UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment #1
to
FORM 10-QSB
_X_ Annual report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarter ended July 31, 2000.
or
__Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _________ to _________.
Commission File Number 0-25868
Controlled Environment
Aquaculture Technology, Inc.
(Exact name of small business as specified in its charter)
Colorado 84-129316
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1000 Bishop Street, Suite 303
Honolulu, Hawaii 96813
(Address of principal executive office)
(808) 836-3707
(Registrant's telephone number)
3375 Koapaka Street
Honolulu, Hawaii 96819
(Former address of principal executive office)
Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, no par value
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange 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 requirements
for the past 90 days. Yes X No __
As of July 31, 2000 there were 4,355,450 shares of the registrant's
common stock outstanding.
Transitional small business disclosure format Yes __ No X
Controlled Environment Aquaculture Technology, Inc.
Index
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Page
Consolidated Balance Sheet - July 31, 2000 4
Consolidated Statements of Operations - Three Months and Six
Months Ended July 31, 2000 and July 31, 1999 6
Consolidated Statements of Cash Flow - Six Months Ended July 31,
2000 and July 31, 1999 8
Notes to Consolidated Financial Statements 10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operation 15
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 28
Item 6. Exhibits and Reports on Form 8-K 29
Signature 30
Controlled Environment Aquaculture Technology, Inc.
and Subsidiaries
Consolidated Balance Sheet
(unaudited)
<TABLE>
<CAPTION>
July 31,
2000
<S> <C>
Assets
Current assets:
Cash and cash equivalents $ 115,904
Restricted cash 250,000
Accounts receivable, net of allowance
for doubtful accounts of $20,000 295,464
Inventory 683,857
Other current assets 166,760
Total current assets 1,511,985
Property, plant and equipment - net 4,750,837
Other assets 52,500
Total assets $ 6,315,322
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 274,776
Notes payable 400,000
Revolving line of credit 235,000
Current portion of long-term debt 342,404
Other accrued expenses and liabilities 61,662
Total current liabilities 1,313,842
Long-term debt 2,665,176
Convertible subordinated debenture 900,000
Commitments and contingencies -
Stockholders' equity:
Preferred stock at $100 par value:
10,000,000 shares authorized,
none issued and outstanding -
Common stock at no par value:
100,000,000 shares authorized,
4,355,450 issued and outstanding 5,765,044
Additional paid-in capital 208,325
Retained deficit (4,537,065)
Total stockholders' equity 1,436,304
Total liabilities and
stockholders' equity 6,315,322
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Controlled Environment Aquaculture Technology, Inc.
and Subsidiaries
Consolidated Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
(page 1 of 2)
Three months ended July 31,
2000 1999
<S> <C> <C>
Sales $ 509,969 $ 348,063
Cost of sales 515,327 323,113
Gross margin (5,358) 24,950
General and administrative
expenses 273,117 429,323
Loss from operations (278,475) (404,373)
Interest expense (103,592) -
Interest income 4,368 -
Other income (expense) 4,000 -
Net loss $ (373,699) $ (404,373)
Net loss per common share $ (0.09) $ (0.10)
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 4,355,450 4,007,825
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Controlled Environment Aquaculture Technology, Inc.
and Subsidiaries
Consolidated Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
(page 2 of 2)
Six months ended July 31,
2000 1999
<S> <C> <C>
Sales $ 1,146,812 $ 650,529
Cost of sales 1,168,146 662,454
Gross margin (21,333) (11,925)
General and administrative
expenses 562,235 991,941
Loss from operations (583,568) (1,003,866)
Interest expense (175,524) -
Interest income 8,348 -
Other income (expense) 19,393 -
Net loss $ (731,352) $ (1,003,866)
Net loss per common share $ (0.17) $ (0.26)
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 4,355,450 3,935,178
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Controlled Environment Aquaculture Technology, Inc.
and Subsidiaries
Consolidated Statements of Cash Flow
(unaudited)
<TABLE>
<CAPTION>
Six months ended July 31,
2000 1999
<S> <C> <C>
Operating activities
Net loss $ (731,352) $ (1,003,866)
Adjustments to reconcile net loss
to net cash used in operating activities
Depreciation 166,370 34,474
Net changes in operating assets
and liabilities
Accounts receivable (19,051) (190,589)
Inventory (104,236) 7,598
Other current assets (122,308) 13,361
Accounts payable (116,413) 123,796
Accrued expenses and other
liabilities (3,495) (49)
Net cash used in
operating activities (930,485) (1,015,275)
Investing activities
Capital expenditures (248,282) (367,999)
Net cash used in
investing activities (242,282) (367,999)
Financing activities
Restricted cash used for
specific purpose (79,293) -
Proceeds from issuance of
convertible debentures 900,000 -
Proceeds from issuance of
debt 125,000 372,948
Principal payments on
long-term debt (23,557) -
Proceeds from issuance of
common stock - 1,000,000
Net cash provided by
financing activities 1,080,736 1,372,948
Change in cash and
cash equivalents (98,031) (10,326)
Cash and cash equivalents
at beginning of period 213,935 436,611
Cash and cash equivalents
at end of period $ 115,904 $ 426,285
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Controlled Environment Aquaculture Technology, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited)
1. Basis of Presentation
In the opinion of management, the accompanying unaudited
consolidated financial statements of Controlled Environment
Aquaculture Technology, Inc. (the "Company") include all
adjustments (consisting only of normal recurring adjustments)
considered necessary to present fairly its financial position as of July
31, 2000 and the results of operations and cash flows for the quarters
ended July 31, 2000 and 1999. Certain prior period amounts have
been reclassified to conform with the 2000 presentation. The results of
operations for the quarter ended July 31, 2000 are not necessarily
indicative of the results to be expected for the full year or for any
future period.
The consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries, Ceatech HHGI
Breeding Corp., Ceatech Plantations, Inc., Sunkiss Shrimp Co., Ltd.,
and Hawaii High Health Seafood Corp. Significant intercompany
transactions and amounts have been eliminated in consolidation. The
consolidated condensed financial statements and notes included herein
should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's Annual
Report on Form 10-KSB for the fiscal year ended January 31, 2000.
2. Development Stage Company
Since its inception, January 19, 1995, through the year ended
January 31, 1999, the Company was a development stage company as
defined by Statement of Financial Accounting Standards No.7 -
Accounting and Reporting by Development Stage Enterprises. The
Company is no longer an enterprise in the development stage as
defined.
3. Going Concern
The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going concern
and, therefore, do not include any adjustments relating to the
recoverability of assets and satisfaction of liabilities that might result
should the Company be unable to continue as a going concern. The
Company has sustained continuing losses resulting in an accumulated
deficit of approximately $4.5 million at July 31, 2000. In addition, the
Company continued to experience negative operating cash flows
during the quarter ended July 31, 2000. These factors, among others,
may indicate that the Company will be unable to continue as a going
concern for a reasonable period of time.
Management believes that the continued existence of the
Company is dependent upon its ability to obtain external financing in
order to construct additional growout ponds and to fund working
capital requirements. Therefore, it is currently management's intent to
obtain the outside financing necessary to construct 20 more growout
ponds and to fund the Company's working capital requirements during
the construction period by way of an equity offering, additional debt
financing, or some combination thereof. There can be no assurance
that the Company will be able to obtain such financing on satisfactory
terms. Failure to obtain such financing on acceptable terms could have
a material adverse effect on the Company's business, operating results
and financial condition.
4. Restricted Cash
Restricted cash includes a $250,000 certificate of deposit
pledged as security for repayment of the outstanding revolving line of
credit with Central Pacific Bank. During the quarter ended July 31,
2000, the Company disbursed approximately $79,300 of restricted
cash related to the Bank of America construction loan.
5. Revolving Line of Credit
The Company has a $235,000 revolving line of credit with
Central Pacific Bank, secured by a $250,000 certificate of deposit and
with an annual interest rate of 1.5% over the certificate of deposit
rate. This revolving line of credit expires in May 2001.
6. Note Payables
At July 31, 2000, the Company had notes payable outstanding
of $400,000 from shareholders or entities controlled by shareholders,
as evidenced by: (i) promissory note originally made on May 8, 2000
for $75,000 with interest at 8.00% per annum due on November 8,
2000 in favor of an entity controlled by three shareholders; (ii)
promissory note originally made on March 1, 2000 for $50,000 with
interest at 9.75% per annum due on August 2, 2000 in favor of a
shareholder; (iii) promissory note originally made on November 2,
1999 for $225,000 with interest at 10.00% per annum due on August
2, 2000 in favor of an entity represented and controlled by a
shareholder; and (iv) promissory note originally made on March 1,
1999 for $50,000 with interest at 10.00% per annum due on August
2, 2000 in favor of an entity represented and controlled by a
shareholder.
The Board of Directors has authorized the Company to allow
each of the holders of the aforementioned notes payable to convert to
common stock, at the option such holder, all of the outstanding notes
payables plus accrued but unpaid interest, on the same terms and at
the same price offered to accredited investors under a private
placement of the Company's common stock. Each of the holders of
the aforementioned notes payable has entered into an agreement with
the Company to convert all such indebtedness to common stock
effective as of September 1, 2000.
7. Long-term Debt
On September 9, 1998, the Company entered into a
construction loan agreement ("Construction Loan") with the Bank of
America, which provided for advances of up to a maximum principal
amount of $3,000,000. The proceeds from the Construction Loan
were used to construct certain improvements, including
self-constructed growout ponds, buildings and other land
improvements on real property owned in leasehold by the Company.
The United States Department of Agriculture, Rural
Business-Cooperative Service has provided the Bank of America with
a guarantee of up to 90% of the principal and interest as a result of
any loss. In addition, the Company has pledged substantially all of its
assets as collateral for the loan.
The Construction Loan Agreement permits the Company to
repay the amount over a period of seven years following the initial
due date if the Company satisfies certain conditions, which are
substantially met. The Company intends to convert the Construction
Loan to a Permanent Loan in accordance with the loan agreement.
The Permanent Loan would provide for monthly payments over seven
years and a balloon payment may be due at the end of the seven-year
amortization period. Upon conversion, interest is payable at 2% over
the Bank of America Reference Rate for the first two years.
