UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
_X_ Quarterly report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarter ended April 30, 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 Identification No.)
incorporation or organization)
3375 Koapaka Street
Honolulu, Hawaii 96819
(Address of principal executive office)
(808) 836-3707
(Registrant's telephone number)
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 April 20, 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- April 30, 2000 4
Consolidated Statements of Operations - Quarters Ended
April 30, 2000 and April 30, 1999 6
Consolidated Statements of Cash Flow -
Quarters Ended April 30, 2000 and April 30, 1999 7
Notes to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 25
Item 6. Exhibits and Reports on Form 8-K 26
Signatures 27
Controlled Environment Aquaculture Technology, Inc. and Subsidiaries
Consolidated Balance Sheet
(unaudited)
<TABLE>
<CAPTION>
April 30,
2000
<S> <C>
Assets
Current assets:
Cash and cash equivalents $ 467,877
Restricted cash 329,292
Accounts receivable, net of allowance
for doubtful accounts of $20,000 374,350
Inventory 613,302
Other current assets 44,395
Total current assets 1,829,216
Property, plant and equipment - net 4,588,490
Other assets 52,500
Total assets $ 6,470,206
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 382,677
Notes payable 325,000
Revolving line of credit 235,000
Current portion of long-term debt 340,095
Other accrued expenses and liabilities 66,721
Total current liabilities 1,349,493
Long-term debt 2,810,710
Convertible subordinated debenture 500,000
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 (4,163,366)
Total stockholders' equity 1,810,003
Total liabilities and
stockholders' equity $ 6,470,206
</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>
Quarters ended April 30,
2000 1999
<S> <C> <C>
Sales $ 636,843 $ 302,466
Cost of sales 652,819 339,342
Gross margin (15,976) (36,876)
General and administrative
expenses 289,118 565,002
Loss from operations (305,094) (601,878)
Other income 15,393 1,699
Interest income 3,980 3,412
Interest expense (71,932) (2,426)
Net loss $ (357,653) $ (599,193)
Basic and diluted net
loss per common share $ (0.08) $ (0.16)
</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>
Quarters ended April 30,
2000 1999
<S> <C> <C>
Operating activities
Net loss $ (357,653) (599,193)
Adjustments to reconcile net loss
to net cash used in operating activities
Depreciation 83,818 62,565
Net changes in operating assets
and liabilities
Accounts receivable (97,937) 1,336
Inventory (33,681) 124,263
Other current assets 56 7,431
Accounts payable (8,511) 140,294
Accrued expenses and other
liabilities 1,564 196,977
Net cash used in
operating activities (412,344) (66,327)
Investing activities
Capital expenditures (3,382) (356,810)
Net cash used in
investing activities (3,382) (356,810)
Financing activities
Proceeds from issuance of
convertible debenture 500,000 -
Proceeds from issuance of debt 194,465 151,355
Principal payments on
long-term debt (24,797) (175,000)
Proceeds from conversion of
Class A warrants - 400,000
Net cash provided by
financing activities 669,668 376,355
Change in cash and
cash equivalents 253,942 (46,782)
Cash and cash equivalents
at beginning of year 213,935 436,611
Cash and cash equivalents
at end of year $ 467,877 $ 389,829
</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 April
30, 2000 and the results of operations and cash flows for the quarters
ended April 30, 2000 and 1999. Certain prior period amounts have
been reclassified to conform with the 2000 presentation. The results of
operations for the quarter ended April 30, 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 $4.2 million at April 30, 2000. In addition,
the Company continued to experience negative cash flows during the
quarter ended April 30, 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, (i) a $250,000 certificate of deposit
pledged as security for repayment of the outstanding revolving line of
credit with Central Pacific Bank and, (ii) retention of certain
undisbursed construction costs in connection with the Bank of
America construction loan, which funds are to be released when
construction is complete and final inspection is done.
5. Revolving Line of Credit
The Company has a $235,000 revolving line of credit, of
which $235,000 was outstanding at January 31, 2000, with Central
Pacific Bank, secured by $250,000 certificate of deposit, with an
interest rate of 1.5% over CD rate. The amount is due May 5, 2000.
6. Note Payables
On March 1, 2000, a stockholder of the Company advanced
the Company $50,000. This promissory note, as extended, is due and
payable on August 2, 2000, together with interest on any unpaid
balance thereof at an annual interest rate of 9.75%. This promissory
note may be prepaid in whole or in part at any time without penalty.
On November 2, 1999, a stockholder of the Company
advanced the Company $225,000. This promissory note, as extended,
is due and payable on August 2, 2000, together with interest on any
unpaid balance thereof at an annual interest rate of 9.75%. This
promissory note may be prepaid in whole or in part at any time
without penalty.
On March 1, 1999, a stockholder of the Company advanced
the Company $50,000. This promissory note, as extended, is due and
payable on August 2, 2000, together with interest on any unpaid
balance thereof at an annual interest rate of 10%. This promissory
note may be prepaid in whole or in part at any time without penalty.
Subject to formal approval by the Board of Directors, the
Company is contemplating an agreement whereunder the debt
evidenced by these notes may be changed into convertible debentures
or directly converted into equity as part of a second private placement
of common stock units.
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 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 April 30, 2000, the principal balance outstanding on the
Construction Loan was $3,000,000 and the improvements 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
April 30, 2000, the weighted average interest rate was 10.5%.
