NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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1.
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Description of Business
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Umami Sustainable Seafood Inc. (including its subsidiaries unless the context indicates otherwise, "Umami" or "the Company") fishes and farms for Northern and Pacific Bluefin Tuna. The Company has
three
direct subsidiaries, Bluefin Acquisition Group Inc. ("Bluefin"), Baja Aqua Farms, S.A. de C.V. ("Baja"), and Oceanic Enterprises, Inc. ("Oceanic"), and
three
indirect subsidiaries, Kali Tuna d.o.o ("Kali Tuna"), Thynnus d.o.o. ("Thynnus") and Bepina Komerc d.o.o. ("Bepina").
The Company owns and operates Kali Tuna, a limited liability company organized in 1996 under the laws of the Republic of Croatia, which is a Northern Bluefin Tuna farming operation located in the Adriatic Sea off the coast of Croatia. The Company also owns and operates Baja, a corporation organized in 1999 under the laws of the Republic of Mexico, which is a Pacific Bluefin Tuna farming operation located in the Pacific Ocean off Baja California, Mexico.
Prior to June 30, 2010, the Company was a shell company known as Lions Gate Lighting Corp. ("Lions Gate"). On June 30, 2010, Lions Gate and Atlantis Group hf ("Atlantis"), the Company's former majority shareholder, completed a transaction in which Lions Gate purchased from Atlantis all of the issued and outstanding shares of its wholly-owned subsidiary, Bluefin, in consideration for the issuance to Atlantis of
30.0 million
shares of Lions Gate common stock, resulting in a change of control of Lions Gate. As a result of this transaction, Kali Tuna, a wholly-owned subsidiary of Bluefin acquired in 2005, and an indirect subsidiary of Atlantis, became an indirect wholly-owned subsidiary of Lions Gate. This transaction was accounted for as a recapitalization effected by a reverse merger, with Bluefin and Kali Tuna considered the acquirer for accounting and financial reporting purposes.
On July 20, 2010, the Company acquired
33%
of Baja, and on November 30, 2010, it acquired virtually all of the remaining shares of Baja and all of the shares of its related party Oceanic. The Company currently owns
99.98%
of Baja.
In August 2010, Lions Gate changed its name to Umami Sustainable Seafood Inc. The stock symbol on the OTC Bulletin Board was changed to UMAM on the same date.
The Company's core business activity is farming and selling Bluefin Tuna. The Company generates all of its revenue from the sale of Bluefin Tuna primarily into the Japanese sushi and sashimi market, and its sales are highly seasonal. The Company's farming operations increase the total weight of its Bluefin Tuna, which it refers to as biomass, by catching or, less frequently, purchasing Bluefin Tuna and then transporting them to its farms for growth by maintaining its Bluefin Tuna biomass inventory in farm pens over extended cycles.
The Company is a June 30-based fiscal year company and due to the optimal seasonality for harvesting Bluefin Tuna in winter, it generates little or no revenue in its first fiscal quarter (the three months ending September 30) or its fourth fiscal quarter (the three months ending June 30). In Croatia, the Company's harvest months are typically from November through February, while in Mexico, harvest months are typically from October through December.
2. Going Concern
The Company recorded a net loss of
$9.4 million
for the
six months ended December 31, 2012
and does not currently have sufficient available cash, available financing and projected cash flows to fund its operations for the next twelve months, which raises substantial doubt about the Company's ability to continue as a going concern. In addition, at
December 31, 2012
,
$30.0 million
was due under a credit facility which the Company did not pay and has not paid as of the date of this report, and an additional
$22.0 million
in principal and interest payments was due under credit facilities in February and March 2013, of which
$10.3 million
was repaid in February and March 2013. The Company's debt service obligations in the next twelve months consist of debt principal repayments of
$53.3 million
to financial institutions and unrelated third parties and approximately
$2.4 million
in interest payments due on financings from financial institutions and unrelated third parties.
The continuation of the Company is dependent upon its 2012-2013 harvest season, successful completion of additional financing arrangements and/or modification of existing financial arrangements, and/or sale of the Company's treasury stock to third parties. The Company plans to attempt to raise additional funds to finance its operating and capital requirements, including repayment of current financing arrangements and operational expenses, through a combination of equity and debt financings. The Company has previously addressed liquidity needs by issuing debt with commercially unfavorable terms, sometimes with warrants to purchase shares of its common stock. Additional financing may not be available when needed on
commercially reasonable terms, or at all, and there is no assurance that equity or debt financings will be successful in raising sufficient funds to assure the eventual profitability of the Company. In addition, any additional equity financing may involve substantial dilution to the Company's existing stockholders. The financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts of and classification of liabilities that might be necessary in the event the Company cannot continue in existence.
3. Significant Accounting Policies
Basis of Presentation
The accompanying unaudited consolidated financial statements of Umami and its wholly-owned subsidiaries and its controlling variable interest entities have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") for interim financial information in accordance with the instructions to Form 10-Q and Article 8 of Regulation S-X. Certain information and note disclosures normally included in annual financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information contained herein not misleading. Accordingly, the accompanying unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the fiscal year ended June 30, 2012, included in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission ("SEC") on October 12, 2012, as amended.
The interim consolidated financial statements at
December 31, 2012
and for the
three and six months ended December 31, 2012
are unaudited. In the opinion of management, all adjustments and disclosures considered necessary for a fair presentation of the Company's financial position, results of operations and cash flows for the interim periods have been included. These adjustments are of a normal recurring nature. However, the reported results for the interim period ended
December 31, 2012
are not indicative of the results that may be expected for the fiscal year ending
June 30, 2013
. The
June 30, 2012
year-end balance sheet data was derived from the audited financial statements and notes thereto for the fiscal year ended
June 30, 2012
, included in the Company's Annual Report on Form 10-K filed with the SEC on October 12, 2012, as amended.
The Company's functional and reporting currency is the United States dollar (the "USD"). Kali Tuna's and MB Lubin d.o.o.'s ("Lubin") (see below) transactions and balances have been measured in Croatian Kuna (the "HRK"), their functional currency, and their financial statements have been translated into USD. Baja's and Marpesca's (see below) financial statements are maintained in Mexican Pesos (the "MXN"), and have been remeasured into USD, their functional currency. The foreign currency translation adjustments, which relate solely to Kali Tuna and Lubin, are recorded in accumulated other comprehensive income, and are not adjusted for income taxes as they relate to an indefinite investment in a non-U.S. subsidiary. The resulting gain or loss related to Kali Tuna foreign currency transaction adjustments and Baja remeasurements is included in the statements of operations in gain/loss from foreign currency transactions and remeasurements. All amounts appearing in tables are stated in thousands of USD, unless indicated otherwise.
Transactions in foreign currencies are initially recorded at the exchange rates prevailing on the dates of the transactions. Non-monetary assets of Baja are translated at the historical exchange rate prevailing on the date of the transaction. All assets and liabilities of Kali Tuna and monetary assets and liabilities of Baja are translated or remeasured at the spot rates at each balance sheet date. Revenues are translated or remeasured at the exchange rate in effect on the date of each sale, as the Company has a small number of individual sales transactions. Expenses are translated or remeasured at weighted average exchange rates in effect during the period. The results of transaction and remeasurement gains and losses are reflected in the statements of operations in gain (loss) from foreign currency transactions and remeasurements. Equity is translated at historical rates, and the resulting translation adjustments for Kali Tuna are reflected in accumulated other comprehensive income.
Accounting Estimates
The preparation of financial statements in conformity with U.S. GAAP requires that management make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management exercises significant judgment in estimating the weight of the biomass of tuna inventories, the fair value of derivative stock warrant liabilities and stock based compensation, the fair value of treasury stock and related tax implications, recoverability of long-lived assets, purchase accounting and utilization of deferred tax assets. Actual results may differ from those estimates.
Basis of Consolidation
The Company's consolidated financial statements include the operations of Umami Sustainable Seafood Inc. and its wholly-owned subsidiaries for all periods presented. All significant intercompany balances and transactions have been eliminated in consolidation.
Variable Interest Entities
Under ASC 810, "Consolidation," a variable interest entity ("VIE") is an entity that either (i) has insufficient equity to permit the entity to finance its activities without additional subordinated financial support or (ii) has equity investors who lack the characteristics of a controlling financial interest. A VIE is consolidated by its primary beneficiary. The primary beneficiary of a VIE has both the power to direct the activities that most significantly impact the entity's economic performance and the obligation to absorb losses or the right to receive benefits from the entity that could potentially be significant to the VIE.
Based upon the criteria set forth in ASC 810, the Company has determined that it is the primary beneficiary in
two
VIEs, Lubin in Croatia and Marpesca S.A. de C.V. ("Marpesca") in Mexico (of which Kali Tuna and Baja are the primary beneficiaries respectively), as the Company absorbs significant economics of the entities, has the power to direct the activities that are considered most significant to the entities, and provides financing to the entities. In addition, the entities do not have the total equity investment at risk sufficient to permit them to finance their activities without the Company's support. As such, the VIEs have been consolidated within the Company’s interim consolidated financial statements.
Prior to October 31, 2010, Kali Tuna operated a joint venture (the "BTH Joint Venture"). Under the terms of the BTH Joint Venture, Bluefin Tuna was acquired, farmed and sold at our Croatian site. Initially, the BTH Joint Venture was operated through a separate entity, Kali Tuna Trgovina d.o.o. ("KTT"), a Croatian-based company owned
50%
by Kali Tuna and
50%
by Bluefin Tuna Hellas A.E. ("BTH," an unrelated third party). In January 2008, all activities of the BTH Joint Venture were assumed by Kali Tuna. In October 2010, the BTH Joint Venture was terminated, at which time the BTH Joint Venture's remaining assets, consisting primarily of Bluefin Tuna biomass located at the Company's Croatian farming sites were purchased by Kali Tuna at the fair market value of
$1.6 million
. BTH had no operations subsequent to September 30, 2010. On May 23, 2012, the shares in KTT owned by BTH were transferred to Kali Tuna, whereby KTT became the wholly-owned subsidiary of Kali Tuna. Therefore, at
June 30, 2012
, KTT was no longer considered a VIE and was accounted for as a wholly-owned subsidiary of Kali Tuna.
Recently Issued Accounting Standards
In July 2012, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2012-02, “Testing Indefinite-Lived Intangible Assets for Impairment.” This ASU amends ASC 350, “Intangibles — Goodwill and Other” to allow entities an option to first assess qualitative factors to determine whether it is necessary to perform the quantitative impairment test. Under that option, an entity no longer would be required to calculate the fair value of the intangible asset unless the entity determines, based on that qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The amendments in this ASU are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption permitted. The Company does not believe adoption of this guidance will have a material impact on its consolidated financial statements.
In February 2013, the FASB issued ASU 2013-2, "Other Comprehensive Income." This ASU amends ASC 220, "Comprehensive Income," and supersedes and replaces ASU 2011-05 "Presentation of Comprehensive Income" and ASU 2011-12 "Comprehensive Income," to require reclassification adjustments from other comprehensive income to be presented either in the financial statements or in the notes to the financial statements. The standard would not change the current requirements for reporting net income or other comprehensive income in financial statements. However, the guidance would require an entity to provide enhanced disclosures to present separately by component reclassifications out of accumulated other comprehensive income. The amendments in this ASU are effective prospectively for reporting periods beginning after December 15, 2012. The Company does not believe adoption of this guidance will have a material impact on its consolidated financial statements.