Thereafter, the bank may, at its option, offer the following interest
rate options: a) Floating Rate (Reference Rate plus 1.75%); b)
adjustable rate based on a one-year Constant Maturities Treasury
Index plus 2.75%; or c) six month jumbo certificate of deposit rate
plus 2.5%.
As of July 31, 2000, the principal balance outstanding on the
Construction Loan was $2,928,332 and the improvements and final
inspection were complete. The current annual interest rate on the
Construction Loan is Bank of America's Reference Rate plus 2.0%.
For the quarter ended July 31, 2000, the weighted average interest
rate was 11.5%.
Under the terms of the Construction Loan, the Company must,
among other things; 1) maintain a minimum tangible net worth of
$2,000,000; 2) not declare or pay out any dividends to its
shareholders during the term of the loan; 3) not repurchase treasury
stock or make cash transfers to stockholders, and 4) not exceed a ratio
of 1.7 to 1 of total senior liabilities to total net worth. As of July 31,
2000, the Company was not in compliance with the minimum tangible
net worth requirement of the Construction Loan and has notified the
Bank of America of such noncompliance.
8. Convertible Subordinated Debentures
During the quarter ended July 31, 2000, the Company entered
into two convertible debenture subscription agreements ("Subscription
Agreements") with two existing stockholders, for the issuance of four
7.75% convertible subordinated debentures totaling $400,000
("Debenture") as a private placement. The Debentures are due and
payable on or before July 2007 with interest payable quarterly on the
outstanding balance. Such debentures entitle the holder to convert the
debenture, together with accrued but unpaid interest thereon, into
fully paid and nonassessable units, each of which consists of one share
of common stock and one Class A Common Stock Purchase Warrant
entitling the holder thereof to purchase an additional share of common
stock at a price of $2.00 within two years of the date of issuance of
the warrant. The conversion price shall be equal to $1.00 per unit.
The conversion of these Debentures into common stock may further
dilute the interests of the current stockholders and could reduce their
proportionate ownership and voting power in the Company. These
Debentures were sold in reliance upon an exemption from registration
provided under Section 4(2) of the Securities Act of 1933.
On March 22, 2000, the Company entered into a Subscription
Agreement with Hibiscus Investments, Inc., an existing stockholder,
for the issuance of two Debentures of $500,000 ("Debenture") each
within twelve months of the date of the Subscription Agreement. The
Debentures are due and payable on or before March 2007 with
interest payable quarterly on the outstanding balance. Such debentures
entitle the holder to convert the debenture, together with accrued but
unpaid interest thereon, into fully paid and nonassessable units, each
of which consists of one share of common stock and one Class A
Common Stock Purchase Warrant entitling the holder thereof to
purchase an additional share of common stock at a price of $2.00
within two years of the date of issuance of the warrant. The
conversion price shall be equal to $1.00 per unit. The conversion of
these Debentures into common stock may further dilute the interests
of the current stockholders and could reduce their proportionate
ownership and voting power in the Company. As of July 31, 2000, a
total of $900,000 convertible subordinated debentures were
outstanding.
9. Stockholders' Equity
The Company has authorized 100 million shares of no par
value common stock. Each share entitles the holder to one vote.
There are no dividend or liquidation preferences, participation rights,
call prices or rates, sinking fund requirements, or unusual voting
rights associated with these shares. As of July 31, 2000, the
Company had 4,355,450 shares of common stock outstanding.
As of July 31, 2000, the Company also had outstanding
2,760,149 Class A Common Stock Purchase Warrants exercisable at
$2.00 per share on or before December 31, 2001 ("Warrants").
Pursuant to the provisions set forth in putative documentation
governing the issuance and terms of the Warrants, the Company gave
notice of cancellation of the Warrants to be effective as of September
18, 2000. Subsequently, issue has been taken with the Company's
authority to cancel the Warrants based on the existence of another
version of the governing documentation containing provisions contrary
to the provisions of the documentation upon which management relied
in giving notice of cancellation. Management is currently investigating
the facts and circumstances giving rise to the competing
documentation to determine which of the alternate controlling
documentation is actually effective. To date, no notice of an attempted
exercise of Warrants has been received.
In August 2000, the Company's Board of Directors authorized
the private offering of up to 3,000,000 shares of common stock of the
Company to "accredited investors", as that term is defined in Rule
501 of Regulation D of the Securities Act of 1933, at the price of
$1.00 per share. The issuance of these additional shares may further
dilute the interests of the current shareholders and could reduce their
proportionate ownership and voting power in the Company.
10. Loss Per Common Share
Loss per common share is computed using the weighted
average number of common shares outstanding during the periods
presented. The outstanding Warrants were not dilutive and, therefore,
did not impact loss per common share during the periods presented.
11. Dividends
Under the terms of the Construction Loan, the Company may
not declare or pay out any dividends to its shareholders during the
term of the loan. Accordingly, the Company did not pay cash
dividends on its common stock during the quarters ended July 31,
2000 and 1999.
12. Commitments and Contingencies
Ronald L. Ilsley, the former Chief Financial Officer of the
Company, has filed a lawsuit against the Company and its
consolidated subsidiaries in the United States District Court for the
Central District of California alleging wrongful termination, breach of
employment contract and quantum meruit. Damages claimed exceed
$1,000,000.
