could differ from these estimates.





Concentration of risk





We operate in the regulated aquaculture industry.  Material changes in this industry or the applicable regulations could have a significant impact on our business.





The quality and quantity of the aquaculture products we cultivate, harvest and process could be impacted by biological and environmental risks such as contamination, parasites, predators, disease and pollution.  These factors could severely restrict our ability to successfully market our products.





During the year ended August 31, 2009, one customer, Fanny Bay Oysters, accounted for 65% of our revenues and we therefore are materially dependent upon Fanny Bay Oysters.   During the year ended August 31, 2008, three customers, Sea World Fisheries, Turning Point and Organic Ocean Seafood, Inc., individually accounted for
12%, 12% and 10% of our revenues, respectively.   These remain our customers; however we now sell through a single distributor, Fanny Bay Oysters.





Location risk





Most, if not all, of our aquaculture are concentrated in one growing region off the coast of Vancouver Island, British Columbia.  As such, if there were a major environmental disaster, our ongoing operations could be materially impacted.








47





Stock-based compensation





We account for stock-based employee compensation arrangements using the fair value method in accordance with the provisions of the FASB issued Statement of Financial Accounting Standards No, 123 (revised 2004) (Share-Based Payment) (“SFAS 123R”). SFAS 123R is a revision of SFAS 123 (Accounting for Stock-Based Compensation),
and supersedes Accounting Principles Beard (“APB”) Opinion No. 25 (Accounting for Stock Issued to Employees). SFAS 123R requires that the fair value of employees awards issued, modified, repurchased or cancelled after implementation, under share-based payment arrangements, be measured as of the date the award is issued, modified, repurchased or cancelled. The resulting cost is then recognized in the statement of earnings over the service period.





We periodically issue common stock for acquisitions and services rendered.  Common stock issued is valued at the estimated fair market value, as determined by our management and board of directors.  Management and the board of directors consider market price quotations, recent stock offering prices and other factors
in determining fair market value for purposes of valuing the common stock.  The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model with the various weighted average assumptions, including dividend yield, expected volatility, average risk-free interest rate and expected lives.





Basic and diluted net loss per share





Basic income or loss per share includes no dilution and is computed by dividing net income or loss by the weighted-average number of common shares outstanding for the period.  Diluted income or loss per share includes the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted
into common stock (using the treasury stock method for stock options and using the if-converted method for convertible notes), if dilutive.





The following is a reconciliation of the numerators and denominators of the basic and diluted net income per share computations:










Year ending August 31, 2009


Year ending August 31, 2008Numerator:Net income (loss) applicable to common shareholders

$
(2,905,256
)

$
(4,575,010)Denominator:


--



--Denominator for basic net income per share:


25,242,856



23,993,935Weighted average dilutive potential common sharesSeries A Preferred Stock


-



-Series B Preferred Stock


-



-Series C Preferred Stock


-



-Series D Preferred Stock


-



-Options and warrants


-



-Denominator for diluted net income per share


25,242,856



23,993,935Basic net income (loss) per share

$
(0.12
)

$
(0.19)Diluted net income (loss) per share

$
(0.12
)

$
(0.19)








48





The treasury stock effect of options and warrants to purchase shares of common stock outstanding at August 31, 2009 and 2008 has not been included in the calculation of the net loss per share as such effect would have been anti-dilutive. As a result of these items, the basic and diluted loss per share for the year ending August 31, 2009
and 2008 presented are identical.





Recent accounting pronouncements





FASB Establishes Accounting Standards Codification TM




In June 2009, the FASB issued Accounting Standards Update No. 2009-01, “Generally Accepted Accounting Principles” (ASC Topic 105) which establishes the FASB Accounting Standards Codification (“the Codification” or “ASC”) as the official single source of authoritative U.S. generally accepted accounting
principles (“GAAP”). All existing accounting standards are superseded. All other accounting guidance not included in the Codification will be considered non-authoritative. The Codification also includes all relevant Securities and Exchange Commission (“SEC”) guidance organized using the same topical structure in separate sections within the Codification.






Following the Codification, the Financial Accounting Standards Board will not issue new standards in the form of Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts. Instead, it will issue Accounting Standards Updates (“ASU”) which will serve to update the Codification, provide background information about
the guidance and provide the basis for conclusions on the changes to the Codification.




The Codification is not intended to change GAAP, but it will change the way GAAP is organized and presented. The Codification is effective for our first quarter 2010 financial statements and the principal impact on our financial statements is limited to disclosures as all future references to authoritative accounting literature will be
referenced in accordance with the Codification.  In order to ease the transition to the Codification, we are providing the Codification cross-reference alongside the references to the standards issued and adopted prior to the adoption of the Codification.





In December 2007, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin 110 (“SAB 110”). SAB 110 states that the staff will continue to accept, under certain circumstances, the use of the simplified method for estimating the expected term of “plain vanilla” share options in accordance with
SFAS 123(R) beyond December 31, 2007. The Company believes there will be no material impact on the Company’s financial statements upon adoption of this standard.





In December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in Consolidated Financial Statements, and an amendment of ARB Statement No. 51.” SFAS No. 160 amends Accounting Research Bulletin (ARB) No. 51, “Consolidated Financial Statements,” to establish accounting and reporting standards for the non-controlling
interest in a subsidiary and for the deconsolidation of a subsidiary.  SFAS No. 160 clarifies that a non-controlling interest in a subsidiary, which is sometimes referred to as a minority interest, is an ownership interest in the consolidated entity that should be reported as a component of equity in the consolidated financial statements.  Among other requirements, SFAS No. 160 requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent
and the non-controlling interest.  It also requires disclosure, on the face of the consolidated income statement, of the amounts of consolidated net income attributable to the parent and the non-controlling interest. SFAS No. 160 will be effective for the Company on August 31, 2009, and is not expected to have a significant impact on the Company’s financial condition or results of operations.





In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations (Revised)”, to replace SFAS No. 141, “Business Combinations. SFAS No. 141(R) requires the use of the acquisition method of accounting, defines the acquirer, establishes the acquisition date and broadens the scope to all transactions and other events
in which one entity obtains control over one or more other businesses. This statement is effective for business combinations or transactions entered into for fiscal years beginning on or after December 15, 2008. The Company is evaluating the impact of SFAS No. 141 (R). The Company believes there will be no material impact on the Company’s financial statements upon adoption of this standard.








49





Management has evaluated other recent accounting pronouncements and does not believe that the adoption of these would have a material impact on our consolidated financial statements.





In February 2008, the FASB issued FASB Staff Position No. FAS 157-2, “Effective Date of FASB Statement No. 157” (“FSP FAS 157-2”), which delayed the effective date of SFAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial
statements on at least an annual basis, until fiscal years beginning after November 15, 2008. Nonfinancial assets and liabilities that the Company measures at fair value on a non-recurring basis consist primarily of property and equipment, goodwill, and intangible assets, which are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). The adoption of FSP FAS 157-2 did not have a material impact on the Company’s consolidated financial statements





In May 2009, the Financial Accounting Standards Board (“FASB”) issued accounting guidance, effective for financial statements issued for interim and annual periods ending after June 15, 2009, which requires us to disclose the date through which we have evaluated subsequent events and whether the date corresponds with the release
of our financial statements.  (See Note 1)





Note 4.  Property, Plant and Equipment





Property, plant and equipment at August 31, 2009, consisted of the following:





Cost


Accumulated Amortization


Net Book ValueLand

$
230,769


$
-


$
230,769Buildings


1,140,463



(336,343)



804,120Seawater piping and tanks


625,380



(362,253)



263,127Boats and barge


609,041



(234,883)



374,158Field equipment


3,436,826



(1,846,360)



1,590,466Office equipment


23,735



(15,777)



7,958Vehicles


140,497



(64,578)



75,919Computer equipment


55,178



(50,986)



4,192$
6,261,889


$
(2,911,180)


$
3,350,709





Depreciation expense for the years ended August 31, 2009 was approximately $571,000.





