Item 1. BUSINESS
Company Overview
We raise sashimi grade Northern and Pacific Bluefin tuna for
the high end consumer with a focus on environmentally sound practices and the long term sustainability of the species.
Our growth strategy is based on consolidation within the sector to leverage scientific process and research knowledge through economies
of scale. Our objective is to create a self-sustaining farm environment where the tuna spawn and the resultant eggs
are hatched and grown to full size.
We catch and grow sashimi grade Bluefin tuna commercially in
aquaculture farms located in Croatia and Mexico. We own and operate Kali Tuna, an established Croatian-based aquaculture
operation, raising Northern Bluefin tuna in the Croatian part of the Adriatic Sea. We also own and operate Baja, an established
Mexican-based aquaculture operation, raising Pacific Bluefin tuna off the northwest coast of Baja California, Mexico.
We are in the process of creating a self-sustaining farm environment
where the tuna spawn and fertilized eggs are hatched and grown to full commercial size. Although we have achieved some
successes in the area of spawning and hatching, we believe that commercialization of this propagation program is still a number
of years away. Although, we do not believe that our success is reliant on the success of the propagation program, it
is expected to enhance our long-term prospects.
Corporate Background
We were incorporated as Lions Gate Lighting Corp. (“Lions
Gate”) in the state of Nevada on May 2, 2005. From August 31, 2007 until June 30, 2010, we were a shell company. On
June 30, 2010 we completed the reverse merger described below.
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 based holding company
with its key market in Japan that seeks to produce, market and distribute sustainable seafood, with a focus on aquaculture. Atlantis
is a major supplier of fresh and frozen premium sustainable fish and seafood in Australia and Europe and one of the largest importers
of Bluefin tuna into Japan. It is our majority shareholder (and an affiliate of our Chief Executive Officer) and has
been a major provider of capital to the Company. Atlantis, through its affiliates, also serves as our exclusive sales
agent. In addition, for the year ended June 30, 2011, Atlantis Japan, and other Atlantis Group subsidiaries, purchased
from us approximately $41.0 million worth of products, representing approximately 72% of our total sales for the year.
In March 2010, Atlantis created Bluefin, a wholly owned subsidiary
of Atlantis, for the purpose of holding the shares of Kali Tuna. On May 3, 2010, Lions Gate entered into a share exchange agreement among
Lions Gate, Kali Tuna, Bluefin and Atlantis, pursuant to which Lions Gate purchased from Atlantis all of the issued and outstanding
shares of Bluefin in consideration for the issuance to Atlantis of 30.0 million shares of Lions Gate common stock (the “Share
Exchange”) resulting in a change of control of Lions Gate. As a result, effective June 30, 2010, Kali Tuna became
our indirect wholly owned subsidiary. As of the date hereof, Atlantis continues to be our majority shareholder.
On August 20, 2010 we changed our name to Umami Sustainable
Seafood Inc. The stock symbol on the OTC Bulletin Board was changed to UMAM on the same date.
Acquisition of Baja Aqua Farms and Oceanic
On July 20, 2010, we entered into a Stock Purchase Agreement
with Corposa, S.A. de C.V. (“Corposa”), Holshyrna ehf, (“Holshyrna”), Marpesca, S.A. de C.V, (“Marpesca”),
Oceanic, Vilhelm Gudmundsson and Robert Gudfinnsson, providing for the sale from Corposa and Holshyrna of 33% of the equity of
Baja and its affiliate Oceanic. Under the terms of the transaction, we paid $8.0 million, which included $4.9 million that had
been advanced to Baja previously.
We also acquired the right to purchase all remaining Baja and
Oceanic shares in consideration for the payment of $10.0 million in cash and the issuance of 10.0 million shares of our common
stock, valued at $12.1 million. On November 30, 2010, we consummated the acquisition of Baja and Oceanic by paying cash in the
amount of $7.8 million and the issuance of promissory notes in the aggregate principal amount of $2.2 million. These notes were
paid in full on December 10, 2010. An additional $2.0 million had been paid in connection with the execution of certain amendments
to the agreements. As a result, Baja became our 99.98% owned subsidiary and Oceanic became our wholly owned subsidiary.