The Company believes that this lawsuit is without merit and
the Company's outside legal counsel has recently filed responsive
pleadings on behalf of the Company.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
The following discussion contains certain statements which
may constitute forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Any statements that
refer to expectations, projections or other characterizations of future
events or circumstances, and especially those which include variations
of the words "believes", "intends", "estimates", "anticipates,"
"expects", "plans", or similar language, are likely to be
forward-looking statements, and as such, are likely to concern matters
which involve risks, uncertainties and other factors that could
materially and adversely affect the outcome or results indicated by or
inferred from the statements themselves. Therefore, the reader is
advised that the following discussion should be considered in light of
the discussion of risks and other factors contained in the Company's
report on Form 10-KSB for the fiscal year ended January 31, 2000,
and in the Company's other filings with the Securities and Exchange
Commission, and that no statements contained in the following
discussion or in this Form 10-QSB should be construed as a guarantee
or assurance of future performance or future results.
Overview
The following discussion and analysis of the results of
operations and financial position of the Company should be read in
connection with the Company's Form 10-KSB for the year ended
January 31, 2000.
In view of severe operating losses over the past two years, the
Company has identified several development strategies and steps that
must be and are being taken to contribute to the Company's survival
and future success. First, the Company is proceeding with the
development of its own expanded facility for the sorting, packaging
and freezing of farm product. It is anticipated that the facility will
become operational in the fourth quarter of the current fiscal year and
that it will enable the Company to handle harvests far more efficiently
and respond more effectively to the product distribution requirements
of different segments of the market. Second, the Company is
proceeding aggressively with plans for expansion of its farm
operations and has developed site plans for the construction of 20
additional growout ponds within the farm's present Kekaha
Agricultural Park location. The Company is currently pursuing
construction financing for the additional ponds which will enable it to
take advantage of certain economies of scale inherent in its advanced
aquaculture methods and thereby increase farm production at lower
incremental cost. Third, the Company has continued to refine and
develop marketing strategies and distribution arrangements for the sale
of the increased production anticipated from the operation of more
ponds. Finally, due to a dramatic fall in the market for the Company's
broodstock late in the first quarter of fiscal year 2000, as discussed in
more detail below, management is increasing efforts to expand and
diversify its client base for broodstock sales in other geographic areas.
Presently, the sorting of shrimp (by size), de-heading and
packing for shipment to distributors or for shipment to Honolulu for
freezing takes place in a small facility located in the nearby town of
Hanapepe on the island of Kauai, which was formerly used for
processing and selling local fish products. IQF freezing of product has
been done at a small, independently owned plant in Honolulu, whose
limited size only allows the Company to freeze approximately 3,500
pounds of product per week, and whose schedule sometimes has
prevented the Company from freezing any product over a given
period. The Kauai facility is not large enough or well enough
equipped to handle the harvest of an entire pond, and the freezing
schedule imposed by the Honolulu packing plant places additional
constraints on quantities of shrimp that can be harvested at any given
time. As a consequence, the Company has been unable to take full
advantage of the rapid, mechanically efficient harvesting methods
designed into the farm's infrastructure and has been forced to harvest
in increments using more labor intensive methods. Less efficient
harvesting has resulted in lengthened crop cycles, thereby substantially
increasing production expenses, especially for feed and electric
power. Transportation and storage costs incurred as a result of having
to ship freshly harvested shrimp to Honolulu for freezing have added
significantly to the costs of preparing shrimp for the market, and the
limited availability and freezing capacity of the Honolulu packing
plant has adversely affected the Company's ability to service potential
high volume customers. Thus, the existing preparation, packing and
freezing facilities form an operations bottleneck which has increased
production costs and which limits expansion of the farm facilities.
In response, the Company has acquired the leasehold rights to
the site of the existing facility in Hanapepe, Kauai and has
commenced construction of an expanded facility on the site. It is
currently anticipated that construction of the expanded facility will be
completed in November 2000. The Company has arranged for $1.0
million in convertible debenture financing for this project. The
expanded facility is designed to efficiently handle the sorting,
preparation, freezing and packaging for shipment of regularly
scheduled full-pond harvests from a farm having 100 or more ponds
in production. In addition, the new facility will be equipped to have
block-freezing capability, in addition to IQF, which will enable the
Company to prepare and freeze whole (head on) product in the
manner preferred by the large and potentially lucrative markets for
premium quality shrimp in Europe, Asia and the continental United
States.
Concurrently, the Company has completed preliminary plans
for expansion of the farm and will undertake such expansion as soon
as financing and/or additional infusion of equity capital will permit.
The planned expansion is on parcels already leased by the Company
from the State of Hawaii Department of Agriculture located within the
State owned and designated agricultural park site known as the
Kekaha Agricultural Park. The present plans for expansion are for 20
more production ponds, and the Company currently estimates that the
development costs will be approximately $2.1 million.
Beyond the Company's present plans for expansion within the
Kekaha Agricultural Park, there also are several thousand acres of
State owned lands adjacent to and in the immediate vicinity of the
farm, most of which are presently devoted to the growing of sugar
cane but which may become available in the near future. The State of
Hawaii is presently conducting discussions with the present user and
others regarding the future use and control of these lands, but the
Company is unaware of any impending use and is actively engaged in
presenting the case that its shrimp agri-business and other related
industries provide the most viable replacement use for significant
portions of these lands. The Company previously held a permit and
right of entry to use a 313 acre parcel of land near but not adjacent to
the existing farm site but has since notified the State of Hawaii
Department of Land and Natural Resources of its desire to cancel this
revocable permit. This action was taken because near-term expansion
of the farm onto this land is not feasible due to infrastructure
constraints.