Earnings Per Share
Basic earnings per share is computed by dividing net income attributable to Umami stockholders by the weighted average number of common shares outstanding in each period. Diluted earnings per share is computed by dividing net income attributable to Umami stockholders by the weighted average number of common shares outstanding plus the weighted average number of common shares that would be issued upon exercise of dilutive outstanding options and warrants.
The following table presents the calculation of the loss per share (in thousands, except per share data):
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Three Months Ended December 31,
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Six Months Ended December 31,
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2012
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2011
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2012
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2011
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Numerator: Net income (loss) attributable to Umami shareholders
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$
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(895
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)
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$
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17,390
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$
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(9,123
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)
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$
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16,663
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Denominator: Weighted average shares outstanding (basic)
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57,377
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59,512
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58,446
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59,512
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Effect of dilutive securities:
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Stock options, unvested RSUs and warrants
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—
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1,799
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—
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1,368
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Denominator: weighted average share outstanding (diluted)
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57,377
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61,311
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58,446
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60,880
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Net income (loss) per share (basic)
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$
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(0.02
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)
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$
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0.29
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$
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(0.16
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)
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$
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0.28
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Net income (loss) per share (diluted)
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$
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(0.02
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)
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$
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0.28
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$
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(0.16
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)
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$
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0.27
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Revenue Recognition
Revenue is recognized when persuasive evidence of an arrangement exists, tuna inventory is delivered, the significant risks and rewards of ownership have been transferred to the buyer, the arrangement fee is fixed and determinable and collectability is reasonably assured. The delivery occurs either at one of the Company's sites in Croatia or Mexico when loaded into a freezer vessel or container or at the auction house in Japan. The Company is responsible for the costs of shipping and handling up to the point of sale. These costs are included in the cost of goods sold. The Company does not incur any post-sale obligations.
Value Added Tax (VAT or IVA)
Revenue is presented net of value added taxes collected. In Croatia ("VAT") and Mexico ("IVA", "Impuesto al Valor Agregado", or "VAT in Mexico"), is not charged on exports, and in Mexico, Bluefin Tuna is classified as a food which is IVA exempt. In both countries, the Company can claim back VAT or IVA paid on its business purchases. At
December 31, 2012
and
June 30, 2012
, the VAT rate for Croatia was
25%
, and the IVA rate for Mexico was
16%
. The amount receivable from the Mexican and Croatian Tax authorities is recorded in the Company's balance sheet as "Refundable value added tax."
Cost of Goods Sold
Cost of goods sold includes costs associated with the initial catching or purchasing of tuna and costs associated with towing fish to the Company's farming operations, as well as farming costs, tuna shipping and handling costs and insurance costs related to the Company's Bluefin Tuna inventories. The Company's farming costs include feed costs, which are the largest component of growing costs, as well as other costs of farming such as employee compensation, benefits, and other employee-related costs for its farming personnel and direct costs incurred in the farming operation, including abnormal mortalities and storm losses. Finally, cost of goods sold in the
six months ended December 31, 2012 and 2011
also reflects fair value adjustments representing the increase in the carrying value of Baja inventory to reflect the valuation of the inventory purchased in the Baja acquisition over its historical fishing and farming costs. Changes in cost of goods sold do not necessarily correlate with revenue changes, as certain fishing and farming costs are relatively fixed. Costs of goods sold may be materially impacted by changes over which the Company has limited or no control, particularly feed costs.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist of commissions payable arising from the Company's former sales agreement with Atlantis, compensation, benefits, and other employee-related costs for executive management, finance, human resources and other administrative personnel, third-party professional fees, allocated facilities costs, and other corporate and operating expenses.
Fair Value Measurements
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Applicable accounting guidance provides an established hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in valuing the asset or liability and are developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company's assumptions about the factors that market participants would use in valuing the asset or liability. The standard describes three levels of inputs that may be used to measure fair value:
Level 1
- Unadjusted quoted prices for identical assets or liabilities in active markets that an entity has the ability to access as of the measurement date, or observable inputs.
Level 2
- Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3
- Significant unobservable inputs that reflect an entity's own assumptions that market participants would use in pricing an asset or liability.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. When that occurs, assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurements. The Company reviews the fair value hierarchy classification on a quarterly basis. Changes in the observability of valuation inputs may result in a reclassification of levels for derivative stock warrants within the fair value hierarchy.
Financial Assets and Liabilities
The Company utilizes the market approach to measure fair value for its financial assets and liabilities. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. As of
December 31, 2012
and
June 30, 2012
, the Company had certain liabilities, derivative stock warrants, that are required to be measured at fair value on a recurring basis. The carrying value of the Company's cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities all approximate their fair value due to their short-term nature. In addition, the Company believes the fair value of their short- and long-term borrowings approximate their carrying values based on change in control provisions in their debt agreements.
The Company's derivative stock warrants do not trade in an active securities market, and as such, the Company estimates the fair value of those warrants using a binomial pricing model. Some of the significant inputs are observable in active markets, such as the fair value of the Company's share price and risk free rate. Because some of the inputs to the Company's valuation model are either not observable quoted prices or are not derived principally from or corroborated by observable market data by correlation or other means, the warrant liability is classified as Level 3 in the fair value hierarchy. See Note 11 — "Equity Awards and Warrants" to our unaudited consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for a discussion regarding the determination of fair value for these liabilities. The unrealized gains or losses on derivative stock liabilities are recorded as a change in fair value of derivative stock warrants in the Company's Consolidated Statements of Operations.
No other assets or liabilities are measured at fair value on a recurring basis, or have been measured at fair value on a non-recurring basis subsequent to initial recognition, on the accompanying consolidated balance sheets as of
December 31, 2012
and
June 30, 2012
. The Company does not hold any financial instruments for trading purposes.
Financial liabilities measured at fair value on a recurring basis are summarized below (in thousands):
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Fair Value Measurements as of or at a Reporting Date Using:
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Liabilities
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Fair Value
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Quoted Prices in Active Markets for Identical Liabilities (Level 1)
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Significant Other Observable Inputs (Level 2)
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Significant Unobservable Inputs (Level 3)
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Total
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|
December 31, 2012
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Derivative stock warrants
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$
|
4,037
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|
|
$
|
—
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|
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$
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—
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|
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$
|
4,037
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$
|
4,037
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June 30, 2012
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Derivative stock warrants
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$
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1,739
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$
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—
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$
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—
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$
|
1,739
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$
|
1,739
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There were no transfers between Level 1, Level 2 and Level 3 measurements during the
six months ended December 31, 2012
or the
year ended June 30, 2012
.
The following table presents the qualitative information about Level 3 fair value measurements for financial instruments measured at fair value on a recurring basis at
December 31, 2012
and
June 30, 2012
:
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Fair Value as of
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Range (Weighted Average)
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December 31, 2012
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Valuation Technique
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Unobservable Inputs
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Derivative stock warrants
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$
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4,037
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Binomial pricing model
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Expected volatility
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17% - 39% (27%)
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Exercise price for settlement warrants
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$0.01 - $1.65 ($0.14)
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Fair Value as of
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Range (Weighted Average)
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|
June 30, 2012
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Valuation Technique
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Unobservable Inputs
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Derivative stock warrants
|
1,739
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|
|
Binomial pricing model
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Expected volatility
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17% - 60% (32%)
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Exercise price for settlement warrants
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$0.01 - $1.65 ($1.29)
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Goodwill
The Company records as goodwill the portion of the purchase price that exceeds the fair value of net assets of entities acquired. The Company evaluates goodwill annually for impairment and whenever circumstances occur indicating that goodwill may be impaired.
Long-Lived Assets
The Company reviews its long-lived assets for possible impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. An impairment loss would be recognized when estimated future cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying amount.
Farming Concessions and Fishing Quotas
Farming concessions and fishing quotas are recorded at the acquisition cost or fair value as assessed at the date of acquisition. The concessions and quotas are determined to be indefinite lived assets that the Company evaluates for impairment annually or more frequently based on facts and circumstances.
Income Taxes
Income taxes are accounted for using the asset and liability method. Under the asset and liability method of accounting for income taxes, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis, and for tax loss carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period the changes are enacted. In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. A valuation allowance is provided for deferred income tax assets for which it is deemed more likely than not that future taxable income will not be sufficient to realize the related income tax benefits from these assets. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. The Company considers the scheduled reversal of deferred tax liabilities (including the impact of available carryback and carryforward periods), projected future taxable income, and tax-planning strategies in making this assessment.
The Company evaluates its uncertain tax positions in accordance with the guidance for accounting for uncertainty in income taxes. The Company recognizes the effect of uncertain tax positions only if those positions are more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. Recognized income tax positions are measured based on the largest amount that has a greater than
50%
likelihood of being realized upon ultimate settlement. Guidance is also provided for recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, and income tax disclosures. Judgment is required in assessing the future tax consequences of events that have been recognized in the Company's financial statements or tax returns. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Company records interest and penalties related to unrecognized tax positions in income tax expense.
Property and Equipment
Property and equipment are stated at cost and depreciated over the estimated useful lives of the related assets, which generally range from
2
to
20 years
, using the straight line method. Maintenance and repairs, which do not extend asset lives, are expensed as incurred. The gain or loss arising on the disposal or retirement of an item of property and equipment is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognized in the Statements of Operations.
Inventories
Inventories consist primarily of live tuna stock that the Company farms until the tuna reaches desirable market size. Management systematically monitors the size, growth and growth rate of the tuna to estimate the quantity in kilograms at each balance sheet date. Live stock inventories are stated at the lower of cost, based on the average cost method, or market. Inventories of fish feed are stated at the lower of cost, based on the average cost method, or market.
Management reviews inventory balances to estimate if inventories will be sold at amounts (net of estimated selling costs) less than carrying value. If expected net realizable value is less than carrying value, the Company would adjust its inventory balances through a charge to cost of goods sold.
During the fishing season, tuna is caught at sea and transported to the Company's farms. This tuna is not included in the Company's live stock inventory until it has been transferred into the farming cages and has been counted and the biomass assessed.
Costs associated with the fishing activities are accumulated in a separate inventory account and are transferred to live stock inventory when the biomass has been assessed at lower of cost or the net realizable value. Fishing costs include costs associated with the initial catching or purchasing of the Company's tuna and costs associated with towing these fish to its farming operations, as well as farming costs and insurance costs related to its Bluefin Tuna inventories. The Company's farming costs include feed costs, which are the largest component of growing costs, as well as other costs of farming such as employee compensation, benefits, and other employee-related costs for its farming personnel and direct costs incurred in the farming operation.
Trade Accounts Receivable
Trade accounts receivable represents the balance owed to the Company by its customers (both related and non-related parties) in connection with sales transactions. An allowance for uncollectible accounts is determined by management based on a review of its accounts, with consideration of historical losses, industry circumstances and general economic conditions. Accounts are charged against the allowance when all attempts to collect have failed.
The total allowance for doubtful accounts related to non-related party receivables was
nil
on
December 31, 2012
and
June 30, 2012
. See discussion regarding receivables due from a related party at Note 12 – "Related Parties" to our unaudited consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
Cash and Cash Equivalents
The Company considers all highly liquid cash investments that mature in three months or less when purchased, to be cash equivalents. The Company's bank deposits are generally not covered by deposit insurance.