Property, plant and equipment at August 31, 2008, consisted of the following:





Cost


Accumulated Amortization


Net Book ValueLand

$
236,731


$
-


$
236,731Buildings


1,161,108



(294,883
)


866,225Seawater piping and tanks


641,535



(339,478
)


302,057Boats and barge


620,431



(187,385
)


433,046Field equipment


3,496,702



(1,444,566
)


2,052,136Office equipment


24,348



(14,960
)


9,388Vehicles


100,523



(49,520
)


51,003Computer equipment


55,924



(24,174
)


31,750$
6,337,302


$
(2,354,966
)

$
3,982,336





Depreciation expense for the years ended August 31, 2008 was approximately $563,000.








50





Note 5.  Acquisition of Granscal





Granscal Tenure





On October 31, 2008, the Company 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.  The note is currently in default, but the note holder has not taken further action to enforce payment of the arrears liability and we are currently working to modify repayment terms.





Note 6.  Related Party Transactions





At August 31, 2008, we had five secured non-interest notes receivable from 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, totaling $114,079.  Robert Saunders, our President and
CEO, owns 100% of RKS.





Note 7.  Investments in Tenures





Ocean Smart carries its Investment in Tenures at $3,663 and $3,758 at August 31, 2009 and 2008, respectively.  This amount represents the carrying costs of certain shellfish tenures acquired by Island Scallops’ subsidiaries.  Shellfish tenures are government-granted rights allowing limited use of offshore waters
for the purposes of cultivation of shellfish.  The granting of shellfish tenure rights are the responsibility of the Provincial (British Columbia) Government.   The Shellfish tenures held by Ocean Smart and our subsidiaries have expiration dates ranging from 2021 to 2024.





These tenures are considered to have an indefinite useful life because renewal on expiration is anticipated, and are not subject to amortization.








51





Note 8.  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 $62,539 and $33,292 at August 31, 2009 and 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 August 31, 2009 and 2008 is $144,303 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 11 – Long Term Debt for additional information).





Note 9.  Short Term Debt





Included in short-term debt at August 31, 2009 and 2008, are estimated royalties of US$60,948 and US$62,522 payable to a third party from whom the former sole shareholder of Island Scallops originally acquired the shares of Island Scallops.  The 1992 share purchase agreement (for Island Scallops) provided that the third party
was to receive 3% of revenues from Island Scallops as earned, on a quarterly basis, throughout the period from December 1, 1992 to November 30, 2002.  The third party holds a first charge (or first lien) over our inventory (including broodstock) in the amount of CDN$350,000 in support of its royalty entitlement.  The third party has not taken further action to enforce payment of the arrears liability.  To date, we have accrued the entire balance of US$60,948 as a current liability
and we plan to pay it with available funds in the near future.





Included in short-term notes payable at August 31, 2009 and 2008, is an unsecured non-interest bearing demand loan payable to an individual with a face value of US$45,939 and  US$47,126 with no specific terms of repayment.  However, the lender had previously informally requested that the loan be repaid in full by October
6, 2008. The individual has not taken further action to enforce payment of the arrears liability.





Included in short-term debt at August 31, 2009 is US$13,736 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 (see Note 5 - Acquisition of Granscal for additional information).  Also included in short-term debt at August 31, 2009 is an auto loan for US$41,309.  The loan is repayable at US$328 (CDN$356) per month and has an interest rate of 8.55%.





Note 10.  Line of Credit





Included in line of credit at August 31, 2009 is a bank line of credit.  The line is a US$76,000 bank line of credit for Island Scallops.  The interest rate on the line of credit is 12% as of August 31, 2009 and the balance due is US$75,194.





Included in line of credit at August 31, 2008 are two bank lines of credit.  The first line is a $78,000 bank line of credit for Island Scallops.  The interest rate on the line of credit is 7.5% as of August 31, 2008.  At August 31, 2008, the balance due is US$77,795. The second line was for US50,000 bank line
of credit for Island Scallops.  The interest rate on the line of credit is 6.5% as of August 31, 2008.  At August 31, 2008, the balance due is US$46,971.  This second line of credit was subject to a personal guarantee by our Chairman and CEO, Robert Saunders.












52






Note 11. 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 $916 (CDN$1,000) per month through December 31, 2009.  Commencing January 31, 2010, we will begin paying $4,579 (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 $9,158 (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 $9,158 (CDN$10,000) per month.  At August 31, 2009, the balance due is $388,428, of
which US$138,107 is reflected in the current portion of long term debt and the remaining balance of US$250,321 is reflected as long term debt.





These consolidated financial statements include Island Scallops’ unsecured loan from the National Research Council of Canada Industrial Research Assistance Program which requires quarterly payments commencing March 1, 2003 equal to 3% of gross revenues of Island Scallops until the earlier of full repayment or December 1, 2012.  If
at December 1, 2012, Island Scallops has not earned sufficient revenues to repay the original loan amount, the remaining portion of the loan is to be forgiven.  Amounts currently due at August 31, 2009, bear interest at a rate of 1% per month.  At August 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 $144,303 that they claim is owed under this loan
agreement.  As such, at August 31, 2009, US$144,303 is included in accounts payable and accrued liabilities and the remaining principal balance of US$216,211 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 $3,045 (CDN$3,325 per month (interest only calculated at 10.5% per annum).  The loan is secured by a first charge on the real property of Island Scallops. At August 31, 2009, the principal due is $347,985.





As a result, at August 31, 2009, we had $952,624 of long-term debt less a current portion of $354,318 for a balance of $598,306.  Principal payments due within each of the next five fiscal years and subsequently, in respect to long term debt are approximately as follows:





2010

$
354,3182011


109,8902012


109,8902013


30,5412014


-2015 and beyond


347,985$
952,624





Note 12.  Series C Preferred Stock Financing





We completed a private equity financing of $897,444 on November 5, 2007, with one accredited investor.  Net proceeds from the offering are approximately $801,000.  As part of this financing, the investor returned the Series J Warrant, Series D Warrant, Series E Warrant and Series F Warrant that they received as a result
of our Series B financing completed on January 16, 2007.  Pursuant to this financing, we issued 747,870 shares of our Series C Preferred Stock,  par value $0.001 per share and the investor also received one of each of the following warrants: (i) Series A Warrant, (ii) Series B Warrant, (iii) Series C Warrant, (iv) Series J Warrant, (v) Series D Warrant, (vi) Series E Warrant, and (vii) Series F Warrant, each to purchase a number of shares of common stock equal to fifty percent (50%) of the
number of shares of common stock issuable upon conversion of the purchaser’s preferred stock, except for the Series J Warrants, which shall entitle the investor to purchase a number of shares of our Series C Preferred Stock equal to one hundred percent (100%) of the number of Series C Preferred Stock it received in the financing.  Each of the Warrants has a term of 5 years, except for the Series J Warrants, which have a term of 1 year.  Each share of the preferred stock is convertible
into one fully paid and nonassessable share of our common stock at an initial conversion price of $1.20, subject to adjustment.  We were obligated to file a registration statement on or before December 5, 2007 providing for the resale of the shares of common stock issuable upon conversion of the preferred stock and the shares of common stock underlying the Warrants and underlying the preferred stock issuable upon exercise of the Warrants.  In connection with the financing, our management agreed
not to sell any of our securities owned by them, their affiliates or anyone they have influence over until the registration statement has been effective for nine months.    In connection with the financing, a deemed dividend was recorded for $163,386 based on the relative fair values of the preferred shares and warrants.









53




In connection with this financing, we paid cash compensation to a placement consultant in the amount of approximately $72,000 and issued him placement consultant warrants, exercisable for a period of three years from the date of issue. The placement consultant's warrants allow him to purchase up to (i) 74,787 shares of Series C Preferred
Stock, and each of the following warrants, which are identical to the warrants issued to the investors of the financing: (i) Series A Warrant, (ii) Series B Warrant, (iii) Series C Warrant, (iv) Series D Warrant, (v) Series J Warrant, (vi) Series E Warrant, and (vii) Series F Warrant, each to purchase 37,393 shares of common stock, except for the Series J Warrants, which shall entitle the Consultant to purchase 74,787 shares of our Series C Preferred Stock.





The net proceeds from the financing are to be used for working capital and general corporate purposes.