The decline of the market for hatchery products, especially in
Taiwan, continues to negatively impact broodstock sales and will do
so until alternative markets, such as Central and South America and
the Asia-Pacific region, can be developed or the Taiwan market
recovers. Nevertheless, the long-term prospects for sales and revenue
growth in the market for hatchery products remain strong. As a result
of widespread problems with disease infestation in the past few years,
more and more countries with major shrimp farming industries are
adopting strict regulations governing the importation of broodstock
that will require suppliers of broodstock to show a multi-year history
of disease screenings (indicating disease free results) and to have
certified "SPF" (Specific Pathogen Free) facility status. The
Company's hatchery facility is one of very few which is currently able
to meet the requirements of such import regulations and which is SPF
certified. Moreover, anecdotal feedback from contacts in the
Taiwanese hatchery industry indicate that the Company's broodstock
still have the reputation of being the highest quality broodstock
available.
The Company's basic marketing strategy and primary sales and
distribution arrangements remain unchanged. The Company remains
committed to creating and maintaining market acceptance of its
shrimp as a premium product commanding a price substantially higher
than prices generally applicable in the commodity market, and its
distribution arrangement with the largest distributor of seafood
products in Hawaii continues in large measure because of this
distributor's willingness to work closely with Company management
in product promotions designed to obtain premium pricing. The
Company continues to explore high volume markets for frozen
product in Europe and Asia, as well as the U.S. mainland, and will
likely intensify its efforts in these areas as the new freezing and
packing facility nears operational status.
At present, the general marketing plan developed over the past
eighteen months remains in place. Sales of fresh, chilled, whole
shrimp are limited to the local Hawaii market, and sales of product in
fresh, chilled, tail-only form are earmarked for the U.S. mainland,
mostly to specialty seafood stores and outlets in several major west
coast cities and to a limited number of specialty food outlets in the
midwest and east coast. Frozen product, mainly frozen tails, is sold
both locally and on the U.S. mainland.
The following discussion of results of operations and liquidity
and capital resources should be read in conjunction with the
Consolidated Financial Statements and related Notes contained in Item
1. - Financial Statements.
Results of Operations
General.
Since inception in January 1995, the Company has sustained
net losses of approximately $4.5 million. Such losses have generally
been financed through a combination of internally generated funds,
funds provided by loans with financial institutions and stockholders,
funds provided through the conversion of Class A warrants, and funds
provided through the sale of common stock units, which are
comprised of common stock and Class A warrants to purchase
common stock at $2.00 per share. Based on current shrimp production
levels and near-term projected sales revenue, the Company will be
required to obtain additional financing in order to continue to fund
losses until such time as expanded production facilities are
operational. Based on current plans, revenue from such expansion
could require up to twelve months to be realized.
The accompanying financial statements have been prepared on
a going concern basis, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of business. As
shown in the consolidated financial statements for the quarters ended
July 31, 2000 and 1999, the Company incurred losses of
approximately $373,700 and $404,700, respectively. In addition, the
Company currently has no committed source of outside capital
available to fund future losses. These factors, among others, may
indicate that the Company will be unable to continue as a going
concern for a reasonable period of time.
The consolidated financial statements do not include any
adjustments relating to the recoverability and classification of
liabilities that might be necessary should the Company be unable to
continue as a going concern. The Company's continuation as a going
concern is dependent upon its ability to generate sufficient cash flow
to meet its obligations on a timely basis, to comply with the terms of
its existing loan agreements, to obtain additional financing or
refinancing as may be required, and ultimately to attain positive
operating cash flow. The Company is actively pursuing plans for
additional financing through, among others, an equity offering,
additional debt financing, or some combination thereof. See Liquidity
and Capital Resources below for further discussion.
Management does not consider a comparison of
quarter-to-quarter results to be necessarily meaningful because the
Company's production facilities did not become fully operational until
July 1999.
Product Sales.
The Company's revenue from shrimp sales for the quarter
ended July 31, 2000 was approximately $510,000 compared to
approximately $348,000 for the quarter ended July 31, 1999. The
increase in revenue was primarily the result of a full production cycle
for farm shrimp in the second quarter of 2000 versus a limited
production cycle in the second quarter of 1999. During the quarter
ended July 31, 2000, the Company sold approximately 86,000 pounds
of farm shrimp compared to approximately 63,000 pounds in the
quarter ended July 31,1999. In addition, the Company had revenue
from the sale of broodstock of approximately $31,000 for the second
quarter of fiscal 2000 as compared to revenue of approximately
$10,000 in last year's second quarter. In late 1999, the Company
experienced a severe slowdown in broodstock sales primarily as a
result of an oversupply in the Taiwan market where the Company
previously sold virtually all of its broodstock. As a result, the
Company anticipates that its broodstock sales for the near-term will be
significantly less than sales made in the fourth quarter of fiscal year
1999.