Accounting for Employee Equity Awards
The Company accounts for its share-based employee equity awards by expensing the estimated fair value of share-based awards over the requisite service and/or performance period, which is the vesting period. The measurement of stock-based compensation expense is based on several criteria including, but not limited to, the valuation model used and associated input factors such as expected term of the award, stock price volatility, risk free interest rate, award forfeiture rate and dividend rate. The input factors to use in the valuation model are based on subjective future expectations combined with management judgment. The Company estimates the fair value of stock options granted using the Black-Scholes valuation model and the assumptions shown in Note 11 – "Equity Awards and Warrants" to our unaudited consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. The expected term of awards granted is estimated based on the simplified method as documented in Staff Accounting Bulletin ("SAB") 107 and SAB 110 for companies that do not have sufficient data to provide for a reasonable basis for the expected term. Since the Company has limited prior trading history, stock price volatility is estimated based on the historical volatility of similar companies in the same industry as the Company. The risk-free interest rate is estimated based upon rates for U.S. Treasury securities with maturities equal to the expected term of the options. The forfeiture rate was estimated to be
zero
as options and RSUs have only been granted to
six
individuals who are members of the Company's management and Board of Directors, and because of their position with the Company (with the exception of its former Chief Executive Officer) are not anticipated to leave prior to the option maturities, and because the
Company has no history of forfeitures. The Company does not presently expect to pay dividends. Stock-based compensation cost of restricted stock units ("RSUs") is measured by the market value of the Company's common stock on the date of grant.
Derivative Stock Warrants
Warrants to purchase approximately
4.1 million
shares of the Company's common stock are currently accounted for as liabilities as of
December 31, 2012
due to specific features within the warrant agreements. See Note 11 – "Equity Awards and Warrants" to our unaudited consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for further discussion.
Treasury Stock
On December 10, 2012, the Company exercised its right to realize on the pledge of
8,980,000
shares of Umami common stock which had been provided as security for outstanding receivables due from the Company's former majority shareholders, Atlantis Co. Ltd. and Aurora Investments ehf, into the names of the Company's subsidiaries, Kali Tuna d.o.o. and Baja Aqua Farms, S.A. de C.V., pursuant to various pledge agreements between the Company's subsidiaries, Atlantis and Aurora. These shares have been accounted for as treasury stock at
December 31, 2012
and recorded at cost on the Company's consolidated balance sheet. See further discussion regarding this transaction and the valuation of the treasury stock at Note 12 – "Related Parties" to our unaudited consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
4. Significant Concentrations
Revenue concentration for sales of Bluefin Tuna to the Company's major customers (including related parties) for the
six months ended December 31, 2012 and 2011
were as follows (as a percentage of total net revenue):
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended December 31,
|
|
|
|
2012
|
|
2011
|
|
Atlantis Group and Subsidiaries (Related Party)
|
|
0.2%
|
|
26.5%
|
|
Sirius Ocean Inc.
|
|
25.2
|
|
10.3
|
|
Daito Gyorui Co., Ltd
|
|
—
|
|
20.7
|
|
Kyokuyo Co., LTD
|
|
46.5
|
|
11.9
|
|
Global Seafoods Co., LTD
|
|
18.9
|
|
9.6
|
During the
six months ended December 31, 2012
,
97.5%
of the Company's net revenue was generated by sales to Japanese customers, compared to
98.8%
in the
six months ended December 31, 2011
. During the
six months ended December 31, 2012
, the sources of the Company's net revenues were
2%
from Croatia and
98%
from Mexico, compared to
29%
from Croatia and
71%
from Mexico in the
six months ended December 31, 2011
. At
December 31, 2012
, approximately
53%
of the Company's long-term assets were located in Mexico,
46%
were located in Croatia and
1%
were located in the United States.
In addition, while the Company's functional currency is the U.S. dollar, a majority of its business is presently conducted in currencies other than the U.S. dollar and may be exposed to financial market risk resulting from fluctuations in foreign currency exchange rates. Historically, the Company has generated substantially all of its revenue in Japanese Yen and incurred a significant amount of its expenses in HRK, Euros and MXN. The Company's results of operations are therefore subject to both currency transaction risk and currency translation risk.
5. Inventories
Inventories were comprised as follows as of
December 31, 2012
and
June 30, 2012
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012
|
|
June 30, 2012
|
|
Live stock inventories:
|
|
|
|
|
|
under 30 kg.
|
|
$
|
28,025
|
|
|
$
|
9,792
|
|
|
30-60 kg.
|
|
17,943
|
|
|
18,041
|
|
|
61-90 kg.
|
|
12,995
|
|
|
5,439
|
|
|
91+ kg.
|
|
5,356
|
|
|
1,834
|
|
|
|
|
64,319
|
|
|
35,106
|
|
|
Inventory in transit (fishing season in progress)
|
|
—
|
|
|
5,561
|
|
|
Fish feed and supplies
|
|
2,862
|
|
|
4,086
|
|
|
Total inventories
|
|
$
|
67,181
|
|
|
$
|
44,753
|
|
Inventories are stated at the lower of cost, based on the average cost method, or market. Cost is calculated on a weighted average basis and includes all costs to acquire and to bring the inventories to their present location and condition. The inventories purchased as part of the Baja acquisition were recorded at fair value which was estimated based upon the estimated market prices that a market participant would be willing to pay for the inventory, less costs to be incurred up to the estimated harvest date and an acceptable profit margin on the cost to be incurred and the selling efforts. International regulations prohibit the sale for consumption of Atlantic Bluefin Tuna (which is farmed in Croatia) under
30
kg. The Company evaluates the net realizable value of its inventories on a quarterly basis and would record a provision for loss to reduce the computed weighted average cost if it exceeds the net realizable value.
Inventory in transit from the fishing grounds to the farm is not included in the Company's biomass totals until it has been properly measured and counted upon arrival at the farm.
6. Other Current Assets
Other current assets were comprised as follows as of
December 31, 2012
and
June 30, 2012
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012
|
|
June 30, 2012
|
|
Prepaid fishing expenses
|
|
$
|
1,155
|
|
|
$
|
1,100
|
|
|
Other receivables and deposits
|
|
3,803
|
|
|
148
|
|
|
Prepaid quota and other expenses
|
|
1,726
|
|
|
2,197
|
|
|
Prepaid insurance
|
|
78
|
|
|
347
|
|
|
|
|
$
|
6,762
|
|
|
$
|
3,792
|
|
During the
six months ended December 31, 2012
, the Company paid
$3.5 million
for the option to purchase the rights to a contingent acquisition, which was recorded as Other Receivables and Deposits at
December 31, 2012
.
7. Property and Equipment
Property and equipment were as follows as of
December 31, 2012
and
June 30, 2012
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012
|
|
June 30, 2012
|
|
Cost:
|
|
|
|
|
|
Land
|
|
$
|
444
|
|
|
$
|
420
|
|
|
Buildings
|
|
2,655
|
|
|
2,507
|
|
|
Vessels
|
|
21,956
|
|
|
15,389
|
|
|
Machinery and equipment
|
|
11,977
|
|
|
10,335
|
|
|
Fixtures and office equipment
|
|
408
|
|
|
384
|
|
|
Construction in progress
|
|
2,344
|
|
|
1,196
|
|
|
|
|
39,784
|
|
|
30,231
|
|
|
Less accumulated depreciation:
|
|
|
|
|
|
|
|
Buildings
|
|
1,265
|
|
|
1,138
|
|
|
Vessels
|
|
6,966
|
|
|
5,853
|
|
|
Machinery and equipment
|
|
6,977
|
|
|
6,072
|
|
|
Fixtures and office equipment
|
|
234
|
|
|
193
|
|
|
|
|
15,442
|
|
|
13,256
|
|
|
Property and equipment, net
|
|
$
|
24,342
|
|
|
$
|
16,975
|
|
Property and equipment is depreciated over the estimated useful lives of the related assets, using the straight line method. The useful life will depend upon the asset and its use estimated as follows:
|
|
|
|
|
|
|
Asset
|
|
Estimated Useful
Lives
|
|
Vessels
|
|
10 - 20 years
|
|
Farm Equipment
|
|
2 - 6 years
|
|
Machinery
|
|
4 - 10 years
|
|
Fixtures and office equipment
|
|
2 - 10 years
|
Depreciation expense for each of the
six months ended December 31, 2012 and 2011
was
$0.9 million
and
$0.8 million
, respectively.
8. Acquisitions
Croatian Operation
In June 2011, the Company completed an acquisition from Drvenik Tuna d.o.o. (which included Bepina Komerc d.o.o., an inactive Croatian entity) of a farming concession, along with live Bluefin Tuna, cages and supplies in Croatia. The Company paid a total of
$5.3 million
for the assets. The Company finalized the fair value of the assets acquired and liabilities assumed as of
June 30, 2012
, which resulted in a reclassification of
$0.3 million
between the estimated fair value of the acquired goodwill and farming concessions. The purchase price was allocated as follows:
$2.9 million
to biomass inventory,
$1.0 million
to farming concessions,
$0.8 million
to property and equipment and
$0.6 million
to goodwill. The acquisition will enable the Company to expand its operations in Croatia by approximately
1,500
metric tons. The changes in the carrying amount of the goodwill for the year ended June 30, 2012 was as follows:
|
|
|
|
|
|
|
|
Balance, June 30, 2011
|
$
|
585
|
|
|
Foreign currency translation adjustments
|
(81
|
)
|
|
Balance, June 30, 2012
|
$
|
504
|
|
9. Borrowings
The Company's borrowings were comprised as follows as of
December 31, 2012
and
June 30, 2012
(monetary units in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowing Party
|
Facility
|
Maturity Date
|
Interest Rate
|
Effective rate at December 31, 2012
|
|
December 31, 2012
|
|
June 30, 2012
|
|
Amerra Capital Management, LLC
|
Umami
|
USD 39,000
|
December 31, 2012 and March 31, 2013
|
9%+1YR LIBOR + 11.75% 1YR LIBOR
|
10.68%
|
|
$
|
39,000
|
|
|
$
|
13,315
|
|
|
Erste&Steiermaerkische bank d.d.
|
Kali Tuna
|
HRK 29,240
|
February 15, 2013
|
4.4% floating *
|
5.74%
|
|
5,097
|
|
|
4,826
|
|
|
Erste&Steiermaerkische bank d.d.
|
Kali Tuna
|
HRK 30,000
|
March 15, 2013
|
4.4% floating *
|
5.65%
|
|
5,229
|
|
|
4,952
|
|
|
Erste&Steiermaerkische bank d.d.
|
Kali Tuna
|
HRK 80,000
|
December 31, 2014
|
40% at HBOR 2.8% + 60% at 3%+floating T-Bill
|
4.60%
|
|
13,946
|
|
|
13,205
|
|
|
Erste&Steiermaerkische bank d.d.
|
Lubin
|
EUR 550
|
January 31, 2018
|
3M EURIBOR+5%
|
5.53%
|
|
584
|
|
|
603
|
|
|
Privredna banka Zagreb d.d.
|
Kali Tuna
|
EUR 2,505
|
March 31, 2014
|
3M EURIBOR+4.75%
|
5.05%
|
|
2,516
|
|
|
2,371
|
|
|
Erste&Steiermaerkische bank d.d.
|
Lubin
|
EUR 1,778
|
June 30, 2020
|
2%
|
2.32%
|
|
2,193
|
|
|
—
|
|
|
Erste&Steiermaerkische bank d.d.
|
Lubin
|
EUR 814
|
June 30, 2020
|
4%
|
4.42%
|
|
1,004
|
|
|
—
|
|
|
Croatian Bank for Reconstruction and Development
|
Lubin
|
EUR 1,779
|
June 30, 2025
|
2%
|
2.17%
|
|
2,251
|
|
|
—
|
|
|
Croatian Bank for Reconstruction and Development
|
Lubin
|
EUR 813
|
June 30, 2025
|
4%
|
4.38%
|
|
1,028
|
|
|
—
|
|
|
Privredna banka Zagreb d.d.
|
Kali Tuna
|
EUR 1,300
|
October 15, 2013
|
1M EURIBOR+4.75%
|
6.43%
|
|
1,710
|
|
|
—
|
|
|
Bancomer
|
Baja
|
MXN 46,878
|
February 22, 2013
|
TIEE + 5.0%
|
9.77%
|
|
3,673
|
|
|
3,487
|
|
|
Total obligations under capital leases
|
|
|
|
|
|
160
|
|
|
14
|
|
|
Less: Debt Discount
|
|
|
|
|
|
|
(927
|
)
|
|
(513
|
)
|
|
Total borrowings
|
|
|
|
|
|
|
$
|
77,464
|
|
|
$
|
42,260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Classification of borrowings:
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings
|
|
|
|
|
|
|
$
|
56,623
|
|
|
$
|
27,528
|
|
|
Long-term debt
|
|
|
|
|
|
|
20,841
|
|
|
14,732
|
|
|
Total borrowings
|
|
|
|
|
|
|
$
|
77,464
|
|
|
$
|
42,260
|
|
* Interest rate as of
December 31, 2012
or latest practicable date prior to repayments, if paid in full prior to
December 31, 2012
.