Following the completion of these acquisitions, our corporate
structure is as follows:
* Marpesca’s remaining
51% is owned by Baja’s General Manager, Victor Manuel Guardado France. Mr. Guardado is our 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, including specifically Mr. Sarmiento.
** The remaining 50% of Kali Tuna Trgovina is owned by Bluefin
Tuna Hellas A.E., an unrelated third party.
*** Thynnus d.o.o. is an inactive Croatian company.
Kali Tuna d.o.o
Kali Tuna was organized in 1996 under the laws of the Republic of Croatia by individuals who had gained considerable experience
in the area of tuna fishing, farming and trading in Southern Australia for approximately 30 years before moving their operations
to Croatia. Kali Tuna owns and operates facilities and equipment in Croatia where it farms Northern (or Atlantic) Bluefin tuna
for sale into the sushi and sashimi market. Most of its products are sold into Japanese trading houses for distribution
to the high end sushi and sashimi market in Japan.
Kali Tuna’s activities consist of: (a) tuna farming and
processing, (b) sales and exports of tuna products, and (c) storage and processing of fish feed for its tuna farming operations. Through
an affiliated entity, MB Lubin d.o.o. (“MB Lubin”), it also operates a fleet of seven fishing vessels that typically
catch Northern Bluefin tuna and small pelagic fish used for tuna feed in the Adriatic and transports the live tuna back to its
farming sites off the Croatian coast for further growing.
Prior to October 31, 2010, Kali Tuna operated a joint venture, owned 50% by Kali Tuna and 50% by Bluefin tuna Hellas A.E., an unrelated
third party. Under the terms of the joint venture, Bluefin tuna was acquired, farmed and sold at Kali Tuna’s site. Initially,
the joint venture was operated through a separate entity, Kali Tuna Trgovina d.o.o. In January 2008, all activities
of the joint venture were assumed by Kali Tuna. In October 2010, the joint venture was terminated, at which time the
joint venture’s remaining assets, consisting primarily of Bluefin tuna biomass located at Kali Tuna’s farming sites
were purchased by Kali Tuna at the fair market value of $1.6 million. We do not expect to enter into these types of
arrangements in the future.
Kali Tuna also owns Bepina Komerc d.o.o., an inactive Croatian
entity, that owns the right to use one of Kali Tuna’s concessions.
Baja Aqua Farms S.A. de C.V
Baja was organized in 1999 under the laws of the Republic of Mexico by individuals who were involved for many years in the tuna
feed industry in Southern Australia before commencing operations in Mexico. Baja owns and operates facilities and equipment in
Mexico where it farms Pacific Bluefin tuna for sale primarily into the Japanese sushi and sashimi market.
Baja’s activities consist of: (a) tuna farming and processing,
(b) sales and exports of tuna products, and (c) processing of fish feed for its tuna farming operations. Baja leases a fleet of
purse seiners and tow boats during the fishing season to catch the Pacific Bluefin tuna and transport them live back to its farming
sites located off the Baja California, Mexico coast for further growing. Through Marpesca, an affiliated entity, it operates a
fishing vessel that typically fishes for small pelagic fish used for tuna feed. Baja sells its fish through various Japanese importers
primarily into the Japanese sushi and sashimi market.
Prior and subsequent to our acquisition of Baja, its administrative
functions were performed by Oceanic Enterprises, Inc. (“Oceanic”). These functions included accounting, payroll, human
resources and related matters. While Oceanic does not have an ongoing sales function, in 2008 and 2009 it also sold Bluefin Tuna
on Baja’s behalf and was responsible for overseeing the processing and shipping of that Bluefin Tuna. In limited circumstances,
Oceanic also acquires and exports certain equipment from U.S. vendors to Baja in cases where the U.S. vendors require a U.S. entity
as a counterparty. It has no other functions or operations beyond providing these services to Baja and is not a significant subsidiary.