Note 13.  Series D Preferred Stock Financing





On May 29, 2008, we signed a Series D Convertible Preferred Stock Purchase Agreement with one accredited investor whereby such investor was committed, subject to the satisfaction of certain closing conditions, to purchase $1,500,000 of our Series D Preferred Shares.  As part of this financing, we also entered into an Exchange
Agreement with the investor and certain other holders of our outstanding warrants, whereby the Series J Warrant that the investor received pursuant to the financing we closed on November 5, 2007, as disclosed in the Form 8-K filed on November 7, 2007, was cancelled, and the investor and certain other holders of our outstanding warrants returned to us warrants to purchase an aggregate of 24,941,605 shares of our common stock, which the investor and such other warrant holders received pursuant to the financings
we closed on: (i) April 12, 2006, as disclosed in our Form 8-K filed on April 14, 2007; (ii) May 30, 2006, as disclosed in our Form 8-K filed on May 30, 2006; and (iii) November 5, 2007, as disclosed in our Form 8-K filed on November 7, 2007, in exchange for an aggregate of 267,059 Series D Preferred Shares. The net proceeds from the financing are to be used for supplies, processing plant upgrades, working capital and general corporate purposes.  All of the closing conditions were satisfied and accordingly
we completed the private equity financing and received net proceeds of approximately $1.46 million on June 11, 2008. In connection with the financing, a deemed dividend was recorded for $100,360 based on the relative fair values of the preferred shares and exchanged warrants.








Pursuant to the financing, we filed a Certificate of Designation of the Relative Rights and Preferences of our Series D Convertible Preferred Stock on May 29, 2008.  The Certificate of Designation designates 380,000 shares of our authorized preferred stock as Series D Convertible
Preferred Stock, which ranks junior to our Series A, Series B and Series C Convertible Preferred Stock, but senior to our common stock.  Except with respect to specified transactions that may affect the rights, preferences, privileges or voting power of the Series D Preferred Shares and except as otherwise required by Nevada law, the Series D Preferred Shares have no voting rights.  At any time on or after the issuance date, the holder of any Series D Preferred Shares may, at the holder's
option, elect to convert all or any portion of the Series D Preferred Shares held by such person into a number of fully paid and nonassessable shares of common stock equal to the quotient of (i) the stated value ($40.00 per share) of the Series D Preferred Shares being converted divided by (ii) the conversion price, which initially is $0.80 per share, subject to certain adjustments.  In the event of our liquidation, dissolution or winding up, the holders shall receive a liquidation preference equal
to 120% of the stated value per Series D Preferred Share.





Note 14.  Preferred Stock Dividends





Preferred Stock Dividends Issued in Fiscal Year Ending August 31, 2008





Date

Preferred Stock
Common Shares Issued
Dividend Value12/31/2007

Series A
172,750
$                  223,50012/31/2007

Series B
45,999
$                    62,60012/31/2007

Series C
17,883
$                    24,3006/30/2008

Series A
322,228
$                  231,1006/30/2008

Series B
85,515
$                    61,8006/30/2008

Series C
37,075
$                    26,800








54






Preferred Stock Dividends Issued in Fiscal Year Ending August 31, 2009





Date

Preferred Stock
Common Shares Issued
Dividend Value12/31/2008

Series A
324,691
$                  232,90012/31/2008

Series B
86,454
$                    62,50012/31/2008

Series C
37,482
$                    27,0006/30/2009

Series A
320,269
$                  229,7006/30/2009

Series B
85,278
$                    61,6006/30/2009

Series C
36,972
$                    26,700







Note 15.  Contingent Liabilities





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





Note 16.  Income Taxes





We did not provide any current or deferred United States federal, state or foreign income tax provision or benefit for the period presented because we have experienced operating losses since inception.  We have provided a full valuation allowance on the deferred tax asset, consisting primarily of unclaimed research and development
expenditures, because of uncertainty regarding our ability to realize the benefit.





Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the net deferred taxes at August 31, 2009 and 2008 are as
follows:





August 31,


August 31,2009


2008Deferred tax asset attributable to:Net operating loss carryover

$
5,330,000


$
4,386,000Less, valuation allowance


(5,330,000
)


(4,386,000
)Total net deferred tax asset

$
-


$
-





We follow Statement of Financial Accounting Standards Number 109 (SFAS 109), “Accounting for Income Taxes.” SFAS No. 109 requires a valuation allowance, if any, to reduce the deferred tax assets reported if, based on the weight of the evidence, it is more likely than not that some portion or all of the deferred tax assets will
not be realized.  Management has determined that a valuation allowance of approximately $5,330,000 and $4,386,000 at August 31, 2009 and 2008 is necessary to reduce the deferred tax assets to the amount that will more than likely than not be realized.  The change in valuation allowance for 2009 and 2008 was approximately $946,000 and $845,000 respectively.





At August 31, 2009, and 2008 we had net operating loss carry forwards amounting to approximately $11,359,000 and $9,296,000 for U.S. and Canadian tax purposes, respectively, that expires in various amounts beginning in 2010 and 2009 in the U.S. and Canada, respectively.








55





The federal statutory tax rate reconciled to the effective tax rate for 2009 and 2008 are as follows:





2009


2008Tax at U.S. statutory rate


34.0
%


34
%State tax rate, net of federal benefits


0.0



0.0Foreign tax rate in excess of U.S. statutory rate


17.6
%


17.6
%Change in valuation allowance


(51.6
%)


(51.6
%)Effective tax rate


0.0
%


0.0
%





Note 17.  Stock Compensation, Stock Option and Warrants





Stock Compensation in Fiscal Year Ending August 31, 2008





Date

Shareholder
Common Shares Issued
Value10/31/2007

Pacific Crab Seafood
25,000
$                    32,00011/30/2007

Pacific Crab Seafood
5,000
$                      6,2501/1/2008

Pacific Crab Seafood
5,000
$                      6,7502/1/2008

Pacific Crab Seafood
5,000
$                      4,9003/4/2008

Pacific Crab Seafood
5,000
$                      4,7501/1/2008

Pacific Crab Seafood
5,000
$                      4,7501/1/2008

Consulting for Strategic Growth
25,000
$                    23,7505/19/2008

Pacific Crab Seafood
5,000
$                      4,0006/20/2008

Pacific Crab Seafood
5,000
$                      4,000








Stock Compensation in Fiscal Year Ending August 31, 2009





Date

Shareholder
Common Shares Issued
Value1/1/2009

Leslie Romough
400,000
$                    32,0003/1/2009

International Consulting Company S.A
50,000
$                      9,5003/23/2009

Gallatin Consulting, Inc
100,000
$                      8,000











56




Stock Options




In August 2005, our Board of Directors approved the “Edgewater Foods International 2005 Equity Incentive Plan.” The Board of Directors reserved 5,000,000 shares of our common stock to be issued in the form of incentive and/or non-qualified stock options for employees, directors and consultants to Ocean Smart. As of August 31,
2009, our Board of Directors had authorized the issuance of 2,992,000 options to employees.




During the years ended August 31, 2009 and 2008, $185,100 and $1,780,882 in stock option expenses were recognized respectively.  An additional, $5,363 will be recognized in the three month period ending November 30, 2009.





Stock option activity during the period ending August 31, 2009 and 2008, was as follows:





Number of Shares


Weighted Average Exercise PriceOutstanding, August 31, 2007


2,962,000


$
1.26Granted


30,000



1.21Exercised


--



--Forfeited


(400,000)



1.50Expired


--



--Outstanding, August 31, 2008


2,592,000



1.23Granted


3,300,000



0.86Exercised


--



--Forfeited


--



--Expired


--



--Outstanding, August 31, 2009


5,892,000


$
1.03Exercisable, August 31, 2009


5,892,000


$
1.03





At August 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, 2,090,000 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 August 31, 2009 and 2008, was as follows:





Number of Warrants


Weighted Average Exercise PriceOutstanding, August 31, 2007


28,086,252


$
1.75Granted


3,028,873



2.00Exercised


--



--Forfeited


--



--Returned and exchanged


(29,428,826
)


1.75Expired


(304,347
)


1.30Outstanding, August 31, 2008


1,381,952



1.33Granted


--



--Exercised


--



--Forfeited


--



--Returned and exchanged


--



--Expired


(578,667
)


0.56Outstanding, August 31, 2009


803,285


$
1.88Exercisable, August 31, 2009


803,285


$
1.88





At August 31, 2009, if all options and warrants were exercised and all shares of preferred stock were converted, the company would have 58,908,486 shares of common stock outstanding.