Material Credit Agreements - Croatian Operations:
The Company's Croatian operations are funded with local bank debt that is secured by most of the Bluefin Tuna inventory, fixed assets and concessions of its Croatian operations. Most of the loans require pre-approval for any funds to be distributed outside of the Croatian operations. At
December 31, 2012
, Kali Tuna had
$35.0 million
in bank debt, of which
$14.2 million
was current and
$20.8 million
was long-term. At
December 31, 2012
, the Company had
$0.6 million
of cash on hand available for use by its Croatian operations. The following is a description of the material indebtedness owed by the Company's Croatian operations:
Erste & Steiermaerkische Bank Loans
On October 30, 2007, Kali Tuna entered into a framework credit agreement with Erste & Steiermaerkische bank d.d. ("Erste & Steiermaerkische"), which was renewed on January 21, 2008. The framework agreements provided for a secured credit facility consisting of three revolving credit lines: (i) a credit line of HRK
29.2 million
(USD
$5.1 million
at
December 31, 2012
), granted under the short term revolving credit agreement dated November 12, 2007, payable successively or at once on February 15, 2012, with a variable interest rate of
5.0%
; (ii) a credit line of HRK
30.0 million
(USD
$5.2 million
at
December 31, 2012
), granted under the short term revolving credit agreement dated June 6, 2008, payable successively or at once on March 15,
2012, with a variable interest rate of
5.0%
; and (iii) a credit line of JPY
180.0 million
, payable successively or at once on March 1, 2012, with a variable interest rate of
3-month LIBOR
+
6.5%
. The funds were to be used for preparation of goods for export and other export purposes. The first two of the mentioned agreements were executed as part of the program of the Croatian Bank for Reconstruction and Development ("HBOR") for advancement of export, which included a subsidized interest rate, and were each renewed for
one
additional year. The JPY
180.0 million
credit line was repaid in full in March 2012 and has not been renewed. On March 15, 2012, the HRK
29.2 million
and HRK
30.0 million
credit lines were extended to February 15, 2013 and March 15, 2013, respectively, and, in connection therewith, the interest rates were reduced from
5.0%
to
4.4%
. Kali Tuna has repaid in full the balances due under the two credit lines due in February and March 2013 (HRK
59.2 million
or approximately USD
$10.3 million
) and expects to draw on these revolving credit lines to fund its working capital needs.
On April 15, 2011, Lubin entered into a credit agreement with Erste & Steiermaerkische. The agreement provides for a secured credit facility of EUR
0.6 million
(USD
$0.6 million
at
December 31, 2012
) with interest payable monthly at a variable rate of
three-month EURIBOR
plus
5.0%
. The loan matures on January 31, 2018. Funds advanced were used for operational purposes at the Company's Croatian operations. The loan/facility is secured by certain fixed assets of the Company's Croatian operations. Kali Tuna is jointly liable for all of Lubin's obligations under the facility.
On June 8, 2011, Kali Tuna entered into an additional syndicated credit agreement with Erste & Steiermaerkische and HBOR. The agreement provides for a secured credit facility consisting of a credit line of HRK
80.0 million
(USD
$13.9 million
at
December 31, 2012
), which was fully drawn at December 31, 2011, with
40.0%
of the credit line (funds of HBOR) accruing interest at a variable rate of
2.8%
and the remaining
60.0%
at a variable rate equal to the rate accruing on
Croatian National Bank bills with maturity of 91 days
, plus
3.0%
. The facility matures on December 31, 2014 and is repayable in
one
installment. The interest is payable quarterly. Funds advanced are to be used for working capital needs for the operation of the farming sites of Kali Tuna in Croatia or for the purchase of Bluefin Tuna, and require that matching funds (at least
45%
) be provided by the Company. The line is secured by live Bluefin Tuna owned by Kali Tuna in Croatia, as well as other security instruments, including guaranties issued by Lubin, Atlantis and Umami. See further discussion regarding Atlantis' guarantees of the Company's debt at Note 12 – "Related Parties" to our unaudited consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
Under the Erste & Steiermaerkische's agreements, Kali Tuna agreed that, without obtaining Erste & Steiermaerkische's consent, it would not pledge or otherwise encumber its assets, dispose of its assets (except in the ordinary course of business), undertake actions affecting the company's status (including mergers or subdivisions), repay indebtedness owed to its shareholders, guarantee the obligations of others (with the exception of Lubin's loan) or incur additional indebtedness. Events of defaults, which results in an acceleration of all amounts due under the facility, include the failure to pay any obligation when due, Kali Tuna's insolvency, a material adverse change in Kali Tuna's business, use of funds for purposes other than those for which the loan was granted, the invalidity (or non-substitution) of any of the security instruments, a breach of the obligation to conduct at least
75%
of the payment operations through Erste & Steiermaerkische, and a change of ownership of Kali Tuna that is not acceptable to Erste & Steiermaerkische.
In August 2012, Lubin entered into an agreement with Conex Trade d.o.o. ("Conex") to purchase Bluefin Tuna quota and
two
fishing vessels in exchange for a EUR
1.5 million
payment in cash and assumption of Conex's
four
loans with Erste & Steiermaerkische bank and HBOR totaling EUR
5.2 million
(USD
$6.4 million
translated at the prevailing rate on the date of the agreement and USD
$6.5 million
at
December 31, 2012
). The
two
loans with Erste & Steiermaerkische mature in June 2020 and the
two
loans with HBOR mature in June 2025. The loans are payable in quarterly installments beginning September 30, 2012. Interest accrues monthly at a rate of
2.0%
per annum on two of the loans and
4.0%
per annum on the other two loans, and is payable quarterly. Because the terms of the loans were more advantageous than the Company would have been able to obtain for a similar credit facility in the open market, the fair value of the loans was determined to be EUR
4.6 million
(
$5.6 million
translated at the prevailing rate on the date of the agreement), and a discount of EUR
0.6 million
(
$0.8 million
translated at the prevailing rate on the date of the agreement) was recorded. The loans are secured by the acquired fishing vessels and other security instruments.
Other Bank Loans
Kali Tuna also has a loan from Privredna banka Zagreb d.d. for EUR
2.5 million
(USD
$2.5 million
at
December 31, 2012
) that matures on March 31, 2014 and is payable in
three annual installments
which began March 31, 2012. The first annual installment was paid early in January 2012. Interest is payable monthly based on the
three-month EURIBOR
rate plus
4.75%
. Funds advanced were granted for the purchase of certain assets and for working capital purposes. The loan is secured by certain of the Company's fish inventory in Croatia as well as certain other security instruments, including the pledge over
two
motor boats owned by the seller of those assets. The parties established that the value of the pledged Bluefin Tuna inventory amounted to HRK
29.7 million
on March 31, 2011, and Kali Tuna undertook to maintain a certain value of inventory until the
full repayment of the loan. Under the agreement, Kali Tuna undertook various other obligations, including not to assume further debts or to encumber its assets in a manner that could affect its ability to repay the loan, to inform the bank of all material changes (including changes of the company status) or changes affecting its business or ability to repay the loan and to conduct its monetary operations through the bank on a pro rata basis in relation to other creditors. In case of default, the bank may terminate the agreement with immediate effect and make due the total amount of the loan. Events of default include a delay in repaying any of its obligations under the agreement (or any other agreement it may enter into with the bank), a material adverse changes that may reasonably affect the ability of Kali Tuna to fulfill its obligations under the agreement and a change of the company name or address of which the bank is not informed within
three
days. In addition, Kali Tuna undertook not to perform any activities that could endanger the environment or any activities in breach of the applicable regulations relating to environmental protection for the duration of the agreement.
On October 26, 2012, Kali Tuna entered into a revolving loan agreement with Privredna banka Zagreb d.d. for EUR
1.3 million
(USD
$1.7 million
at
December 31, 2012
) that matures on October 15, 2013. Interest accrues monthly at a variable rate of
one-month EURIBOR
plus
4.75%
, payable quarterly. The loan is secured by live Bluefin Tuna owned by Kali Tuna in Croatia, as well as other security instruments.
Material Credit Agreements - Mexican Operations:
On February 22, 2012, Baja entered into a revolver facility with BBVA Bancomer, S.A., Institución de Banca Múltiple, Grupo Financiero BBVA Bancomer ("Bancomer") for MXN
46.9 million
(USD
$3.7 million
at
December 31, 2012
) that accrues interest payable at an annual rate of the
28-day period TIIE
and is unsecured. This facility originally was to mature on February 22, 2013, however in February 2013 the maturity date was extended to February 8, 2014. At
December 31, 2012
, Baja has drawn all funds available under the facility. Under this facility Baja is not subject to restrictive covenants other than customary affirmative covenants such as the periodic delivery of financial statements and compliance with applicable Mexican environmental laws and regulations. This facility does not restrict the ability of Baja to pay dividends.
Private Investor Loans - Baja and Umami
On August 26, 2011, Umami, together with Baja, entered into a credit agreement with AMERRA Agri Fund, L.P., AMERRA Agri Opportunity Fund, L.P., JP Morgan Chase Retirement Plan (the “Lending Parties”) and AMERRA Capital Management, LLC (as administrative agent). The agreement was amended in February 2012, April 2012, June 2012, August 2012 and October 2012 (the agreement, as amended, is referred to as the “AMERRA Agreement”).
The AMERRA Agreement provides for a secured credit facility consisting of loans in an aggregate principal amount of up to
$30.0 million
(increased to
$35.0 million
in August 2012, including a
$5.0
million term loan facility, and increased again in October 2012 to
$39.0 million
, including a
$9.0 million
term loan facility), with a variable interest rate of one-year
LIBOR
plus
9.0%
for a portion of the loans and
LIBOR
plus
11.75%
for a portion of the loans. At
December 31, 2012
, no additional funds were available under the line.