Oceanic, which was formed in California in 2000 under the name Agritrade USA, Inc., was an affiliate of Baja that we acquired concurrently
with the Baja acquisition. Oceanic holds no intellectual property, does not require any government approval to conduct its operations
as currently conducted, has not engaged in research and development activities or incurred any costs or experienced any effects
related to compliance with environmental laws. As of June 30, 2011, Oceanic had 8 employees, all of whom were full time employees.
Industry Overview
Aquaculture Industry
Aquaculture is the farming of aquatic organisms including fish, mollusks, crustaceans and aquatic plants. Farming implies some
form of intervention in the rearing process to enhance production, such as regular stocking, feeding, and protection from predators.
Farming also implies individual or corporate ownership of the stock being cultivated. Aquaculture production specifically refers
to output from aquaculture activities, which are designated for final harvest for consumption.
Aquaculture
is the world’s fastest growing segment in the food production system and has been for the past two decades. According to
a recent study by the Food and Agriculture Organization of the United Nations (the “FAO”),
1
world fisheries production reached a high of 143.6 million metric tons in 2006. The contribution of aquaculture to the world fisheries
production in 2006 was 51.7 million metric tons of fish, or 36% of world fisheries production, up from 3.6% in 1970. The FAO’s
worldwide fisheries data are typically five or more years old.
A study
covering the year in 2008, entitled “Blue Frontiers: Managing the Costs of Aquaculture,” and published in 2011 by
the WorldFish Center (“WFC”) in Penang, Malaysia, using data from FAO FishStat, shows the growth continuing unabated.
In 2009, world fisheries production was 145.1 million metric tons. According to WFC, worldwide aquaculture production grew at
an average annual rate of 8.4% from 1970 to 2008, which means that the growth in aquaculture has ‘significantly outpaced
growth in world population.’
2
Global
aquaculture accounted for 6% of the fish available for human consumption in 1970. In 2009, assuming that all fish grown
by global aquaculture is allocated to fish available for human consumption, global aquaculture accounted for 46.8% of the fish
available for human consumption according to the WFC.
3
The FAO report also describes that over half of the global aquaculture in 2008 was freshwater fin-fish. Based
on the FAO’s projections, it is estimated that in order to maintain the current level of per capita consumption, global
aquaculture production will need to reach in excess of 80 million metric tons of fish by 2050. WFC’s projections
are even more aggressive. WFC estimates world aquaculture production to rise to 75 million tons by 2020, and to 95
million tons by 2030.
According
to the FAO, per capita supply from aquaculture increased from 0.7 kg in 1970 to 7.8 kg in 2006, an average annual growth rate
of 6.9%.
4
It is set to overtake capture fisheries
as a source of food fish. From a production of less than 1 million metric tons per year in the early 1950s, production in 2008
was reported to be 52.5 million metric tons with a value of $98.4 billion, representing an annual growth rate of nearly 7%.
A good aquaculture site is made up of many factors, with the
key ones being location, weather, water temperature, currents and predator risk. As the availability of sites for aquaculture
is becoming increasingly limited due to licensing and environmental factors and the ability to develop non-agricultural land is
restricted, the competition to develop additional aquaculture production systems is intensifying. As the intensification for aquaculture
production systems increases, the demand for institutional support, services and skilled persons is anticipated to increase, along
with the demand for more knowledge-based aquaculture education and training as aquaculture becomes more important worldwide.
According
to the WFC, ‘aquaculture is among the fastest growing food production sectors in the world and this trend is set to continue’. Further,
WFC states that ‘this future growth must be met in ways that do not erode natural biodiversity or place unacceptable demands
on ecological services.”
5
Tuna Industry
Tuna
and tuna-like species are of great economic importance and represent a significant source of food. They include approximately
forty species occurring in the Atlantic, Indian and Pacific Oceans and in the Mediterranean Sea. According to the FAO, their global
production has increased from less than 0.6 million metric tons in 1950 to 6.5 million metric tons in 2009.
6
Seven principal market species made up 4.4 million tons of the whole in 2009, with Bluefin tuna totaling 58,944 metric tons, or
1.3% of the global production of tuna.