57





Note 18.  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 CAO and Javier Idrovo will remain on the Board.





Note 19. Commitments and Contingencies





Corporate Offices





For the fiscal year ended August 31, 2008, our U.S. corporate office was located at 400 Professional Drive, Suite 310, Gaithersburg, Maryland 20878.  This space was provided on a rent free basis by one of our shareholders.  As a result, we did not recognize rental expense in the fiscal year.





Employment Agreements





We entered into an employment agreement with Mr. Robert Saunders as our Chairman and President effective on June 29, 2005.  Subsequently in August 2005, Mr. Saunders was appointed CEO by our Board of Directors.  Mr. Saunders will serve at the pleasure of the Board of Directors.  For serving as President, Mr.
Saunders’ compensation will be US $60,000 per annum.  Additionally, we agreed to grant Mr. Saunders a signing bonus of US $150,000 to be paid on closing of at least US $3,500,000 in third party financing and increase his compensation to $120,000 per annum if we receive at least US $5,000,000 in outside funding.  After the completion of our Series A Preferred Stock Financing, Mr. Saunders was due the signing bonus of $150,000 and a monthly salary of $10,000 per month beginning in August
2006. However, Mr. Saunders agreed to reduce his monthly salary to $5,000 per month until such time that we become significantly cash flow positive for its operations.   As of August 31, 2008 we had paid Mr. Saunders $100,000 of the $150,000 bonus that was due under the terms of the agreement.  Additionally, we are currently discussing possible restructuring/payment terms of the accrued salary of  $250,000 as of August 31, 2009 until such time that we become significantly cash
flow positive for its operations.  As of August 31, 2009, the term of the initial employment agreement had expired and we are currently discussing finalizing a new employment agreement.  Until a new agreement is completed, we will continue to operate under the terms of this agreement.



















58









ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE





We have had no disagreements with our certified public accountants with respect to accounting practices or procedures or financial disclosure.








ITEM 9A.                      CONTROLS AND PROCEDURES





Quarterly Evaluation of Controls





As of the end of the period covered by this annual report on Form 10-K, the Company evaluated the effectiveness of the design and operation of (i) their disclosure controls and procedures, and (ii) their internal control over financial reporting. The evaluators who performed this evaluation were our Chief Executive Officer, Robert Saunders
and Acting Chief Accounting Officer, Michael Boswell; their conclusions, based on and as of the date of the Evaluation (i) with respect to the effectiveness of our Disclosure Controls and (ii) with respect to any change in our Internal Controls that occurred during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect our Internal Controls are presented below.





CEO and CFO Certifications





Attached to this annual report, as Exhibits 31.1 and 31.2, are certain certifications of the CEO and Acting CAO, which are required in accordance with the Exchange Act and the Commission’s rules implementing such section (the "Rule 13a-14(a)/15d-14(a) Certifications"). This section of the annual report contains the information
concerning the Evaluation referred to in the Rule 13a-14(a)/15d-14(a) Certifications. This information should be read in conjunction with the Rule 13a-14(a)/15d-14(a) Certifications for a more complete understanding of the topic presented.





Disclosure Controls and Internal Controls





Disclosure Controls are procedures designed with the objective of ensuring that information required to be disclosed in the Company's reports filed with the Securities and Exchange Commission under the Securities Exchange Act, such as this annual report, is recorded, processed, summarized and reported within the time period specified
in the Commission’s rules and forms. Disclosure Controls are also designed with the objective of ensuring that material information relating to the Company is made known to the CEO and the Acting CAO by others, particularly during the period in which the applicable report is being prepared. Internal Controls, on the other hand, are procedures which are designed with the objective of providing reasonable assurance that (i) the Company's transactions are properly authorized, (ii) the Company’s assets
are safeguarded against unauthorized or improper use, and (iii) the Company's transactions are properly recorded and reported, all to permit the preparation of complete and accurate financial statements in conformity with accounting principles generally accepted in the United States.











59








Limitations on the Effectiveness of Controls





The Company's management does not expect that their Disclosure Controls or their Internal Controls will prevent all error and all fraud. A control system, no matter how well developed and operated, can provide only reasonable, but not absolute assurance that the objectives of the control system are met. Further, the design of the control
system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of a system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated objectives under all potential future conditions. Over time, control may become inadequate because of changes in conditions, or because the degree of
compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.





Scope of the Evaluation





The CEO and Acting CAO’s evaluation of the our Disclosure Controls and Internal Controls included a review of the controls’ (i) objectives, (ii) design, (iii) implementation, and (iv) the effect of the controls on the information generated for use in this annual report. In the course of the Evaluation, the CEO and Acting
CAO sought to identify data errors, control problems, acts of fraud, and they sought to confirm that appropriate corrective action, including process improvements, was being undertaken. This type of evaluation is done on a quarterly basis so that the conclusions concerning the effectiveness of our controls can be reported in our quarterly reports on Form 10-K and annual reports on Form 10-K. The overall goals of these various evaluation activities are to monitor our Disclosure Controls and Internal Controls,
and to make modifications if and as necessary. Our external auditors also review Internal Controls in connection with their audit and review activities. Our intent in this regard is that the Disclosure Controls and the Internal Controls will be maintained as dynamic systems that change (including improvements and corrections) as conditions warrant.





Among other matters, the Evaluation was to determine whether there were any significant deficiencies or material weaknesses in our Internal Controls, which are reasonably likely to adversely affect our ability to record, process, summarize and report financial information, or whether the Evaluators identified any acts of fraud, whether
or not material, involving management or other employees who have a significant role in our Internal Controls. This information was important for both the Evaluation, generally, and because the Rule 13a-14(a)/15d-14(a) Certifications, Item 5, require that the CEO and Acting CAO disclose that information to our Board (audit committee), and our independent auditors, and to report on related matters in this section of the annual report. In the professional auditing literature, "significant deficiencies" are referred
to as "reportable conditions". These are control issues that could have significant adverse affect on the ability to record, process, summarize and report financial data in the financial statements. A "material weakness" is defined in the auditing literature as a particularly serious reportable condition where the internal control does not reduce, to a relatively low level, the risk that misstatement cause by error or fraud may occur in amounts that would be material in relation to the financial statements and
not be detected within a timely period by employee in the normal course of performing their assigned functions. The Evaluators also sought to deal with other controls matters in the Evaluation, and in each case, if a problem was identified, they considered what revisions, improvements and/or corrections to make in accordance with our ongoing procedures.




Conclusions





Based upon the Evaluation, our disclosure controls and procedures are designed to provide reasonable assurance of achieving our objectives. Our CEO and Acting CAO concluded that our disclosure controls and procedures are effective at that reasonable assurance level to ensure that material information relating to us is made known to
management, including the CEO and Acting CAO, particularly during the period when our periodic reports are being prepared, and that our Internal Controls are effective at that assurance level to provide reasonable assurance that our financial statements are fairly presented inconformity with accounting principles generally accepted in the United States. Additionally, there has been no change in our Internal Controls that occurred during our most recent fiscal quarter that has materially affected, or is reasonably
likely to affect, our Internal Controls.










60






Management’s Report on Internal Controls Over Financial Reporting





Board of Directors and Ocean Smart, Inc.:





The Management of Ocean Smart, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting for the Company.  The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with U. S. generally accepted accounting principles.  The Company’s internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company’s assets, (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with U. S. generally accepted accounting principles, and that  receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; (iii) provide reasonable assurance regarding prevention of timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements, and (iv) provide reasonable assurance that receipts and expenditures
of the Company are being made only in accordance with authorization of management and directors of the Company.





Internal control over financial reporting includes the controls themselves, monitoring and internal auditing practices and actions taken to correct deficiencies as identified.





Because of its inherent limitations, internal control over financial reporting, no matter how well designed, may not prevent or detect misstatements. Accordingly, even effective internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation. Also, the effectiveness of
internal control over financial reporting was made as of a specific date. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.





Management conducted an assessment of the effectiveness of the Company’s internal control over financial reporting as of August 31, 2009, based on criteria for effective internal control over financial reporting described in “Internal Control—Integrated Framework”
issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management’s assessment included an evaluation of the design of the Company’s internal control over financial reporting and testing of the operational effectiveness of its internal control over financial reporting. Management reviewed the results of its assessment with the Audit Committee of the Company’s Board of Directors.