The Company's revenue from shrimp sales for the six months
ended July 31, 2000 nearly doubled to $1,147,000 compared to
approximately $650,500 for the six months ended July 31, 1999. The
significant increase in revenue can be attributed to a full production
cycle for farm shrimp in the first six months of fiscal year 2000
versus a limited production cycle in the first six months of fiscal year
1999. During the six months ended July 31, 2000, the Company sold
approximately 196,000 pounds of farm shrimp compared to
approximately 63,000 for the six months ended July 31, 1999. In
addition, the Company had revenue from the sale of broodstock of
approximately $110,000 for the first half of fiscal year 2000 as
compared to revenue of approximately $193,000 in the first half of
last year.
Cost of Sales.
Cost of sales for the second quarter of fiscal year 2000 was
approximately $515,000 compared to $323,000 in the second quarter
of fiscal year 1999. This increase was principally the result of the
higher farm shrimp sales in the second quarter of 2000 as well as the
impact of increased indirect cost allocations to inventory primarily
related to depreciation of the shrimp farm construction costs. The
Company's gross profit continues to be negatively impacted due to the
lack of a sorting, freezing and packaging facility and the need for an
additional 20-growout ponds. When such facilities are completed it is
anticipated that the Company will have sufficient economies of scale
in order to be able to achieve positive gross profit levels.
Cost of sales for the first six months of fiscal year 2000 was
approximately $1,168,000 as compared to $662,500 in the first six
months of fiscal year 1999. This increase was principally the result of
increased farm shrimp sales in the first half of fiscal 2000 as
compared to the first half of 1999.
General and Administrative Expenses.
General and administrative expenses for the quarter ended July
31, 2000 were approximately $273,000, as compared to $429,300 for
the quarter ended July 31, 1999. During the third quarter of fiscal
year 1999, the Company implemented a comprehensive cost reduction
and containment program which included, among other things, payroll
reductions of up to 40% for all employees, a moratorium on all
long-term contractual commitments, a freeze on all new salaried hires,
a comprehensive review of all existing contracts and arrangements
including insurance coverage, and a reduction of outside professional
services provided to the Company. The Company intends to further
scrutinize all expenditures in order to identify additional cost savings
areas.
General and administrative expenses for the six months ended
July 31, 2000 were $562,000 as compared to approximately
$1,000,000 in the first six months of the prior year. The dramatic
reduction in general and administrative expenses for the first six
months of fiscal year 2000 as compared to the first six months of
fiscal year 1999 was primarily the result of the Company's
comprehensive cost reduction and containment program implemented
in the third quarter of fiscal year 1999.
Interest Expense.
During the quarters ended July 31, 2000 and July 31, 1999,
the Company recognized interest expense of approximately $103,600
and $0, respectively, and for the six months ended July 31, 2000 and
July 31, 1999, the Company recognized interest expense of
approximately $175,500 and $0, respectively. The significant increase
in interest expense recognized for the three months and six months
ended July 31, 2000 versus the prior year's similar periods was
mainly due to capitalization and deferral of interest costs on the Bank
of America construction loan during the construction of the shrimp
farm and hatchery in fiscal year 1999.
Liquidity and Capital Resources
Since inception in January 1995 through January 1999, the
Company financed its development stage operations and infrastructure
requirements primarily through a combination of equity and debt.
During the quarter ended July 31, 2000, the Company entered
into four convertible debenture subscription agreements ("Subscription
Agreements") with existing stockholders, for the issuance of 7.75%
convertible subordinated debentures of $400,000 ("Debenture") as a
private placement. The Debentures are due and payable on or before
July 2007 with interest payable quarterly on the outstanding balance.
Such debentures entitle the holder to convert the debenture, together
with accrued but unpaid interest thereon, into fully paid and
nonassessable shares of the Company's common stock. The
conversion price shall be equal to $1.00 per share. The conversion of
these Debentures into common stock may further dilute the interests
of the current stockholders and could reduce their proportionate
ownership and voting power in the Company. These Debentures were
sold in reliance upon an exemption from registration provided under
Section 4(2) of the Securities Act of 1933.
On March 22, 2000, the Company entered into a Subscription
Agreement with Hibiscus Investments, Inc., an existing stockholder,
for the issuance of two Debentures of $500,000 ("Debenture") each
within twelve months of the date of the Subscription Agreement.
The Debentures are due and payable on or before March 2007 with
interest payable quarterly on the outstanding balance. Such debentures
entitle the holder to convert the debenture, together with accrued but
unpaid interest thereon, into fully paid and nonassessable units, each
of which consists of one share of common stock and one Class A
Common Stock Purchase Warrant entitling the holder thereof to
purchase an additional share of common stock at a price of $2.00
within two years of the date of issuance of the warrant. The
conversion price shall be equal to $1.00 per unit. The conversion of
the Debentures may further dilute the interests of the current
stockholders and could reduce their proportionate ownership and
voting power in the Company. As of July 31, 2000, a total of
$900,000 in convertible debentures were outstanding.
The Company requires additional capital to expand its growout
facilities and for working capital purposes. The Company currently
estimates that the costs of constructing 20 additional ponds will be
approximately $2.1 million. In addition, the Company currently
believes its ability to generate sufficient funds internally for working
capital purposes is limited by the lack of such facilities. As such, the
Company will require an outside source of working capital during the
period of construction of these facilities, currently estimated to take
up to twelve months.