Funds advanced were to be used solely to refinance certain of the Company's indebtedness, to finance the working capital needs of Baja and to pay expenses incurred in connection with the credit facility. The loans were funded in multiple tranches. The first tranche of
$5.2 million
was received on September 7, 2011 in the amount of
$5.1 million
, of which
$3.1 million
was used to repay a secured note with a maturity date of March 31, 2012, plus accrued interest and to pay placement agent costs totaling
$0.1 million
, with the remainder being used as general working capital for growth and reinforcement of infrastructure at the Company's facility in Mexico. The second tranche of
$1.1 million
was received on September 15, 2011. In January 2012, the Company repaid
$0.3 million
of the initial funds. The third tranche of
$4.0 million
was received on April 16, 2012 in the amount of
$3.9 million
. In addition, the fourth tranche of
$0.4 million
was received on May 24, 2012, the fifth tranche of
$0.5 million
was received on June 8, 2012, and the sixth tranche of
$2.0 million
was received on June 26, 2012. Six additional tranches totaling
$20.1 million
with net proceeds of
$19.4 million
were received in July through September 2012, including
$5.0 million
received as a term loan with net proceeds of
$4.8 million
under the credit agreement. Two additional tranches totaling
$6.0 million
with net proceeds of
$5.9 million
were received in October 2012, including
$4.0 million
received under the term loan facility with net proceeds of
$3.9 million
under the credit agreement.
At
December 31, 2012
,
$30.0 million
was due under the facility, with an additional
$9.0 million
due on March 31, 2013 under the term loan facility drawn down under the amendments to the credit agreement in August 2012 and October 2012. The Company did not pay the
$30.0 million
due at December 31, 2012 and the
$9.0 million
due at March 31, 2013, and has not paid these amounts due as of the date of this report. As a result, AMERRA can declare the Company in default and accelerate the Company's outstanding indebtedness under the default provisions of the AMERRA Agreement. In addition, at
December 31, 2012
, the Company was not in compliance with financial covenants required under the AMERRA Agreement. Generally, if an event of default under any of the Company's debt agreement occurs, then pursuant to cross default acceleration clauses,
substantially all of the Company's outstanding debt could become due. The Company is seeking and will continue to seek restructured loan terms from AMERRA. If the Company is not able to reach agreement with AMERRA as to restructured loan terms, or if it is unable to comply with the restructured loan terms, this could lead to a declaration of default and an acceleration of the outstanding debt under the Company's debt agreements. The Company's failure to satisfy its covenants under its debt agreements, and any consequent acceleration and cross-acceleration of its outstanding indebtedness, would have a material adverse effect on its business operations, financial condition and liquidity and would raise substantial doubt about its ability to continue as a going concern. In addition, an event of default would also trigger an adjustment to the Company's derivative warrant liability. See Item 1A – "Risk Factors" included elsewhere in this Quarterly Report on Form 10-Q for additional discussion.
The notes are secured by (1) substantially all of the Umami's assets, including the shares it holds in Baja and Oceanic and (2) pledges of the common stock of Marpesca made by Baja. Moreover, each of Atlantis, Aurora Investments ehf ("Aurora"), Oceanic and Mr. Steindorsson have guaranteed prompt and complete performance of Umami's obligations under the AMERRA Agreement and related contracts. See further discussion regarding Atlantis' guarantees of the Company's debt at Note 12 – "Related Parties" to our unaudited consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
In August 2011, the Company also issued five-year warrants to the Lending Parties to purchase
500,000
shares of its common stock at an initial exercise price of
$1.50
. In connection with the AMERRA Agreement, the Company granted the Lending Parties demand and piggyback registration rights and agreed to indemnify them and AMERRA against certain expenses related to the transaction and controversies arising thereunder or in connection with their registration rights, should they occur. The warrants are subject to anti-dilution protection should their then-applicable exercise price be greater than the price or exercise price of certain subsequently issued common stock or securities (including additional warrants), among other circumstances. The Company accounted for these warrants as a liability at
December 31, 2012
.
The Company and its subsidiaries are subject to a number of restrictions under the AMERRA Agreement that affect their ability to incur indebtedness, transfer assets, issue dividends and make investments, among other activities. For instance, subject to certain exceptions, the Company and its subsidiaries: (1) may not incur or permit to exist any indebtedness, unless the indebtedness: (a) is pre-existing or is a like-amount renewal of pre-existing debt, (b) is used to finance the acquisition and maintenance of capital assets and does not exceed
$0.5
million, (c) is related to trade letters of credit, (d) is certain subordinated debt, (e) is incurred to harvest or increase our biomass, (f) is assumed pursuant to a permitted acquisition, (g) is secured and does not exceed
$5.0 million
outstanding at any time, or (h) qualifies under another limited exemption; (2) may not create, incur or permit any lien on our existing or subsequently acquired property, or assign or sell any rights (including accounts receivable) in respect of any property; (3) may not, without prior approval from certain of the Lending Parties, undergo a fundamental corporate change or dispose of substantially all of the Company's or any of its subsidiaries' assets or the stock in its subsidiaries; (4) may not engage in any business other than the type conducted when the Company entered into the agreement or a business reasonably related to that type; (5) may not hold or acquire any securities (including pursuant to a merger) of, make any loan to or guarantee for, or permit to exist an interest in any assets of, another person or entity, or acquire the assets of another person or entity constituting a business unit, except in the case of (a) short-term U.S. Treasuries, certain highly-rated commercial paper or money market funds, and certain other similar securities, (b) an investment in the capital stock of an existing subsidiary, (c) mergers or other combinations in which the Company or its subsidiary is the survivor and the acquired company operates in a complementary line of business, subject to the approval of AMERRA or (d) other investments or transactions otherwise permitted under the agreement; (6) may not make certain restricted payments, including, in the case of the Company but not its subsidiaries, cash or other non-stock dividends; (7) may not sell to, purchase from, or otherwise engage in any transactions with any affiliates not in the ordinary course and on arm's-length terms, unless the transaction only involves the Company and its subsidiaries or is otherwise permitted under the agreement; (8) may not enter or permit to exist any arrangement that restricts (a) the Company and its subsidiaries' ability to create liens against property or assets or (b) the Company's subsidiaries' ability to pay dividends, repay loans to, or guarantee the indebtedness of, the Company or other of its subsidiaries, subject to certain exceptions. The Company is also subject to certain financial ratio requirements and both Umami and Baja must maintain minimum amounts of working capital.
See Note 12 – "Related Parties" to our unaudited consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for the borrowings from related parties.
Deferred financing costs of
$0.2 million
and
$0.5 million
were incurred in the
six months ended December 31, 2012 and 2011
, respectively. Deferred financing costs of
$0.6 million
and
$0.7 million
were amortized in the
six months ended December 31, 2012 and 2011
, respectively.
10. Variable Interest Entities
Under ASC 810, a VIE is an entity that either (i) has insufficient equity to permit the entity to finance its activities without additional subordinated financial support or (ii) has equity investors who lack the characteristics of a controlling financial interest. A VIE is consolidated by its primary beneficiary. The primary beneficiary of a VIE has both the power to direct the activities that most significantly impact the entity's economic performance and the obligation to absorb losses or the right to receive benefits from the entity that could potentially be significant to the VIE.
Based upon the criteria set forth in ASC 810, the Company has determined that it is the primary beneficiary in
two
VIEs, Lubin and Marpesca, as the Company absorbs significant economics of the entities and has the power to direct the activities that are considered most significant to the entities. As such, the VIEs have been consolidated within the Company’s consolidated financial statements. The Company was also the primary beneficiary in an additional VIE, KTT, prior to May 23, 2012 as discussed below.
MB Lubin d.o.o.
Under Croatian law, a foreign-owned company may engage in fishing in Croatian waters only if such right of the respective foreign-owned company derives from Croatia's obligations set forth in the International Treaties, such as by use of a VIE like Lubin. The Company's farming operation in Croatia needs access to Bluefin Tuna to stock the farm and various bait fish to feed the biomass at the farm. Lubin is a Croatian-based marine company that is owned by one of the members of the Company's Croatian management team. Lubin owns various boats and has the right to fish for Bluefin Tuna and various bait fish, including pilchard, mackerel, horse mackerel and anchovy. In July 2009, the Company entered into twenty-year agreements whereby Lubin is required to provide services exclusively to Kali Tuna related to fish farming, live Atlantic Bluefin Tuna catching and catching of bait fish. Kali Tuna may also purchase feed and Bluefin Tuna from other suppliers.
Pursuant to the Small Pelagic Fish Supply Contract, the Business Cooperation Agreement, the Live Tuna Supply Contract and the Maritime/Fishery Services Contract, each dated July 1, 2009 and entered into between Kali Tuna and Lubin, Lubin is required to deliver to Kali Tuna any Northern Bluefin Tuna, pilchard, mackerel, horse mackerel and anchovy it catches and to provide other maritime/fishery services to Kali Tuna for a period of
twenty years
. The prices Kali Tuna pays under these contracts are to be set by separate agreement for the applicable fishing season or period of service, but must match market prices and payment terms. Pursuant to the Maritime/Fishery Services Contract, Kali Tuna may also agree to reimburse Lubin's costs related to crew, fuel, food, port fees and taxes. Additionally, Lubin has agreed to let Kali Tuna use its vessels for its operations as collateral for any of its credit liabilities and, in return, Kali Tuna has agreed to help Lubin refinance its debt liabilities by taking over certain of Lubin's outstanding debts. Kali Tuna has also agreed to directly finance Lubin, and to provide guarantees and other support in connection with third-party financing, for the short and long-term financing of Lubin's assets and equipment. During the twenty-year term of these agreements, Lubin may not transfer any tangible property or right without Kali Tuna's consent.
On June 6, 2012, Kali Tuna entered into an agreement with Dino Vidov, Lubin's owner and Kali Tuna's General Manager, whereby Kali Tuna agreed to purchase all of the shares of Lubin on the date of entry of the Republic of Croatia in to the European Union or July 31, 2013, whichever occurs earlier. Upon execution of the agreement, Kali Tuna transferred HRK
900,000
to Mr. Vidov as an earnest payment towards the acquisition of
100%
of his shares in Lubin, which was accounted for as a reduction to the Company's non-controlling interest in Lubin at
June 30, 2012
.
Kali Tuna Trgovina d.o.o.
Prior to October 31, 2010, Kali Tuna operated the BTH Joint Venture. Under the terms of the BTH Joint Venture, Bluefin Tuna was acquired, farmed and sold at our Croatian site. Initially, the BTH Joint Venture was operated through a separate entity, KTT, a Croatian-based company owned
50%
by Kali Tuna and
50%
by BTH, an unrelated third party). In January 2008, all activities of the BTH Joint Venture were assumed by Kali Tuna. In October 2010, the BTH Joint Venture was terminated, at which time the BTH Joint Venture's remaining assets, consisting primarily of Bluefin Tuna biomass located at our Croatian farming sites, were purchased by Kali Tuna at the fair market value of
$1.6 million
. BTH had no operations or results subsequent to September 30, 2010. On May 23, 2012, the shares in KTT owned by BTH were transferred to Kali Tuna, whereby KTT became a wholly-owned subsidiary of Kali Tuna. Therefore, as of
June 30, 2012
, KTT was no longer considered a VIE and was accounted for as a wholly-owned subsidiary of Kali Tuna. KTT had a net loss of
$2,000
for the
six months ended December 31, 2011
. KTT had no results subsequent to March 31, 2012.
The Company has determined that Kali Tuna and its affiliates provided the majority of financial support to Lubin through various sources, including the purchase and sale of inventory, rental income and unsecured loans. In addition, as of
December 31, 2012
, Kali Tuna was a guarantor for repayment of Lubin's note payable to Erste & Steiermaerkische in the amount of EUR
0.6 million
(
$0.6 million
).