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 April 30,
2000, the Company was not in compliance with the minimum tangible
net worth requirement of the Construction Loan and has requested,
but not yet received, a waiver of such noncompliance from the Bank
of America.
8. Convertible Subordinated Debenture
On March 22, 2000, the Company entered into a convertible
debenture subscription agreement ("Subscription Agreement") with
Hibiscus Investments, Inc., an existing stockholder, for the issuance
of two 7.75% convertible subordinated 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 22, 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
April 30, 2000, convertible subordinated debentures of $500,000 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 April 30, 2000, the
Company had 4,355,450 shares of common stock outstanding.
In addition, as of April 30, 2000, the Company had
outstanding 2,760,149 Class A Common Stock Purchase Warrants
("Class A warrants") exercisable at $2.00 per share. The Company
reserves the right to extend the expiration date or reduce the exercise
price of any or all classes of warrants upon giving five days notice.
The warrants can only be exercised when a current registration
statement is on file.
The Company is currently contemplating an additional equity
offering. 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 period. The
outstanding Class A 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 April 30,
2000 and April 30, 1999.
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 this Form
10-QSB 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
which must be and are being taken to insure 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 has been done in a small facility located in the nearby town
of Hanapepe, 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 traditional, 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 expects formal
approval of the transfer from the lessor, State of Hawaii, very shortly.
Plans and specifications for construction of an expanded facility on the
site have been prepared and are in the bid process. 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 $2.5 million.
Beyond the Company's present plans for expansion within the
Kekaha Agricultural Park, the Company has a permit and right of
entry to use a 313 acre parcel of land near but not adjacent to the
existing farm site. 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.
Preliminary plans to devote more resources to the production
of high health broodstock and seed stock have been put on hold due to
a dramatic decline in demand from Taiwanese shrimp hatcheries for
the Company's broodstock which occurred in the latter half of the
first quarter of fiscal year 2000. Between November 1999 and
February 2000, hatchery operations in Taiwan, which supply post
larvae seed animals to major shrimp farms in China, had created more
demand for broodstock than the Company anticipated and could
actually produce. Unfortunately, wide-scale disease infestation of
shrimp farms in China has since drastically reduced demand for post
larvae, which in turn has greatly lessened the demand and price for
broodstock previously generated by the Taiwan hatcheries.
The collapse of the Taiwan market for hatchery products will
negatively impact broodstock sales in the near term 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
18 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 $4.2 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 such expansion could require up
to twelve months to complete.
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
April 30, 2000 and 1999, the Company incurred losses of
approximately $360,000 and $ 600,000, 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 April 30, 2000 was approximately $637,000 compared to
approximately $ 302,466 for the quarter ended April 30, 1999. The
sharp increase in revenue was primarily the result of a full production
cycle for farm shrimp in the first quarter of 2000 versus a limited
production cycle in the first quarter of 1999. During the quarter ended
April 30, 1999, the Company sold approximately 110,000 pounds of
farm shrimp. In addition, the Company had revenue from the sale of
broodstock of approximately $100,000 for the first quarter of fiscal
2000 as compared to revenue of approximately $173,000 in last year's
first quarter. The Company has recently 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.
Cost of Sales.
Cost of sales for the first quarter of fiscal year 2000 was
approximately $653,000 compared to $339,342 in the first quarter of
fiscal year 1999. This increase was principally the result of farm
shrimp sales in the fiscal 2000 first quarter as compared to no sales in
the same quarter of last year. 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.
General and Administrative Expenses.
General and administrative expenses for the quarter ended
April 30, 2000 were $289,118 and January 31, 1999 were
approximately $565,002. 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.
Interest Expense.
During for the quarters ended April 30, 2000 and April 30,
1999, the Company paid interest costs of approximately $72,000 and
$2,400, respectively.
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.
On March 22, 2000, the Company entered into a convertible
debenture subscription agreement ("Subscription Agreement") with
Hibiscus Investments, Inc., an existing stockholder, for the issuance
of two 7.75% convertible subordinated debentures of $500,000
("Debenture") each of which is to be issued within twelve months of
the date of the Subscription Agreement. Proceeds from the Debentures
are to be used primarily to construct a sorting, packing and freezing
facility ("Processing Facility"). The Company currently estimates that
the costs of acquiring the leasehold interest in the land and
constructing and equipping the Processing Facility will be
approximately $1.0 million. The Debentures are due and payable on
or before March 22, 2007 with interest payable quarterly on the
outstanding balance. Such debentures entitle the holder to convert the
entire face amounts, 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 additional shares issued upon conversion of the
debentures may further dilute the interests of the current shareholders
and could reduce their proportionate ownership and voting power in
the Company. As of April 30, 2000, there was $500,000 in
convertible debentures 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 $2.5 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. The Company does have
rights to acquire (by lease) all or portions of a separate 313-acre site
that could accommodate up to 100 production ponds, but management
has not actively explored immediate expansion into this area due to its
distance from existing operations. 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 not 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 1,3,4, and 5. Not Applicable
Item 2. Changes in Securities and Use of Proceeds
On March 22, 2000, the Company entered into a convertible
debenture subscription agreement ("Subscription Agreement") with
Hibiscus Investments, Inc., an existing stockholder, for the issuance
of two 7.75% convertible subordinated debentures of $500,000
("Debenture") each within twelve months of the date of the
Subscription Agreement as a private placement. The Debentures are
due and payable on or before March 22, 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 April 30, 2000, convertible
subordinated debentures of $500,000 were outstanding. 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: June 19, 2000