Therefore, the Company is aggressively exploring its available
financing options including, but not limited to, an equity offering,
additional debt financing or some combination thereof. The
Company's inability to obtain additional financing on acceptable terms
would have a material adverse effect on the Company. See Note 3. to
Consolidated Condensed Financial Statements.
Year 2000 Disclosure
The Company utilizes third-party computer equipment and
software that appears to have experienced no significant disruptions as
a result of the Year 2000 date change. Failure of such third-party
equipment or software to operate properly with regard to the Year
2000 and thereafter could require the Company to incur unanticipated
expenses to remedy any problems, which could have a material
adverse effect on the Company's business, operating results and
financial condition. The Company will continue to monitor its
computer systems to ensure that any latent Year 2000 computer
matters that may arise are addressed promptly.
Certain Factors That Might Affect Future Results
The Company does not provide financial performance
forecasts. Ceatech's operating results and financial condition have
varied in the past and may in the future vary significantly depending
on a number of factors. Except for the historical information in this
report, the matters contained herein include forward-looking
statements that involve risks and uncertainties. The following factors,
among others, could cause actual results to differ materially from
those contained in the forward-looking statements made in this report
and presented elsewhere by management from time to time. Such
factors, among others, may have a material adverse effect upon the
Company's business, results of operations and financial condition.
The availability of land for expansion of the Company's farm
facility poses risks which vary in accordance with the scope of
intended expansion. The existing 20-production pond farm operation
is located entirely within the State-owned and designated agricultural
park site known as the Kekaha Agricultural Park ("Agripark"). The
Company leases this land from the State of Hawaii Department of
Agriculture for a term of 45 years. Unused portions of the land
already under lease will permit expansion of the farm to at least 40
ponds, and management does not foresee any use permit issues
involved in expanding the farm on these lands. There are several
more parcels within the Agripark which the Company might acquire
and which would permit expansion of the farm to 47 ponds. The
ability to acquire these parcels is not certain, as each of these parcels
is currently under lease to a third party. For major expansion in the
future, the Company is also looking to acquire some of the abundant
acreage adjacent to the Agripark currently planted in sugar cane which
may become available in the future. Subdivision requirements, land
use approval and permit issues would be significant factors affecting
the availability and ultimate feasibility of expanding into these
adjacent lands, but acquisition risks are mitigated by the present lack
of economically suitable uses for such lands.
The geology, location and climate of Hawaii present certain
risks of natural disasters such as hurricanes, volcanic eruptions,
flooding, and tsunamis. In 1992 for example, Hurricane Iniki caused
substantial damage on the island of Kauai. Though the Company was
not operating during Hurricane Iniki, the prototype ponds, which were
in place at the time, sustained little damage during the storm. The
majority of the Company's infrastructure consists of low-profile basins
that present little vertical relief, and are expected to survive exposure
to hurricane winds, although no assurance can be made that such
infrastructure would survive. In addition, the Company's hatchery
building is designed to survive winds of up to 140 mph and storm
waters from adjacent lands are directed into existing drainage ditches.
To the extent that natural disasters such as hurricanes or severe storms
occur on Kauai, the Company's operations and financial condition
may be adversely affected.
The business of the Company is subject to substantial local,
state and federal regulations, including, but not limited to, protecting
health and safety of food products, archeological preservation laws,
and environmental regulations. The Company believes that it currently
has acquired all necessary permits and licenses for its animals,
seawater wells, pumps, ponds, and buildings constructed to date.
There can be no assurance, however, that the Company will be able
to obtain any additional permits or licenses that may be required in
the future. Although the Company is not currently aware of any
environmental compliance issues, no assurance can be given that such
issues will not have a material adverse effect on the Company's
operation in the future.
The Company's farming sites were formerly sites of
agriculture operations, which involved use of pesticides and other
agriculture chemicals. The use of lined ponds and seawater taken
from below the freshwater groundwater resource where residual
agriculture chemicals may temporarily reside is believed to avoid any
reasonable likelihood that such chemicals could affect product quality,
and tests have confirmed the absence of such pesticides in the
incoming water. In October 1999, the Hawaii State Department of
Health granted the Company a permit for discharge of farm effluents
to the ocean. This Permit is valid through April 2004, and allows a
discharge volume to support a farming operation consisting of 100
ponds. Establishment of the new shrimp packaging/freezing facility on
Kauai will require approval of a facility design permit from the
Department of Health. A delay in the approval of the Company's
planned packaging facility could negatively affect the Company's
operations. Although management is not currently aware of any
environmental compliance issues that are expected to have a material
adverse effect on the Company, no assurance can be given that such
regulations will not have a material adverse effect on the Company's
operation in the future.
The Company's personnel include acknowledged authorities in
the field of shrimp aquaculture and high health shrimp breeding and
production systems. Although the Company performs cross-training
among its technical staff, maintains various operational protocol
documents, and carries insurance on several key employees, the
specialized nature of this marine bio-technical operation suggest that
loss of key personnel could have a material adverse affect on the
Company.