Financial support provided by Kali Tuna and its affiliates to Lubin as of and during the
three and six months ended December 31, 2012 and 2011
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lubin
|
|
Lubin
|
|
|
Three Months Ended December 31,
|
|
Six Months Ended December 31,
|
|
|
2012
|
|
2011
|
|
2012
|
|
2011
|
|
Rental income and sale of inventory
|
$
|
756
|
|
|
$
|
747
|
|
|
$
|
1,347
|
|
|
$
|
1,389
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012
|
|
June 30, 2012
|
|
|
|
|
|
Unsecured loans
|
$
|
10,282
|
|
|
$
|
7,792
|
|
|
|
|
|
Selected information from Lubin's balance sheet as of
December 31, 2012
and
June 30, 2012
, and the results of its operations for the
three and six months ended December 31, 2012 and 2011
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012
|
|
June 30, 2012
|
|
|
|
|
|
Total assets
|
$
|
12,946
|
|
|
$
|
5,307
|
|
|
|
|
|
|
Total liabilities
|
16,918
|
|
|
8,793
|
|
|
|
|
|
|
Stockholders' equity (deficit)
|
(3,972
|
)
|
|
(3,486
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31,
|
|
Six Months Ended December 31,
|
|
|
2012
|
|
2011
|
|
2012
|
|
2011
|
|
Net revenue
|
$
|
756
|
|
|
$
|
747
|
|
|
$
|
1,347
|
|
|
$
|
1,389
|
|
|
Net loss
|
(116
|
)
|
|
(185
|
)
|
|
(282
|
)
|
|
(498
|
)
|
Marpesca S.A. de C.V.
Under Mexican law, a majority foreign-owned company cannot own the right to fish in Mexican waters. Baja's farming operation needs access to various bait fish to feed the biomass at the farm. Marpesca is a Mexican-based fishing company that is owned
49%
by Baja and
51%
by Baja's General Manager, Victor Manuel Guardado France. Mr. Guardado is the Company's nominee for Mexican regulatory purposes, does not have decision-making authority and is not an executive officer or significant employee of Umami. Decision-making authority for Marpesca lies solely with Baja's management. Marpesca leases a fishing boat from Baja and has the right to fish for various bait fish. Baja provides financing for Marpesca and Marpesca does not have total equity investment at risk sufficient to permit it to finance its activities without the support of Baja. It also does not have the fixed assets that it requires to carry out these fishing activities without leasing them. Currently, these are leased from Baja. The Company has therefore determined that Marpesca is a variable interest entity and that Baja is the primary beneficiary.
The Company has determined that Baja has provided the majority of the financial support to Marpesca through various sources, including the purchase and sale of inventory. Selected information from Marpesca's balance sheet as of
December 31, 2012
and
June 30, 2012
, and the results of its operations for the
three and six months ended December 31, 2012 and 2011
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31,
|
|
Six Months Ended December 31,
|
|
|
2012
|
|
2011
|
|
2012
|
|
2011
|
|
Net revenue
|
$
|
293
|
|
|
$
|
420
|
|
|
$
|
469
|
|
|
$
|
1,055
|
|
|
Net income (loss)
|
(32
|
)
|
|
(184
|
)
|
|
(203
|
)
|
|
(190
|
)
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012
|
|
June 30, 2012
|
|
|
|
|
|
Total assets
|
$
|
643
|
|
|
$
|
529
|
|
|
|
|
|
|
Total liabilities
|
1,196
|
|
|
879
|
|
|
|
|
|
|
Stockholders’ deficit
|
(553
|
)
|
|
(350
|
)
|
|
|
|
|
A portion of the operating cost for the non-controlling interest of Lubin and Marpesca is inventoried by Kali Tuna and Baja, respectively, to reflect the actual operating costs of Lubin's and Marpesca's bait operations. The Company expects that the stockholders' deficit at Lubin and Marpesca will be absorbed by Umami shareholders in the future.
11. Equity Awards and Warrants
Stock Options
Stock options entitle the holder to purchase, at the end of a vesting period, a specified number of shares of the Company's common stock at a price per share set at the date of the grant. The Company does not currently have a formal stock option plan, other than the award agreements that evidence the individual equity grants that are not under a plan, including the options and restricted stock unit awards granted to our named executive officers and directors described below.
On June 30, 2010, stock options were granted to
one
employee to purchase a total of
300,000
shares of the Company's common stock at
$1.00
per share. Of these options,
50,000
vested immediately, an additional
50,000
shares vested on June 30, 2011, the first anniversary of the grant, and an additional
100,000
shares vested on June 30, 2012, the second anniversary of the grant. An additional
100,000
shares will vest on June 30, 2013, third anniversary date of the grant. The options have a
five
-year contractual term with
2.5 years
remaining at
December 31, 2012
.
On January 4, 2012, stock options were granted to
one
executive officer to purchase up to
875,000
shares of the Company’s common stock with an exercise price of
$1.60
per share, the last quoted price of the Company’s stock on January 4, 2012. Upon the closing of a single firm commitment underwritten public offering of shares of the Company’s common stock in which the gross proceeds to the Company are at least
$40.0 million
(a “Qualified Equity Offering”),
55%
of the options will vest. The remaining
45%
of the options will vest equally in
six
installments every
six months
, with the first installment vesting on July 4, 2012. In addition, in the event of a Qualified Equity Offering, the officer will receive an option to purchase a number of additional shares of the Company’s common stock such that immediately following the option grant, he will own, assuming full exercise of all option grants held by him, not less than
1.0%
of the Company’s fully-diluted capital stock. Furthermore, pursuant to a compensatory arrangement effective July 1, 2012, the option to purchase up to
875,000
shares of the Company's common stock will vest and become exercisable upon the occurrence of certain conditions precedent. The options have a
five
-year contractual term with
4.0 years
remaining at
December 31, 2012
.
Canceled Options
On June 30, 2010, stock options were granted to Oli Steindorsson, the Company's former Chief Executive Officer and former Chairman of the Company's Board of Directors, to purchase a total of
800,000
shares of the Company's common stock at
$1.00
per share. Of these options,
133,333
vested immediately, an additional
133,333
shares vested on June 30, 2011, the first anniversary of the grants, and an additional
266,667
shares vested on June 30, 2012, the second anniversary of the grants. Effective December 8, 2012, Oli Steindorsson resigned from all of his positions with the Company and from all of his positions with all of the Company’s subsidiaries, including Chairman of the Company’s Board of Directors and Chief Executive Officer of the Company. Subsequent to his resignation, the Company's Board of Directors determined that his resignation should be deemed a termination for cause, and therefore all of his vested and unvested options were canceled effective the date of his resignation. As such, the Company reversed
$65,000
of stock compensation expense related to his unvested options in the three months ended December 31, 2012. The options had a
five
-year contractual term with
2.6
years remaining at the date of cancellation.
On December 6, 2011, January 31, 2012 and March 1, 2012, stock options were granted to the Company's
three
independent directors to purchase a total of
600,000
shares (
200,000
shares each) of its common stock. The options had exercises prices
ranging from
$1.82
to
$2.29
per share. Of these options,
200,000
vested immediately, and an additional
200,000
shares would have vested on each of the second and third anniversary dates of the grants. The options had a
five
-year contractual term. Effective July 4, 2012, the Compensation Committee of the Board of Directors of the Company approved a compensatory arrangement with the Company's three independent directors, which included a total grant of
600,000
RSUs of the Company that will be payable, upon vesting, on a one-for-one basis in shares of the Company’s common stock. Under the compensatory arrangement, the directors' outstanding options to purchase a total of
600,000
shares each of the Company’s common stock, which were granted on December 6, 2011, January 31, 2012 and March 1, 2012, were canceled and replaced with these RSUs.
Valuation of Stock Options
The fair value of each option awarded was estimated on the grant date using a
Black-Scholes valuation model
and the following assumptions:
|
|
|
|
|
|
|
|
|
January 4, 2012 Grant
|
|
June 30, 2010 Grants
|
|
Exercise price
|
$1.60
|
|
$1.00
|
|
Fair value of common stock
|
$1.60
|
|
$0.96
|
|
Expected dividends
|
—
|
|
—
|
|
Expected volatility
|
46%
|
|
50%
|
|
Risk-free interest rate
|
0.40%
|
|
1.91%
|
|
Expected term (in years)
|
3.4
|
|
3.0
|
In the quarter ended December 31, 2011, the Company changed the method by which it determines the fair value of its common stock. In prior periods, the Company estimated the fair value of its common stock by reference to the estimated value of the common stock component of completed sales of units in the past year, along with estimates of the value of the Company based on forecasts and projections of income and cash flows using a discounted cash flow model, as trading volumes were low relative to the Company's size so the Company believed actual private transactions to be a better indicator of the fair value of its common stock. However, in the three months ended December 31, 2011, as there was a significant increase in the trading volume of the Company's common stock, and as the Company had not had any private transactions in the quarter by which to estimate value, the Company believed that the trading value of its common stock was a better indicator of the fair value of its common stock.
Stock option activity during the
six months ended December 31, 2012
follows:
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted Average Exercise Price
|
|
Weighted Average Remaining Contractual Term
|
|
Outstanding as of June 30, 2012
|
2,575,000
|
|
|
$1.45
|
|
3.9 years
|
|
Options granted
|
—
|
|
|
|
|
|
|
Options exercised
|
—
|
|
|
|
|
|
|
Options canceled
|
(1,400,000
|
)
|
|
$1.46
|
|
3.4 years
|
|
Options forfeited
|
—
|
|
|
|
|
|
|
Outstanding as of December 31, 2012
|
1,175,000
|
|
|
$1.45
|
|
2.3 years
|
|
Vested and exercisable as of December 31, 2012
|
265,625
|
|
|
$1.15
|
|
2.9 years
|
|
Non-vested and expected to vest as of December 31, 2012
|
909,375
|
|
|
$1.53
|
|
2.1 years
|
The intrinsic value of stock options is calculated as the amount by which the fair value of the Company's common stock exceeds the exercise price of the option. At
December 31, 2012
, the fair value of the Company's common stock exceeded the exercise price for all outstanding options. As such, the intrinsic value at
December 31, 2012
of the Company's options outstanding, vested and exercisable was
$0.2 million
, and the intrinsic value of options outstanding and expected to vest was
$0.6 million
. As of
December 31, 2012
, total unrecognized stock compensation expense related to stock options was
$0.2 million
, which is expected to be recognized over the remaining vesting period of
0.5 to 2.0 years
.
Restricted Stock Units
RSUs generally entitle the holder to receive, at the end of a vesting period, a specified number of shares of the Company's common stock. Stock-based compensation cost of RSUs is measured by the market value of the Company's common stock on the date of grant.
Effective July 1, 2012, the Compensation Committee of the Board of Directors of the Company approved a compensatory arrangement with one executive officer of the Company. The compensatory arrangement includes a grant of
500,000
RSUs that will be payable, upon vesting, on a one-for-one basis, in shares of the Company’s common stock. Under the compensatory arrangement, the executive officer's outstanding option to purchase up to
875,000
shares of the Company’s common stock, which was granted on January 4, 2012, as well as the officer's new award of RSUs, will vest (and the options will become exercisable) upon the occurrence of certain conditions precedent. The grant date fair value of these RSUs was
$0.7 million
, which will be recognized over the expected term of the units.