7
The
so-called principal market tuna species are the most economically important among the tuna and tuna-like species. They
are landed in numerous locations around the world, traded on a nearly global scale and also processed and consumed in many locations
worldwide. According to the FAO, in 2007, their catch was approximately four million tons, which represents about 65%
of the total catch of all tuna and tuna-like species. Most catches of the principal market tuna species are taken from the Pacific
(69.0% of the total catch of principal market tuna species in 2007), with the Indian Ocean contributing much more (21.7% in 2007)
than the Atlantic and the Mediterranean Sea (9.5% in 2007).
8
Approximate contributions of individual principal market tuna
species to the 2008 total catch is given below.
1
The report may be viewed at
http://www.fao.org/docrep/010/ai466e/ai466e10.htm.
2
The complete report is available at
http://www.conservation.org/Documents/BlueFrontiers_aquaculture_report.pdf.
(hereinafter “Blue Frontiers”)
3
This report is available at
http://www.fao.org/docrep/013/i1820e/i1820e01.pdf. See page 3 of that report.
4
This report may be found at
http://www.fao.org/fishery/topic/13540/en.
5
Blue Frontiers at page 2.
6
Source:
http://www.fao.org/figis/servlet/SQServlet?file=/usr/local/tomcat/FI/5.5.23/figis/webapps/figis/temp/hqp_3281.xml&outtype=html.
7
Source:
http://www.fao.org/figis/servlet/SQServlet?file=/usr/local/tomcat/FI/5.5.23/figis/webapps/figis/temp/hqp_3251.xml&outtype=html.
8
Ibid.
Principal market tunas
|
|
Albacore (ALB)
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4.7%
|
|
Atlantic bluefin tuna (BFT)
|
less than 1%
|
|
Bigeye tuna (BET)
|
9.6 %
|
|
Pacific bluefin tuna (PBF)
|
less than 1%
|
|
Southern bluefin tuna (SBF)
|
less than 1%
|
|
Skipjack tuna (SKJ)
|
57.5%
|
|
Yellowfin tuna (YFT)
|
27.1%
|
Source:
http://www.fao.org/fishery/statistics/tuna-catches/en
Bluefin Tuna Trade
The Bluefin trade includes three species of tuna: the Pacific
Bluefin, the Southern Bluefin and the Northern (Atlantic) Bluefin. The Northern (Atlantic) Bluefin Tuna (Thunnus thynnus)
is native to both the western and eastern Atlantic Ocean, the Mediterranean and the Black Sea. It can live up to 30
years and can reach weights of over 450 kilograms. The Pacific Bluefin Tuna (Thunnus orientalis) is native to both the western
and eastern Pacific Ocean. It can live up to 25 years and weigh up to 500 kilograms.
We concentrate on the Atlantic Bluefin tuna trade for our Croatian
operation, and on the Pacific Bluefin tuna trade for our Mexican operation.
The following graph shows global production (catching and farming
combined) for each species of Bluefin tuna in metric tons per year.
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
Southern Bluefin Tuna
|
|
|
17,439
|
|
|
|
16,225
|
|
|
|
13,159
|
|
|
|
15,515
|
|
|
|
13,979
|
|
Pacific Bluefin Tuna
|
|
|
30,943
|
|
|
|
23,174
|
|
|
|
20,942
|
|
|
|
25,308
|
|
|
|
21,761
|
|
Northern Bluefin Tuna
|
|
|
39,869
|
|
|
|
35,730
|
|
|
|
38,474
|
|
|
|
26,525
|
|
|
|
23,204
|
|
TOTALS
|
|
|
88,251
|
|
|
|
75,129
|
|
|
|
72,575
|
|
|
|
67,348
|
|
|
|
58,944
|
|
The graph and the table are based on data extracted from the
following source:
http://www.fao.org/figis/servlet/SQServlet?file=/usr/local/tomcat/FI/5.5.23/figis/webapps/figis/temp/hqp_3048.xml&outtype=htm
l.