Shrimp diseases have caused serious economic impacts to
shrimp aquaculture operations worldwide and the occurrence of an
infection at the Company's operations would have a material adverse
affect on its operations. The establishment of import bans on live
shrimp by foreign countries to which the Company markets its shrimp
hatchery products, or changes to air shipment regulations could
negatively affect its ability to sell into these markets. Commercially
available feeds of appropriate nutritional composition and acceptable
price need to be shipped from off-island to the farm. The
unavailability of feeds, large price increases, or the interruption of
transport logistics would negatively impact the Company's operations.
All of the potential vectors of the primarily viral shrimp
pathogens are not completely understood, but transmission from
infected parents to offspring and contamination from adjacent shrimp
farms are understood to be principal causes of infection. The
Company has aggressively pursued a disease prophylaxis strategy in a
number of ways. The farming location was sited in an arid, isolated
portion of Kauai, an island where no other shrimp farms exist, and
seawater is drawn from deep seawater wells rather than directly from
the ocean to preclude the incidental introduction of pathogens. When
beginning operations, the Company first established its hatchery
operation with state-of-the-art animals known to be free of diseases
associated with shrimp aquaculture elsewhere, and committed to the
exclusive use of its high health seed in all its farming operations. The
Company established rigorous quarantine and biosecurity procedures,
a continuous pathological surveillance program, and animal health
management protocols, and controls the transfer of materials, animals,
vehicles and pedestrian traffic on its hatchery. Although these are the
most effective and sound means to insure the health status of its
animal stocks, there can be no assurance that incident of infection
might occur within one of its properties.
As a result of the fact that importation of infected broodstock
is a key source of infection, several countries where shrimp farming is
practiced have increased restrictions, instated special animal quality
assurance requirements, and in some cases temporarily instated bans
on importation of live animals. Generally, these actions work in
favor of the Company's marketing of its high health hatchery products
because their health quality can pass the most rigorous standards. A
substantial proliferation in the number shrimp farming countries
instituting overall bans on the importation of live animals, or
regulatory changes to the air shipment of live animals could negatively
affect the foreign sale of these products.
The capability to import appropriate feeds at acceptable prices
is a risk that the Company has attempted to address through the
establishment of relations with multiple feed vendors. Nonetheless, the
continued existence of these feed suppliers, substantial, industry-wide
changes to the economics of the total feed industry, or the occurrence
of strikes which would interrupt shipping logistics could negatively
impact the Company's operations.
The sale price of the Company's premium shrimp is affected to
some degree by global market conditions. The Company's strategy is
to secure a price premium by differentiating the product from
commodity-grade products by virtue of its excellent taste, texture and
purity. Despite this effort, if the global shrimp market suddenly
became flooded with low priced commodity grade product, it is
possible that the amount of premium for high-quality product could
fall in the face of excessive supply. The capability to secure sales of
the premium shrimp and high health hatchery products outside the
limited Hawaiian markets is critical to the Company's market
strategy. The Company has received numerous expressions of interest
from large clients worldwide to purchase its premium Pacific white
shrimp when its packing/freezing operation can regularly supply
sufficient volumes. Despite such willingness, the present inability to
secure contracts for such purchases represents an uncertainty, which
could adversely affect the Company's operation. Increasing the sale of
hatchery products entails continued penetration into new markets and
client bases in Asia and the Americas. The increased sales volume,
and the expanded customer base have been encouraging, but because
this market relies heavily on word of mouth endorsements from
associates and exigencies within the industry, it is difficult to predict
the rate at which sales can be expected to grow.
PART II. OTHER INFORMATION
Items 3,4, and 5. Not Applicable.
Item 1. Legal Proceedings
Ronald L. Ilsley, the former Chief Financial Officer of the
Company, has filed a lawsuit against the Company and its
consolidated subsidiaries in the United States District Court for the
Central District of California alleging wrongful termination, breach of
employment contract and quantum meruit. Damages claimed exceed
$1,000,000.
The Company believes that this lawsuit is without merit and
the Company's outside legal counsel has filed the responsive pleadings
on behalf of the Company.
Item 2. Changes in Securities and Use of Proceeds
During the quarter ended July 31, 2000, the Company entered
into four convertible debenture subscription agreements ("Subscription
Agreements") with existing stockholders, for the issuance of 7.75%
convertible subordinated debentures of $400,000 ("Debenture") as a
private placement. The Debentures are due and payable on or before
July 2007 with interest payable quarterly on the outstanding balance.
Such debentures entitle the holder to convert the debenture, together
with accrued but unpaid interest thereon, into fully paid and
nonassessable shares of the Company's common stock. The
conversion price shall be equal to $1.00 per share. The conversion of
these Debentures into common stock may further dilute the interests
of the current stockholders and could reduce their proportionate
ownership and voting power in the Company. These convertible
debentures were sold in reliance upon an exemption from registration
provided under Section 4(2) of the Securities Act of 1933.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
27.1 Financial Data Schedule - Filed herewith.
Controlled Environment Aquaculture Technology, Inc.
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned thereto duly authorized.
Controlled Environment Aquaculture Technology, Inc.
(Registrant)
By: /s/ Edward T. Foley
EDWARD T. FOLEY
Executive Vice President and Chief Financial Officer
(principal financial and accounting officer)
Date: September 19, 2000