Based on this assessment, management determined that, as of August 31, 2009, Ocean Smart, Inc. maintained effective internal control over financial reporting.





Although currently we do not identify any material weaknesses in the process of self assessment, we have recognized significant weaknesses in internal controls.  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.  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.





This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting.  Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that
permit us to provide only management’s report in this annual report.





OCEAN SMART, INC





/s/  Robert Saunders


Robert Saunders


Chief Executive Officer














61














PART III.





ITEM 10.                      DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT





The following table and text set forth the names and ages of all directors and executive officers as of November 28, 2008. The Board of Directors is comprised of only one class. All of the directors will serve until the next annual meeting of shareholders, which is anticipated to be held in February __, 2010, and until their successors
are elected and qualified, or until their earlier death, retirement, resignation or removal. Dr. Kristina Miller, our Chief Scientific Advisor is the wife of Robert Saunders, our Chairman, CEO and President; otherwise, there are no family relationships among our directors and executive officers. Also provided herein are brief descriptions of the business experience of each director, executive officer and advisor during the past five years and an indication of directorships held by each director in other companies
subject to the reporting requirements under the Federal securities laws.











Name

Age

PositionRobert Saunders

56

CEO and PresidentJavier Idrovo

41

DirectorMichael Boswell

40

Director, Acting Chief accounting OfficeChristopher Wall

37

ChairmanMichael Ross

41

Director





Robert Saunders,  CEO and President.Mr. Saunders has directed all research and development efforts at Island Scallops since its establishment.  After studying for his B.Sc. at
the University of British Columbia in the early 1970's, Mr. Saunders has worked exclusively in the aquaculture research and development field.  His efforts have primarily involved designing and implementing innovative culture technology and methods for new aquaculture species in British Columbia.  Mr. Saunders has direct experience with managing projects similar to the type proposed, such as developing the hatchery technology for producing the Japanese scallop and the development of sablefish
aquaculture.











62





Javier Idrovo, Director.Mr. Idrovo has been involved in the food industry since 2001 when he joined Dole Food Company, Inc. as Vice President of Strategy. In 2004, Mr. Idrovo was promoted to Senior Vice President of Strategy.  In 2005, he became
Vice President and CFO of Dole Packaged Foods, one of the operating divisions of Dole Food Company.  In 2006, he was promoted to President of Dole Packaged Foods and held that title until March 2008.  Prior to joining Dole, Mr. Idrovo worked as a management consultant for The Boston Consulting Group, Inc. holding positions of increasing responsibility from Associate Consultant to Manager.  As a consultant, Mr. Idrovo worked for clients on projects that focused on strategy issues
as well as organizational effectiveness issues across a number of industries including, but not limited to, Telecommunications, Retailing, Manufacturing, and Financial Services.  He received a Bachelor of Science degree in 1989 and a Master of Engineering degree in 1990 both from Harvey Mudd College.  Mr. Idrovo also received a Master of Business Administration degree from Harvard Business School in 1995.





Michael Boswell,Director and Acting Chief Accounting Officer.Mr.
Boswell is a co-founder and member in TriPoint Capital Advisors, LLC, a boutique merchant bank focused on small and mid-sized growth companies and a co founder of the TriPoint family of companies. Mr. Boswell provides high-level financial services to start-up businesses and small to mid-sized companies. Mr. Boswell is currently a member of the board of directors and chairman of the audit committee of Radiant Pharmaceutical, Inc. (AMEX: RPC), a publicly held biotechnology firm.  Mr. Boswell is also currently
a director of Global Growth Acquisition Corp. 1, a Cayman Islands corporation. Mr. Boswell holds the Series 24, 82 and 63 licenses and is also President, COO and Chief Compliance Officer of TriPoint Global Equities, LLC, a FINRA member firm.  Prior to the founding of TriPoint, Mr. Boswell had a number of executive positions focusing on business development and management consulting. Mr. Boswell also spent eight years as a senior analyst and/or senior engineer for various branches of the United States
Government. He earned a MBA from John Hopkins University and a BS degree in Mechanical Engineering from University of Maryland.





Christopher Wall, Chairman.Mr. Wall is Chairman of the Board of Ocean Smart. Additionally, he currently handles assessment, restructuring and recapitalization, monitoring and sale of
distressed portfolio assets at Vision Capital Advisors, a New York based Hedge fund with over $900 million in assets under management. Prior to joining Vision, he was Director of Corporate Development for Organica AG, Director of Business Development for Harbor Technology Group, and an Associate for Scient Corp. Mr. Wall has a B.A. in Philosophy and Economics from Columbia University. He serves as a Director on the Board of 4 Elements, Inc and; he is also Chairman of the Board Halo Technology Holdings.




Michael Ross, Director.  Michael Ross is President of Joseph Capital and of Berkeley Financial, and has experience from several
bulge bracket institutions.









63








Significant Employees





The following are employees who are not executive officers, but who are expected to make significant contributions to our business:





Bruce Evans, Farm Manager.Mr. Bruce Evans has been involved in shellfish production since 1985. He successfully established an oyster business, employing methods of long-line and beach culture production.  That business is still in operation
today, producing 7,000 gals of shucked oysters annually and employing 3 full time people and 4 part time people.  He moved to Island Scallops in 1989.  Mr. Evans was responsible for securing the leases from the Provincial government for this scallop grow-out project. He built the established long-line systems that currently produce scallops for Island Scallops.  Mr. Evans worked with a Japanese scallop farmer for two years in B.C. and spent a month working on highly acclaimed scallop
farms in Japan.  Mr. Evans has BS in Marine Biology from the University of Victoria.





Dr. Kristina M. Miller, Chief Scientific Advisor.   Dr. Miller is currently Head of the Molecular Genetics Section in the Pacific Region for the Department of Fisheries and Oceans, Canada (DFO).   She has been a research scientist at
DFO since obtaining her PhD in Biological Sciences from Stanford University in 1992.  The Molecular Genetics section she oversees contains a staff of 26, including scientists, biologists, computer analysts and research technicians.  Dr. Miller conducts research on the genetic composition, adaptation, immunity and physiology of wild and domesticated fish and shellfish species using both molecular and genomic approaches.  She has been a leader in the development of molecular technologies to aid in
the conservation and management of aquatic resources.  In the past 10 years, she has published over 40 scientific peer-reviewed journal manuscripts, and her group has been the focus of numerous magazine and newspaper articles.  Dr. Miller brings a strong scientific component to the management of Ocean Smart, Inc., and she will serve as Chief Scientific Advisor.  In addition to her PhD, Dr. Miller received a BSc in Zoology from University of California, Davis in 1983, and a MSc in Biology from University
of British Columbia in 1986.  Dr. Miller is Robert Saunders, our Chairman, CEO and President’s wife.







































64








We currently have three committees appointed by our Board of Directors:








·
Acquisition/Business Opportunity Committeewhich is comprised of Javier Idrovo, Michael Ross and Christopher Wall.





·
Audit/Finance Committee which is comprised of Michael Boswell (Chair), Javier Idrovo and Michael Ross.





·
Compensation Committee which is comprised of Javier Idrovo, Michael Ross and Christopher Wall.











Audit Committee and Financial Expert





We have an Audit/ Finance Committee as specified in Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended, composed of Michael Boswell (Chair), Javier Idrovo and Michael Ross.  The Audit/Finance  Committee focuses its efforts on assisting our Board of Directors to fulfill its oversight responsibilities
with respect to our:





●          Quarterly and annual consolidated financial statements and financial information filed with the Securities and Exchange Commission;





●          System of internal controls;





●          Financial accounting principles and policies;





●          Internal and external audit processes; and





●          Regulatory compliance programs.











65








The committee meets periodically with management to consider the adequacy of our internal controls and financial reporting process.  It also discusses these matters with our independent auditors and with appropriate financial personnel that we employ.  The committee reviews our financial statements and discusses
them with management and our independent auditors before those financial statements are filed with the Securities and Exchange Commission.





The committee has the sole authority to retain and dismiss our independent auditors and periodically reviews their performance and independence from management.  The independent auditors have unrestricted access and report directly to the committee.