Effective July 4, 2012, the Compensation Committee of the Board of Directors of the Company approved a compensatory arrangement with the Company's three independent directors. The compensatory arrangement includes a total grant of
600,000
RSUs that will be payable, upon vesting, on a one-for-one basis in shares of the Company’s common stock. Under the compensatory arrangement, the directors' outstanding options to purchase a total of
600,000
shares each of the Company’s common stock, which were granted on December 6, 2011, January 31, 2012 and March 1, 2012, were canceled and replaced with these RSUs. The new award of RSUs will vest upon the occurrence of certain conditions precedent. The grant date fair value of these RSUs was
$0.8 million
, and the total incremental cost resulting from the modification was
$0.9 million
, which will be recognized over the expected term of the units. The compensatory arrangement also includes adoption of an amended cash compensation plan for the Company's independent directors effective July 4, 2012. Under the plan, each independent director will receive an annual cash retainer of
$40,000
per calendar year, plus
$1,000
per board of directors or board committee meeting attended, but not to exceed
$5,000
per calendar quarter in meeting fees. In addition, an independent director who serves as lead director or Chairman of the Audit Committee of the Board of Directors of the Company will receive an annual cash retainer of
$10,000
, and an independent director who serves as Chairman on the Compensation Committee of the Board of Directors of the Company will receive an annual cash retainer of
$5,000
. The plan is retroactive to the date of each independent directors' election to the Board of Directors.
The following table summarizes RSU activity for unvested awards for the
six months ended December 31, 2012
:
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted Average Grant Date Fair Value per Share
|
|
Unvested at June 30, 2012
|
—
|
|
|
|
|
Granted
|
1,100,000
|
|
|
$1.36
|
|
Vested
|
—
|
|
|
|
|
Canceled/forfeited/expired
|
—
|
|
|
|
|
Unvested at December 31, 2012
|
1,100,000
|
|
|
$1.36
|
As of
December 31, 2012
, there was
$0.9 million
of total unrecognized compensation cost related to non-vested RSUs, which the Company expects to recognize over a period of
0.75 to 1.5 years
. At
December 31, 2012
, the aggregate intrinsic value of the RSUs outstanding was
$0.6 million
.
There was no tax benefit related to the stock based compensation because no options or RSUs have been exercised to date. Stock-based compensation expense recognized as selling, general and administrative expenses in the Consolidated Statements of Operations was
$0.7 million
and
$0.1 million
for the
six months ended December 31, 2012 and 2011
, respectively. As of
December 31, 2012
, total unrecognized stock compensation expense related to stock options and non-vested RSUs was
$1.1 million
, which is expected to be recognized over the remaining vesting period of
0.5 to 2.0 years
.
Stock Warrants
As of
December 31, 2012
, the Company had issued warrants to purchase
11.1 million
shares of the Company's common stock to various parties in conjunction with debt offerings and private placements, as compensation for services, and in settlement of a dispute. The Company's warrants are accounted for as equity or liabilities based on specific features within the warrant agreements. Stock warrants that embody obligations of the issuer must be classified as liabilities. Examples of an obligation include put options that if exercised would require an entity to repurchase its equity shares by physical settlement or issuing another instrument, contracts that contain terms granting settlement in a variable number of shares, or contracts that require net
cash or net share settlement. All other stock warrants generally should be accounted for as equity instruments. As of
December 31, 2012
, warrants were outstanding as follows (warrants in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
Weighted Average Exercise Price
|
|
Weighted Average Remaining Contractual Term
|
|
Balance at June 30, 2012
|
11,113
|
|
|
$1.60
|
|
|
|
Exercised
|
(50
|
)
|
|
$1.80
|
|
|
|
Balance at December 31, 2012
|
11,063
|
|
|
$1.60
|
|
2.7 years
|
In the
six months ended December 31, 2012
, certain third-party warrant holders exercised warrants through cashless exercises. A portion of the warrants exercised were net settled in satisfaction of the exercise price. The exercises are summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants Exercised
|
|
Exercise Price
|
|
Net Shares to Warrant Holder
|
|
Warrants Net Settled for Exercise
|
|
Cash Proceeds from Exercise
|
|
30,000
|
|
|
$1.80
|
|
3,477
|
|
|
26,523
|
|
|
$
|
—
|
|
|
20,000
|
|
|
$1.80
|
|
20,000
|
|
|
—
|
|
|
$
|
36,000
|
|
Derivative Stock Warrant Liability
The Company accounts for its derivative stock warrants in accordance with the applicable FASB guidance as discussed in Note 3 to our unaudited consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. Under this guidance, derivative stock warrants are accounted for as fair value liabilities and are valued using Level 3 inputs, with changes in fair value included in net income (loss).
The fair value of the liability associated with the Company's derivative stock warrants increased to
$4.0 million
at
December 31, 2012
from
$1.7 million
at
June 30, 2012
, which resulted in a
$2.3 million
loss from the change in fair value of warrants for the
six months ended December 31, 2012
.
Approximately
4.1 million
warrants are currently accounted for as liabilities as of
December 31, 2012
due to specific features within the warrant agreements. The following table sets forth a summary of the change in our Level 3 derivative stock warrant liability for the
three months ended December 31, 2012
(in thousands):
|
|
|
|
|
|
|
|
Balance at June 30, 2012
|
$
|
1,739
|
|
|
Unrealized losses in fair value recognized in operating expenses
|
2,317
|
|
|
Reclassification of derivative warrant liability
|
(19
|
)
|
|
Balance at December 31, 2012
|
$
|
4,037
|
|
The Company's derivative stock warrants do not trade in an active securities market, and as such, the Company estimates the fair value of these warrants using a binomial pricing model using the following assumptions:
|
|
|
|
|
|
|
|
|
December 31, 2012
|
|
June 30, 2012
|
|
Exercise price
|
$1.00 - $3.00
|
|
$1.00 - $3.00
|
|
Fair value of common stock
|
$1.94
|
|
$1.38
|
|
Expected dividends
|
—
|
|
—
|
|
Expected volatility
|
27%
|
|
32%
|
|
Risk-free interest rate
|
0.72%
|
|
0.72%
|
|
Expected term (in years)
|
2.9
|
|
3.2
|
In the quarter ended December 31, 2011, the Company changed the method by which it determines the fair value of its common stock, as discussed above. Expected volatility is based primarily on historical volatility. Historical volatility was computed
using daily pricing observations for recent periods of comparable companies that correspond to the remaining term of the warrants. The Company uses daily pricing comparisons for comparable companies and not the trading value of its own common stock, as there are very few of its registered shares available to the market and there are very low volumes of its shares traded relative to the Company's size. The Company believes this method produces an estimate that is representative of its expectations of future volatility over the expected term of these warrants. The Company currently has no reason to believe future volatility over the expected remaining life of these warrants is likely to differ materially from historical volatility. The expected life is based on the contractual term and vesting period of the warrants using the simplified method. The risk-free interest rate is the interest rate for treasury constant maturity instruments published by the Federal Reserve Board that is closest to the expected term of the warrants.
12. Related Parties
Related parties are those parties which have influence over the Company, directly or indirectly, either through common ownership or other relationship. In 2005, Kali Tuna, a limited liability company organized under the laws of the Republic of Croatia, was acquired by Atlantis Group hf ("Atlantis"), an Icelandic holding company currently in bankruptcy. Atlantis was the Company's largest stockholder and an affiliate of the Company's former Chief Executive Officer. Atlantis or Atlantis Co., Ltd., ("Atlantis Japan"), a wholly-owned subsidiary of Atlantis, served as the Company's exclusive sales agent through the 2011-2012 harvest season (see further discussion at —"Sales Agency Agreement" below). In addition, for the
six months ended December 31, 2011
, Atlantis Japan and other Atlantis subsidiaries, purchased from the Company, for their own account and not as sales agents, approximately
$19.0 million
of Bluefin Tuna, representing
26.5%
of the Company's total sales for that period. There were
no
sales to Atlantis Japan in the
six months ended December 31, 2012
, however there were
$48,000
in sales to an Atlantis subsidiary in the
six months ended December 31, 2012
. The Company's sales contract with Atlantis Japan was terminated effective March 31, 2012. The Company has adopted policies that prohibit any future related party transactions with Atlantis or Atlantis Japan. In addition, subsequent to September 30, 2012 but prior to the Company filing its quarterly report on Form 10-Q as of and for the three months ended September 30, 2012 on November 14, 2012, the Company adopted policies that prohibit any future related party transactions with any Atlantis subsidiaries. Except for this sales relationship, Atlantis Japan did not provide any other function to the Company. The Company had also entered into financing transactions with Aurora, a former shareholder of the Company that is indirectly owned by the Company's former Chief Executive Officer, who is also a director of Aurora.
Effective December 8, 2012, Oli Steindorsson, the Company's Chief Executive Officer and Chairman of the Company's Board of Directors, resigned from all of his positions with the Company and from all of his positions with all of the Company’s subsidiaries.
In December 2012, Atlantis and its subsidiaries were declared in default under various credit and collateral agreements by various of their creditors, including Umami. As a result, by February 14, 2013, creditors, including Kali Tuna and Baja, foreclosed on all shares of the Company's common stock previously owned by Atlantis and Aurora. As a result of these foreclosures, Atlantis and Aurora are no longer shareholders of the Company, and Mr. Steindorsson is no longer a direct or beneficial owner of any shares in the Company. In addition, Daito Gyorui Co., Ltd, one the Company's major customers, became a significant shareholder of the Company at
December 31, 2012
. Atlantis is the holder of record of
258,948
warrants to acquire Umami common stock, and Aurora is the holder of record of
640,000
warrants to acquire Umami common stock. In January 2013, Atlantis Group filed for bankruptcy in Iceland and Mr. Steindorsson filed for personal bankruptcy in Iceland.
Financing Transactions
At
June 30, 2011
, the Company owed Atlantis and Aurora
$4.3 million
and
$5.3 million
in notes payable and accrued interest and fees, respectively. On July 7, 2011, the Company entered into a credit facility with Atlantis that provided for a line of credit of up to
$15.0 million
. This amount included funds utilized for the refinance of the
$4.0 million
of the notes payable due to Atlantis on June 30, 2011. New funds available under the credit line totaled
$10.7 million
(after deduction of fees and expenses). Principal amounts drawn under the credit line bore interest at the rate of
1.0%
per month based on the average amount outstanding payable monthly, and required payment of a
1.25%
fee related to the advances. During the
year ended June 30, 2012
, the Company borrowed an additional
$1.3 million
from Atlantis, repaid
$2.7 million
to Atlantis and Aurora and paid
$3.0 million
to others on Atlantis' behalf. Also, during the
year ended June 30, 2012
, the Company issued warrants to acquire
258,948
shares of its common stock at an exercise price of
$3.00
in connection with amounts borrowed from Atlantis. The notes and accrued interest totaling
$5.4 million
were due and payable March 31, 2012. In addition, the Company owed Atlantis Japan
$0.9 million
in commissions at March 31, 2012. However, on May 15, 2012, the Company reached an agreement with Atlantis whereby Atlantis and Umami agreed to offset all amounts due to Atlantis under the Atlantis Credit facility, including interest, and the amounts due to Atlantis Japan under the Sales Agency agreement effective as of March 31, 2012 (a total of
$6.3 million
) against amounts due to Kali Tuna and Baja for fish purchased by Atlantis Japan. Additionally, Atlantis and
Atlantis Japan agreed to pay the Company for all remaining amounts owed by Atlantis Japan under its purchase agreements with Kali Tuna (totaling HRK
99.7 million
or approximately $
17.1 million
USD on May 15, 2012) and Baja (totaling
$1.1 million
USD), totaling
$18.2 million
, representing the amounts that would have been received by Kali Tuna and Baja in their respective functional currencies had the accounts receivable been paid on their respective due dates. On June 27, 2012, the agreement was amended whereby Atlantis and Atlantis Japan agreed to pay Kali Tuna as the secured party for all remaining amounts owed by Atlantis Japan under its purchase agreements with Kali Tuna (totaling JPY
1.3 billion
or approximately
$16.4 million
USD on June 27, 2012).