Atlantic Bluefin Tuna
As concerns over depleting the natural stock of the Atlantic
Bluefin tuna have increased in recent years, international organizations have increased regulation relating to and imposed strict
quotas on Bluefin Tuna catches. The main international body that regulates fishing activities and trade in the Atlantic Bluefin
is the International Commission for the Conservation of Atlantic Tunas or ICCAT. It describes itself as an inter-governmental
fishery organization responsible for the conservation of tunas and tuna-like species in the Atlantic Ocean and its adjacent seas. Its
primary tool in its conservation efforts is its ability to impose quotas. The organization was established in 1966,
is headquartered in Madrid, Spain, and covers 30 species of tuna, including the Northern (Atlantic) Bluefin Tuna.
In the last five years great advancements have been made in
the conservation of the Atlantic Bluefin tuna. In November 2006, members of the ICCAT reached an agreement to reduce
the Bluefin tuna quota in the Mediterranean Sea from 32,000 metric tons in 2006 to 25,500 metric tons in 2007. In November
2007, the ICCAT set the annual quota for 2008 at 22,000 metric tons, reducing it to 18,500 tons in 2009. Various groups,
including environmental groups, have claimed that this quota was set at an unsustainable level.
In 2008, the ICCAT adopted measures, which included a 15-year
recovery plan for Bluefin tuna and included, among other things, a call for a 6-month off-season for specific types of boats, a
ban on the use of aircraft in spotting tuna, prohibiting the capture of tuna under 30 kg except in certain specific circumstances
and areas, and requiring extensive reporting of tuna catches. Furthermore, it only allows tuna to be offloaded at designated ports
and obliges countries to place observers on fishing boats to monitor their adherence to regulations.
In 2009, strict additional control measures were agreed upon
to accelerate the rebuilding of the stock to levels that will allow maximum catches at sustainable levels. These included:
|
·
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Reductions in fishing capacity.
|
|
·
|
A limit on the number of joint fishing operations that could be carried out.
|
|
·
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An observer program with 100% coverage of purse seine and farming activities.
|
|
·
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Reporting of catches close to real-time, allowing for a closer monitoring of the quota.
|
Pacific Bluefin Tuna
Management
of Pacific Bluefin tuna comes under various international organizations, such as the Western & Central Pacific Fisheries Commission
(WCPFC) in the central and western Pacific and the Inter-American Tropical Tuna Commission (IATTC) in the eastern Pacific, which
is based in La Jolla, California, and which was formed in 1949, making it the oldest regional fishery management organization
(RFMO). According to the latest IATTC Fishery Status Report No. 8, Tunas and Billfishes in the Eastern Pacific Ocean
in 2009, Bluefin tuna only made up 0.6% of total tuna catch (3,605 metric tons out of a total catch of 616,849 metric tons).
9
As a result, no quota or regulations are imposed on the Pacific Bluefin
tuna, although various governments have had preliminary discussions regarding measures to preserve Pacific Bluefin stock.
According
to the IATTC, most of the catches of bluefin in the Eastern Pacific Ocean are taken by purse seiners. Nearly all of the purse-seine
catches have been made west of Baja California and California, within about 100 nautical miles of the coast, between about 23°N
and 35°N. Ninety percent of the catch is estimated to have been between about 60 and 100 cm in length, representing mostly
fish 1 to 3 years of age. Aquaculture facilities for bluefin were established in Mexico in 1999, and some Mexican purse seiners
began to direct their effort toward bluefin during that year. During recent years, most of the catches have been transported to
holding pens, where the fish are held for fattening and later sale to sashimi markets. Lesser amounts of bluefin are caught by
recreational, gillnet, and longline gear. Bluefin have been caught during every month of the year, but most of the fish are caught
during May through October.
10
At its seventh regular session, the WCPFC adopted a conservation
measure for Pacific Bluefin tuna in their area, calling for a reduction in catch of juveniles (0-3 years of age) to below 2002-2004
levels. Since we don’t catch any of our Bluefin tuna from the central and western Pacific, we don’t
see any impact on our operations from this conservation measure. The WCPFC is based in Kolonia, Pohnpei, Federated States
of Micronesia, and is among the newest RFMOs, having come into effect in 2004.