Audit Committee Financial Expert





Michael Boswell is our Audit Committee Financial Expert, as that term is defined in Item 407 of Regulation S-B and the Board has determined that Mr. Boswell is not independent, as that term is defined in Section 121 of the American Stock Exchange’s Listing Standards and Section 10A(m)(3) of the Securities Exchange Act of 1934.  Mr.
Boswell’s qualifications as an audit committee financial expert are described in his biography above.





Compliance with Section 16(a) of the Exchange Act





Section 16(a) of the Exchange Act requires our officers, directors and persons who own more than 10% of any class of our securities registered under Section 12(g) of the Exchange Act to file reports of ownership and changes in ownership with the SEC. Officers, directors and greater than 10% stockholders are required by SEC regulation
to furnish us with copies of all Section 16(a) forms they file.





Based on our review of copies of such reports, we believe that there was compliance with all filing requirements of Section 16(a) applicable to our officers, directors and 10% stockholders during fiscal 2009.





Code of ethics





On August 3, 2005, we adopted a code of ethics that applies to our Chief Executive Officer and Principal Financial and Accounting Officer.  You may obtain a copy of any of our codes of ethics at no cost, by written request to Ocean Smart, Inc., 5552 West Island Highway, Qualicum Beach, British Columbia, Canada V9K 2C8; or, by oral
request at: (250) 757-9811.

















66














ITEM 11.               EXECUTIVE COMPENSATION





Summary Compensation Table











Name and Principal Position
Year
Salary
($)
Bonus
($)
Stock Awards
($)
Option Awards
($)(a)
(b)
(c)
(d)
(e)
(f)Robert Saunders
Chief Executive Officer
2009
60,000 (1)
0
0
0 (3)Robert Saunders
Chief Executive Officer
2008
60,000 (1)
0
0
227,164 (3)Michael Boswell
Acting Chief Accounting Officer
2009
0 (2)
0
0
0 (3)Michael Boswell
Acting Chief Accounting Officer
2008
0 (2)
0
0
295,317 (3)








Name and Principal Position
Year
Non-Equity Incentive
Plan Compensation
($)
Non-Qualified
Deferred
Compensation
Earnings
($)
All other
Compensation
Total
($)(a)
(b)
(g)
(h)
(i)
(j)Robert Saunders
Chief Executive Officer
2009
0
0
[  ]
60,000Robert Saunders
Chief Executive Officer
2008
0
0
0
287,164Michael Boswell
Acting Chief Accounting Officer
2009
0
0
0
0Michael Boswell
Acting Chief Accounting Officer
2008
0
0
0
295,317











67











(1)            In June 2005, we entered into an employment agreement with Robert Saunders, our Chairman, CEO and President.  Mr. Saunders will serve at the pleasure of the Board of Directors.  Pursuant to his employment agreement, Mr. Saunders’ compensation
will be $60,000 (USD) per annum for his services as our President.  Additionally, we agreed to grant Mr. Saunders a signing bonus of US $150,000 to be paid on closing of at least US $3,500,000 in third party financing and increase his compensation to $120,000 per annum if we receive at least US $5,000,000 in outside funding.  After the completion of our Series A Preferred Stock Financing, Mr. Saunders was due the signing bonus of $150,000 and a monthly salary of $10,000 per month beginning
in August 2006. However, Mr. Saunders agreed to reduce his monthly salary to $5,000 per month until such time that we become significantly cash flow positive for its operations. This agreement expired in June 2008 and we are currently operating as if this employment agreement is still in effect as we discuss a new agreement with Mr. Saunders.  As of August 31, 2009, we had paid Mr. Saunders $100,000 of the $150,000 bonus that was due under the terms of the agreement.  Additionally, we are
currently discussing possible restructuring/payment terms of the accrued salary, until such time that we become significantly cash flow positive for its operations.





(2)            Mr. Boswell served as our President from March to June 2005, at which time Mr. Saunders replaced Mr. Boswell as President.  Mr. Boswell has served as our Acting Chief Accounting Officer since August 2005.  Mr. Boswell indirectly owns a minority
interest in TriPoint Capital Advisors, LLC, a significant shareholder and party with which we maintain a consulting agreement.  In August 2006, the Board approved the Compensation Committee’s recommendation to pay TriPoint $15,000 per month, which includes fees for Mr. Boswell’s services as our Acting Chief Accounting during 2005, however TriPoint agreed to reduce such fee to $7,000 per month until our cash flow position improves, at which time the Committee will reconvene and recommend
a return to $15,000 per month.  In addition, TriPoint has agreed not to accept any additional fees, other than expenses, until we are sufficiently funded to carry out our business and operations.  As of February of 2009, TriPoint agree to accrue their monthly fee of $7,000 per month on a go forward basis until the company’s cash position improves.  According to the above reasons, Mr. Boswell did not receive any compensation in 2009 and only received the options listed in the
table above in 2007.





(3)            On August 17, 2007, Mr. Saunders and Mr. Boswell were granted five-year nonqualified stock options, pursuant to our 2005 Equity Plan, that vested on a 1/12 monthly basis over a twelve month period beginning on the grant date.  The exercise price of
the options is $1.21, which represents 110% of the closing price of our common stock on August 17, 2007. Based on the Black-Scholes option pricing model, the total fair value of these options were determined to be $247,815 and $322,159 for Mr. Saunders and Mr. Boswell, respectively.  Since these options vested monthly, the company incurred a monthly cost of $20,651 and $26,847 respectively between August 2007 and July 2008.  As of August 31, 2008, all of these stock options costs had been
realized.














68














Outstanding Equity Awards at Fiscal Year-End





Name
Number of
Securities Underlying
Unexercised Options
(#)
Exercisable
Number of
Securities Underlying
Unexercised Options
(#)
Unexercisable
Equity Incentive
Plan Awards:
Number of
Securities Underlying
Unexercised
Unearned Options
(#)
Option Exercise
Price
($)
Option
Expiration
Date(a)
(b)
(c)
(d)
(e)
(f)Robert Saunders
300,000 (1)
0
0
1.21
8-14-2007Michael Boswell
390,000 (1)
0
0
1.21
8-14-2007





Name
Number of Shares
or Units of Stock
That Have
Not Vested
(#)
Market Value of
Shares of
Units of
Stock That Have
Not Vested
($)
Equity Incentive Plan
Awards: Number of
Unearned Shares, Units or
Other Rights That Have
Not Vested
(#)
Equity Incentive
Plan Awards: Market
or Payout Value of
Unearned Shares,
Units or Other Rights
That Have Not Vested(a)
(g)
(h)
(i)
(j)Robert Saunders
0
0
0
0Michael Boswell
0
0
0
0





(1)                  Pursuant to our 2005 Equity Incentive Plan, Mr. Saunders and Mr. Boswell were granted five-year nonqualified stock options on August 17, 2007 that vest on a 1/12 monthly basis over a twelve month period beginning on the grant date.  The
exercise price of the options is $1.21, which represents 110% of the closing price of our common stock on August 17, 2007.  As of August 31, 2008 all of these options have vested.





Retirement/Resignation Plans





We do not have any plans or arrangements in place regarding the payment to any of our executive officers following such persons retirement or resignation.





Director Compensation














Name
Fees  Earned or Paid in Cash
($)
Stock Awards
($)
Option Awards
($)
Non-Equity incentive Plan Compensation
($)(a)
(b)
(c)
(d)
(e)Christopher Wall
0
0
0
0Michael Ross
0
0
0
0Javier Idrovo
0
0
22,000 (2)
0














69











Name
Change in Pension Value and Nonqualified Deferred Compensation Earnings
All other Compensation
($)
Total
($)(a)
(f)
(g)
(h)Christopher Wall
0
0
0Michael Ross
0
0
0Javier Idrovo
0
0
22,000





(1)                   At the end of the fiscal year, 5,892,000 options are outstanding.


(2)                   On September 8, 2008, our board of directors authorized the issuance of an aggregate of 100,000 options to purchase our common stock pursuant to our 2005 Equity Plan to Mr. Idrovo.   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. Based on the Black-Scholes option pricing model, we will incur approximately $43,000 through August 31, 2010 for these options. However, as of August 31, 2009, Mr. Idrovo 50,000 of these options have vest and we have incurred stock option expenses of roughly $22,000.