To provide security for the total amount due to the Company, Atlantis had secured these obligations with
9.0 million
of its and its affiliated companies' shares in the Company. As Atlantis did not pay the net amount due by July 31, 2012, the Company had the right to liquidate enough of the
9.0 million
shares of collateral to settle the total amount due to Kali Tuna and Baja. On December 10, 2012, the Company exercised certain rights under the pledge agreements and registered the
9.0 million
pledged shares into the names of its subsidiaries, Kali Tuna d.o.o. and Baja Aqua Farms, S.A. de C.V. The Company does not believe that exercising its rights under the collateral agreements changes or relieves Atlantis' obligation to repay in full the amounts it is owed by Atlantis. The Company is using all means to recover the amounts due from Atlantis, including but not limited to claims in Atlantis' bankruptcy. As Atlantis is currently in bankruptcy, the Company does not expect that it will be able to collect the amounts due from Atlantis, and as a result, the Company believes it will only be able to recover the fair value of the
9.0 million
shares registered in the names of the Company's subsidiaries.
The Company hired a third party valuation firm to assist them in valuing the
9.0 million
pledged shares, On the date of the transfer of the shares, the fair value of the shares was determined to be
$14.8 million
(
$1.65
per share). As a result, bad debt expense of
$2.1 million
was recognized in the Company's statement of operations for the
three and six months ended December 31, 2012
, as the balance of the receivable due from Atlantis was
$16.9 million
on December 10, 2012. The amount due to the Company at December 10, 2012 of
$16.9 million
represented the amount due to Kali in Japanese Yen converted into USD at the prevailing exchange rate on December 10, 2012 and the amount due to Baja in USD. The shares were recorded as treasury stock on the Company's consolidated balance sheet and recorded at their deemed cost, which was determined to be their fair value on the settlement date.
During the
six months ended December 31, 2011
, the Company paid
$0.6 million
in interest to Atlantis and Aurora.
No
interest was due or paid to Atlantis or Aurora in the
six months ended December 31, 2012
.
Sales of Bluefin Tuna
In the
year ended June 30, 2012
, Atlantis Japan and other Atlantis subsidiaries purchased a total of
$29.4 million
of Bluefin Tuna from the Company's operations. Of the total amount purchased,
$16.9 million
remained outstanding and was past due at December 10, 2012. See further discussion regarding this receivable at "Financing Transactions" above. The Company had sales of
$48,000
to an Atlantis subsidiary in the
six months ended December 31, 2012
.
Sales Agency Agreement
In October 2011, the Company entered into a sales agency agreement with Atlantis Japan, giving Atlantis Japan exclusive rights to sell the Company's Bluefin Tuna in Japan. Under the agreement, the Company paid Atlantis Japan a
2.0%
sales commission for all sales it made on the Company's behalf to non-related parties up to
4.0 billion
Japanese Yen (approximately
$52 million
), and
1.0%
for all sales above that amount. Commissions under the agreement were payable quarterly. The agreement was retroactive to July 1, 2011 and was terminated effective March 31, 2012. Commission expense for the
six months ended December 31, 2011
was
$1.0 million
. There was
no
commission expense for the
six months ended December 31, 2012
.
Other
In
fiscal 2012
and prior, the Company reimbursed Atlantis for certain services provided to the Company, as well as out of pocket expenses paid on the Company's behalf. For the
six months ended December 31, 2011
,
$0.2 million
was billed for services and reimbursements.
No
services or reimbursements were billed to the Company by Atlantis in the
six months ended December 31, 2012
.
From time to time, Atlantis, Aurora and Oli Steindorsson, our former Chairman, President and Chief Executive Officer, have provided loan guarantees and other credit support through their banking relationships and Atlantis and Aurora had pledged their shares in the Company as collateral for certain financing transactions with private party lenders. Since fiscal 2008, Atlantis, Aurora and Mr. Steindorsson have provided guaranties in connection with the Company's debt facilities. While Atlantis, Aurora and Mr. Steindorsson continue to provide loan guarantees for certain of the Company's existing obligations, the
Company believes that such guarantees will not be renewed. A description of the credit agreements which include guaranties by these parties are as follows (monetary units in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowing Outstanding
|
|
Guarantor(s)
|
Lender
|
Borrowing Party
|
Facility
|
Interest Rate
|
December 31, 2012
|
|
June 30, 2012
|
|
Atlantis
|
Erste&Steiermaerkische bank d.d.
|
Kali Tuna
|
HRK 29,240
|
4.4% floating *
|
$
|
5,097
|
|
|
$
|
4,826
|
|
|
Atlantis
|
Erste&Steiermaerkische bank d.d.
|
Kali Tuna
|
HRK 30,000
|
4.4% floating *
|
5,229
|
|
|
4,952
|
|
|
Atlantis, Aurora, O. Steindorsson
|
Erste&Steiermaerkische bank d.d.
|
Kali Tuna
|
HRK 80,000
|
40% at HBOR 2.8% + 60% at 3%+floating T-Bill
|
13,946
|
|
|
13,205
|
|
|
Atlantis, Aurora, O. Steindorsson
|
Amerra Capital Management, LLC
|
Umami
|
USD 39,000
|
9%+1YR LIBOR + 11.75% 1YR LIBOR
|
39,000
|
|
|
13,315
|
|
*
Interest rate as of
December 31, 2012
or latest practicable date prior to repayments, if paid in full prior to
December 31, 2012
.
Related party amounts included in the Company's balance sheet and income statement are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet
|
|
December 31, 2012
|
|
June 30, 2012
|
|
|
|
|
|
Trade accounts receivable, related parties, net
|
|
$
|
—
|
|
|
$
|
17,261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31,
|
|
Six Months Ended December 31,
|
|
Income Statement
|
|
2012
|
|
2011
|
|
2012
|
|
2011
|
|
Sales to Atlantis and subsidiary - included in net revenue
|
|
$
|
34
|
|
|
$
|
18,787
|
|
|
$
|
48
|
|
|
$
|
18,987
|
|
|
Provision for doubtful accounts
|
|
(2,077
|
)
|
|
—
|
|
|
(2,077
|
)
|
|
—
|
|
|
Reimbursement of costs - included in selling, general and administrative expenses
|
|
—
|
|
|
—
|
|
|
—
|
|
|
157
|
|
|
Commission expense - included in selling, general and administrative expenses
|
|
—
|
|
|
734
|
|
|
—
|
|
|
1,044
|
|
|
Interest expense (including amortization of original issue discounts, deferred financing costs and warrants)
|
|
—
|
|
|
311
|
|
|
—
|
|
|
611
|
|
13. Income Taxes
The Company calculates its interim tax provision in accordance with the guidance for accounting for income taxes in interim periods. At the end of each interim period, the Company estimates the annual effective tax rate and applies that tax rate to its ordinary year-to-date pre-tax income. The tax expense or benefit related to significant, unusual or extraordinary discrete events during the interim period is recognized in the interim period in which those events occurred. In addition, the effect of changes in enacted tax laws or rates or tax status is recognized in the interim period in which the change occurs.
The Company recorded income tax expense of
$0.4 million
for the
six months ended December 31, 2012
, compared to
$6.5 million
for the
six months ended December 31, 2011
. The tax expense in the
six months ended December 31, 2012 and 2011
is primarily due to foreign operating profits generated in the period. The estimated annual effective tax rate for 2013 of
(5)%
differs from the statutory U.S. federal income tax rate of
34%
primarily due to foreign tax income rate differentials, the valuation allowance against the Company's domestic deferred tax assets and discrete tax effects for foreign currency losses.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities (including the impact of available carryback and carryforward periods), projected future taxable income, and tax-planning strategies in making this assessment. The Company has established a valuation allowance against certain deferred tax assets due to the uncertainty that such assets will be realized. The Company periodically evaluates the recoverability of the deferred tax assets. At such time as it is determined that it is more likely than not that deferred tax assets will be realizable, the valuation allowance will be reduced.
Unremitted earnings of Kali Tuna have been included in the consolidated financial statements without giving effect to the United States taxes that may be payable as it is not anticipated such earnings will be remitted to the United States. Such unremitted earnings are considered to be indefinitely reinvested and determination of the amount of taxes that might be paid on these undistributed earnings is not practicable. The Company periodically evaluates its investment strategies for Kali Tuna to determine whether its foreign earnings will be indefinitely reinvested offshore and, accordingly, whether U.S. income taxes should be provided when such earnings are recorded. These additional foreign earnings could be subject to additional tax if remitted, or deemed remitted, as a dividend. Baja earnings are considered to be repatriated to the United States and the Company, to fund the Company's current operations and debt obligations taken out primarily for the acquisition and operations of Baja. Therefore, income taxes are provided on the excess of the amount of financial reporting basis over tax basis of the investment in Baja through the
six months ended December 31, 2012
.
The Company's policy is to classify interest and penalties related to income tax matters as income tax expense. The Company had no accrual for interest or penalties related to uncertain tax positions at
December 31, 2012
or
December 31, 2011
, and did not recognize interest or penalties in the Statements of Operations during the
six months ended December 31, 2012 and 2011
.
The tax years 2009 to 2011 remain open to examination by federal and state taxing jurisdictions and the tax years 2005 to 2011 remain open to examination by foreign jurisdictions. However, the Company has net operating losses ("NOLs") beginning in fiscal 2005 which would cause the statute of limitations to remain open for the year in which the NOL was incurred.
14. Commitments and Contingencies
Legal
The Company is subject to various claims and legal actions in the ordinary course of business. As the Company becomes aware of such claims and legal actions, the Company provides accruals if the exposures are probable and estimable. If an adverse outcome of such claims and legal actions is reasonably possible, the Company assesses materiality and provides disclosure, as appropriate.
Croatian Customs Authorities
In February 2011, Croatian Customs Authorities ("CA") declared Kali Tuna, together with another Croatian tuna farming entity (the "seller"), jointly liable for a tax debt totaling about
$0.9 million
related to the purchase of live tuna and some bait that the seller sold to Kali Tuna. The tax debt consists of customs duties, value added tax and default interest which the CA allowed the seller not to pay based on the expected export of the live tuna. Since the seller instead sold the tuna locally to Kali, the duties, taxes and interest became payable immediately. Due to its insolvency and bankruptcy, the seller was only able to pay
$0.1 million
of the debt. Although Kali Tuna filed a complaint contesting the CA decree, it paid the
$0.8 million
in April 2011 in order to avoid possible enforcement. On August 8, 2012, the Croatian Ministry of Finance issued a final decree rejecting and terminating the Company's complaint contesting the CA decree. On October 12, 2012, the Company filed an appeal to annul the Ministry of Finance's decree. Management expects, based upon the facts and circumstances, that Kali Tuna’s appeal should ultimately prevail and the CA decree will be annulled and that any funds paid will be reimbursed.
15. Subsequent Events
None.