Our directors who are employees do not receive any compensation from us for services rendered as directors. The Board has created three classes of fees for outside directors: (1) outside directors who are “independent,” as defined in the Exchange Act will be paid $500 per meeting, whether telephonic or in person for director
fee – there shall not be any fees for written consents in lieu of board meetings and (2) outside directors who are not “independent” will not receive any fees at this time, but once our cash flow position improves, the Compensation Committee will reconvene and make recommendations.  Additionally, although we do not currently have an arrangement or agreement to provide stock based compensation to our outside directors, we may, from time to time, grant outside directors incentive stock
options pursuant to our 2005 Equity Incentive Plan.











70














ITEM 12.              SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS





Securities authorized for issuance under equity compensation plans.Please see Part II, Item 5: “Market for Common Equity and Related Stockholder Matters” above.





Security Ownership of Certain Beneficial Owners and Management





As used in this section, the term beneficial ownership with respect to a security is defined by Rule 13d-3 under the Securities Exchange Act of 1934, as amended, as consisting of sole or shared voting power (including the power to vote or direct the vote) and/or sole or shared investment power (including the power to dispose of or
direct the disposition of) with respect to the security through any contract, arrangement, understanding, relationship or otherwise, subject to community property laws where applicable.





As of  December 9, 2009, we had a total of 25,920,296 shares of common stock, 7,773,998 shares of Series A Preferred Stock, 207 shares of Series B Preferred Stock, 747,870 shares of Series C Preferred Stock and 304,558 shares of Series D Preferred Stock issued and outstanding, which are our only issued and outstanding equity securities.  However,
our preferred stock does not have any voting rights except with respect to specified transactions that may affect the rights, preferences, privileges or voting power of such class and except as otherwise required by Nevada law.  (For further information regarding the preferred stock see “Description of Securities”)  At the date of this Prospectus, each share of our Series A Preferred Stock and Series C Preferred Stock is convertible into one share of common stock; each share of
our Series B Preferred Stock is convertible into a number of fully paid and nonassessable shares of our common stock equal to the quotient of the liquidation preference amount per share ($10,000) divided by the conversion price, which initially is $1.15 per share, subject to certain adjustments, or approximately 8,696 shares of common for each share of converted Series B Preferred Stock; and, each share of our Series D Preferred Stock is convertible into a number of fully paid and nonassessable shares of our
common stock equal to the quotient of the stated value of the Series D Preferred Stock ($40) divided by the conversion price, which initially is $0.80 per share, subject to certain adjustments.





The following table sets forth, as of August 31, 2009: (a) the names and addresses of each beneficial owner of more than five percent (5%) of our common stock and preferred stock (taken together as one class) known to us, the number of shares of common stock and preferred stock beneficially owned by each such person, and the percent of
our common stock and preferred stock so owned; and (b) the names and addresses of each director and executive officer, the number of shares our common stock and preferred stock beneficially owned, and the percentage of our common stock and preferred stock so owned, by each such person, and by all of our directors and executive officers as a group. Each person has sole voting and investment power with respect to the shares of our common stock and preferred stock, except as otherwise indicated. Beneficial ownership
consists of a direct interest in the shares of common stock and preferred stock, except as otherwise indicated. Individual beneficial ownership also includes shares of common stock that a person has the right to acquire within 60 days from December 9, 2009.




















71








Name and Address
Amount and Nature of Beneficial Ownership
Percentage Of Voting of Securities (1)Robert Saunders
President and CEO
5552 West Island Highway
Qualicum Beach, British Columbia
Canada V9K 2C8
10,200,000 (2)
19.54%Christopher Wall
Chairman
20 West 55th St., 5th Floor
New York, NY 10019
0 (3)
0.00%Michael Ross
Director
400 Professional Drive
Suite 310
Gaithersburg, MD 20879
652,788 (4)
1.25%Javier Idrovo
Director
400 Professional Drive
Suite 310
Gaithersburg, MD 20879
50,000 (5)
0.10%Michael Boswell
Director and
Acting Chief Accounting Officer
400 Professional Drive
Suite 310
Gaithersburg, MD 20879
1,328,000 (6) (7)
2.54%Vision Opportunity Master Fund, Ltd.
20 West 55th St., 5th Floor
New York, NY 10019
2,033,108 (8)
4.99%All directors and officers as a group (5 persons)
14,546,000
23.43%














72











_________________





(1)                 All Percentages have been rounded up to the nearest one hundredth of one percent and such percentage is based upon the amount of outstanding our common stock and preferred stock, on an as converted basis.  The percentage
assumes in the case of each shareholder listed in the above list that all warrants or options held by such shareholder that are exercisable currently or within 60 days were fully exercised by such shareholder, without the exercise of any warrants or options held by any other shareholders.


(2)                 In addition to his stock ownership, Mr. Saunders was granted 300,000 five-year nonqualified stock options on August 17, 2007 that vested on a 1/12 monthly basis over a twelve month period beginning on the grant date.  The
exercise price of the options is $1.21, which represents 110% of the closing price of our common stock on August 17, 2007.  All of these options vested on August 17, 2008.


(3)                 Mr. Wall holds not stock directly, however, is an employee of Vision Capital Opportunity Fund.   As described below in footnote 8, Vision owns directly or indirectly Vision owns 2,204,296 shares of common stock,
5,238,333 shares of common stock issuable upon conversion of their Series A Convertible Preferred Stock, 1,495,740 shares of common stock issuable upon conversion of their Series B Convertible Preferred Stock, 747,870 shares of common stock issuable upon conversion of their Series C Convertible Preferred Stock, 12,714,650 shares of common stock issuable upon the conversion of their Series D Convertible Preferred Stock and 740,627 shares of common stock received as dividends.


(4)               Mr. Ross owns 652,788 shares of common stock, 223,333 shares of common stock issuable upon conversion of their Series A Convertible Preferred Stock, 302,400 shares of common stock issuable upon the conversion of their Series D Convertible
Preferred Stock and 129,055 shares of common stock received as dividends.


(5)               On September 8, 2008, our board of directors authorized the issuance of an aggregate of 100,000 options to purchase our common stock pursuant to our 2005 Equity Plan to Mr. Idrovo.   The options shall 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. As of August 31, 2008, Mr. Idrovo had not yet been granted any options. As of November 28, 2008, none of these options have vested and none will vest within 60 days from such date.


(6)               Mr. Boswell and his wife jointly own Invision, LLC, which owns 38,000 shares of our voting stock.  Additionally, Invision, LLC is a 30% member of TriPoint Capital Advisors, LLC, which owns 3,000,000 shares of our voting stock. Therefore,
Mr. Boswell beneficially owns 938,000 shares of our voting stock.


(7)               In addition to his stock ownership, Mr. Boswell was granted 390,000 five-year nonqualified stock options on August 17, 2007 that vested on a 1/12 monthly basis over a twelve month period beginning on the grant date.  The exercise
price of the options is $1.21, which represents 110% of the closing price of our common stock on August 17, 2007.  All of these options vested on August 17, 2008.


(8)               Vision owns 2,204,296 shares of common stock, 5,238,333 shares of common stock issuable upon conversion of their Series A Convertible Preferred Stock, 1,495,740 shares of common stock
issuable upon conversion of their Series B Convertible Preferred Stock, 747,870 shares of common stock issuable upon conversion of their Series C Convertible Preferred Stock, 12,714,650 shares of common stock issuable upon the conversion of their Series D Convertible Preferred Stock and 1,072,214 shares of common stock received as dividends.  However, based upon the terms of the preferred stock, Vision may not convert its preferred stock if on any date, it would be deemed the beneficial owner of more
than 4.99% of the then outstanding shares of our common stock.  However, Vision can elect to waive the cap upon 61 days notice to us or less if, and only if less than 61 days remain on the term of the warrant and in such case the waiver will not be effective until the warrant’s expiration date.







73








Changes in Control





To the best of our knowledge, there are no arrangements that could cause a change in our control.





ITEM 13.                  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS








We are party to a consulting agreement with TriPoint Capital Advisors, LLC, a company in which Mark Elenowitz, a director and one of our significant shareholders, indirectly owns a 40% interest.  Michael Boswell, our acting Chief Accounting Officer and one of our directors, indirectly owns a 30% interest in TriPoint.  Louis
Taubman, our outside corporate and securities counsel also indirectly owns an interest (30%) in TriPoint.  Our Board recently approved the Compensation Committee’s recommendation of a flat rate $15,000 per month fee, which shall be reduced to $7,500 per month until our cash flow position improves, for the legal services Louis Taubman provides us.  The Board also approved the recommendation of a $15,000 per month fee, which shall be reduced to $7,000 per month until our cash flow position
improves, for the Acting CFO type services and financial advisory services Michael Boswell and TriPoint, respectively, provide us.  Additionally, our corporate offices in Gaithersburg, Maryland are currently provided by Tripoint Holdings, LLC, the parent company of Tripoint at no cost to us.





Island Scallops, our wholly owned subsidiary, in June 2008 transferred 100% ownership of RKS Laboratories, Inc. to Robert Saunders, our Chairman, CEO and President.  RKS is a Vancouver Island research and development that is working towards developing superior strains of scallops (developed by Island Scallops and known as
the Qualicum Beach Scallop) with beneficial traits such as higher meat yield and rapid growth.  Island Scallops agreed to transfer its ownership of RKS in consideration for the grant to Island Scallops by RKS and Robert Saunders of a right of first refusal to commercialize any intellectual property developed by RKS.  Island Scallops has the right to acquire or use any intellectual property from RKS at RKS’ cost, in perpetuity or until such time as RKS shall cease to exist.   Between
June 2006 and August 2009, Island Scallops agreed to loan RKS a total of approximately $199,000.   Originally, we carried this amount as loan related party loan receivable, but given that lack of any repayments to date, we expensed the entire amount in 2009.





ITEM 14.   PRINCIPAL ACCOUTNING FEES AND SERVICES





(1) AUDIT FEES








The aggregate fees billed for professional services rendered by LBB & Associates, Ltd., LPP (formerly Lopez, Blevins, Bork & Associates, LLP) for the audit of the registrant's annual financial statements and review of financial statements included in the registrant's Form 10-K or services that are normally provided by the
accountant in connection with statutory and regulatory filings or engagements for fiscal years 2009 and 2008 were approximately $90,000 and $99,000 respectively.








(2) AUDIT-RELATED FEES





NONE





(3) TAX FEES





NONE





(4) ALL OTHER FEES





NONE






74







(5) AUDIT COMMITTEE POLICIES AND PROCEDURES





The policy of our Audit Committee is to pre-approve all audit and permissible non-audit services to be performed by the Company’s independent auditors during the fiscal year.





No services related to Audit-Related Fees, Tax Fees or All Other Fees described
above, were approved by the Audit Committee.





ITEM 15.                                EXHIBITS LIST








Exhibit Number
Description3.1
Articles of Incorporation of the Company, as amended. (Incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-QSB for the quarter ending February 28, 2007, which was filed on April 13, 2007.)3.2
Amended and restated Bylaws of the Company  (Incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-QSB for the quarter ending February 28, 2007, which was filed on April 13, 2007.)4.1+
Form of certificate representing shares of the Company’s common stock.4.2
Form of Certificate of Designation of Rights and Preferences of Series A Convertible Preferred Stock. (Incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on April 14, 2006).4.3+
Form of certificate representing shares of the Company’s Series A Preferred Stock.4.4+
Form of certificate representing shares of the Company’s Series B Preferred Stock.4.5+
Form of certificate representing shares of the Company’s Series C Preferred Stock.10.1
Form of Series A Convertible Preferred Stock Purchase Agreement, dated April 12, 2006, by and between the Company and each of the Purchasers thereto (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on April 14, 2006).10.2
Form of Registration Rights Agreement, dated April 12, 2006, by and between the Company and each of the Purchasers thereto. (Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on April 14, 2006).10.4
Form of Individual Lock-Up Agreement dated April 12, 2006 by and between the Company and each of the shareholders listed therein. (Incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on April 14, 2006).10.5
Form of Lock-Up Agreement dated April 12, 2006 by and between the Company and World Wide Mortgage Corporation.  (Incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed on April 14, 2006).10.6
Form of Series A Warrant dated April 12, 2006. (Incorporated by reference to Exhibit 10.6 to the Company’s Current Report on Form 8-K filed on April 14, 2006).10.7
Form of Series B Warrant dated April 12, 2006. (Incorporated by reference to Exhibit 10.7 to the Company’s Current Report on Form 8-K filed on April 14, 2006).10.8
Form of Series C Warrant dated April 12, 2006. (Incorporated by reference to Exhibit 10.8 to the Company’s Current Report on Form 8-K filed on April 14, 2006).10.9
Form of Series D Warrant dated April 12, 2006. (Incorporated by reference to Exhibit 10.9 to the Company’s Current Report on Form 8-K filed on April 14, 2006).10.10
Form of Series E Warrant dated April 12, 2006. (Incorporated by reference to Exhibit 10.10 to the Company’s Current Report on Form 8-K filed on April 14, 2006).10.11
Form of Series F Warrant dated April 12, 2006. (Incorporated by reference to Exhibit 10.11 to the Company’s Current Report on Form 8-K filed on April 14, 2006).10.12
Form of Series G Warrant dated April 12, 2006. (Incorporated by reference to Exhibit 10.12 to the Company’s Current Report on Form 8-K filed on April 14, 2006).10.13
Form of Series H Warrant dated April 12, 2006. (Incorporated by reference to Exhibit 10.13 to the Company’s Current Report on Form 8-K filed on April 14, 2006).10.14
Form of Series J Warrant dated April 12, 2006. (Incorporated by reference to Exhibit 10.14 to the Company’s Current Report on Form 8-K filed on April 14, 2006).10.15
Form of Series A Convertible Preferred Stock Purchase Agreement,  dated May 30, 2006,  by and between the Company and each of the Purchasers thereto (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on May 30, 2006).10.16
Form of Registration Rights Agreement, dated May 30, 2006, by and between the Company and each of the Purchasers thereto. (Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on May 30, 2006).10.17
Form of Series A Warrant dated May 30, 2006. (Incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on May 30, 2006).10.18
Form of Series B Warrant dated May 30, 2006. (Incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on May 30, 2006).10.19
Form of Series C Warrant dated May 30, 2006. (Incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed on May 30, 2006).16, 2005).10.20
Form of Series D Warrant dated may 30, 2006. (Incorporated by reference to Exhibit 10.6 to the Company’s Current Report on Form 8-K filed on May 30, 2006).10.21
Amendment to Registration Rights Agreement dated May 30, 2006(Incorporated by reference to Exhibit 10.7 to the Company’s Current Report on Form 8-K filed on August 16, 2005).





+ Filed herewith








75





10.22
Form of Joinder Agreement to the Series A Convertible Preferred Stock Purchase Agreement, dated May 30, 2006, by and between the Company and each of the Purchasers thereto (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on June 30, 2006).10.23
Form of Joinder Agreement to the Registration Rights Agreement, dated May 30, 2006, by and between the Company and each of the Purchasers thereto. (Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on June 30, 2006).4.12
Form of Series C Convertible Preferred Stock Purchase Agreement, dated November 5, 2007, by and between the Company and each of the Purchasers thereto (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on November 7, 2007).4.13
Form of Registration Rights Agreement by and between the Company and each of the Purchasers thereto (Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on November 7, 2007).4.14
Form of Certificate of Designation of Rights and Preferences of Series C Convertible Preferred Stock (Incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on November 7, 2007).4.15
Form of Lock-Up Agreement by and between the Company and each of the shareholders listed therein (Incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on November 7, 2007).4.16
Form of Warrants (Incorporated by reference to Exhibits 10.5 through 10.11 to the Company’s Current Report on Form 8-K filed on November 7, 2007).31.1+
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2+
Certification of Acting Chief Accounting Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1+
Certification of Chief Executive Officer and Acting Chief Accounting Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 
 + Filed herewith









































76





SIGNATURES





In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.








/s/  Robert Saunders

Dated:  December 14, 2009Robert Saunders
President and Chief Executive Officer/s/  Michael Boswell

Dated:  December 14, 2009Michael Boswell
Director & Acting Chief Accounting Officer/s/ Christopher WallChristopher Wall
Director

Dated:  December 14, 2009/s/  Michael RossMichael Ross
Director

Dated:  December 14, 2009/s/  Javier Idrovo

Dated:  December 14, 2009Javier Idrovo
Director









77