Fish Supply
Japan has traditionally been one of the largest consumers of
tuna, especially Bluefin tuna, which is used as a premium ingredient for sushi and sashimi. We believe that as
a result of Atlantis’ and its affiliates’ solid ties in the Japanese fish market, which are built on strong personal
relationships, Umami’s products are regarded by the Japanese as highly reputable and high-end fish products, as evidenced
by our sales to repeat customers and their willingness to pay premium prices.
Kali Tuna
Kali Tuna procures live Bluefin tuna primarily through MB Lubin,
an entity, which, pursuant to a series of agreements, is controlled by Kali Tuna. MB Lubin owns and operates a
fleet of seven vessels that catch fish primarily off the coast of Croatia. Kali Tuna has also purchased live tuna
from other local and foreign-based farms and suppliers including fishing companies operating off the coast of Malta and Libya and
other Mediterranean locations. The tuna is deposited into special towing cages that are towed back to its farming sites
off the Croatian coast for transfer into permanent holding cages. Fishing takes place during the months of May and June
only as permitted by international regulations. Transport of the catch to Kali Tuna’s farms is a slow process
that can take many weeks to complete with speeds of the transport rarely exceeding one mile per hour to maximize the survival rates
of the live fish.
1
The complete report may be found at
http://www.iattc.org/PDFFiles2/FisheryStatusReports/FisheryStatusReport8ENG.pdf.
2
Ibid. at page 94.
MB Lubin sells its live fish to Kali Tuna under an exclusive
arrangement in a supply contract dated July 1, 2009. Under the terms of the agreement, MB Lubin has undertaken to sell
all its Bluefin tuna catches to Kali Tuna. Under the agreement, which has a term of 20 years, all deliveries of tuna
will be made at the market price prevailing at the time of delivery.
In addition, Kali Tuna has entered into an agreement with MB
Lubin that provides for the sale and delivery by MB Lubin of small fish that are used for feeding the tuna. Kali Tuna
may also purchase feed from other suppliers.
Since Kali Tuna operates on a long-term farming cycle, the Company
believes that none of its suppliers of live tuna or fish feed are critical to its business. However, if for any reason
Kali Tuna would be unable to procure fish from a particular supplier, this would likely lead to a temporary interruption in the
supply of fish, at least until Kali Tuna found another entity that could provide it these services.
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.
Baja
Baja procures live Bluefin tuna primarily through its own fishing
efforts. Baja leases fishing vessels (purse seiners) from reputable companies in Mexico. Baja catches fish primarily off the coast
of Baja California, Mexico. The tuna is deposited into special towing cages that are towed back to its two farming sites off the
Baja California coast for transfer into permanent holding cages. Fishing generally takes place during the months of
May through August. Transport of the catch to its farms is a slow process that can take many weeks to complete with
speeds of the transport rarely exceeding one mile per hour. This ensures that the Bluefin tuna will arrive in the best possible
condition. Mexican law requires majority ownership by Mexican nationals of any local fish catching operation. Accordingly,
Baja leases one of its vessels to an affiliate, Marpesca, which is 49% owned by Baja and 51% by Baja’s General Manager and,
accordingly, is controlled by common management.
Although the Company does not believe that any of Baja’s
suppliers of leased purse seiners are critical to its business, if for any reason Baja would be unable to procure vessels for lease
from a particular supplier, this would likely lead to a temporary interruption in the supply of fish at least until Baja found
another entity that could provide it these services or purchased its own purse seiners.
Sales and Customers
Sales
In 2005, Kali Tuna, a limited liability company organized under
the laws of the Republic of Croatia, was acquired by Atlantis Group hf, or Atlantis, an Icelandic holding company with its key
market in Japan that seeks to produce, market and distribute sustainable seafood, with a focus on aquaculture. Atlantis is our
largest stockholder and an affiliate of our Chief Executive Officer. Atlantis or Atlantis Co., Ltd., (“Atlantis Japan”),
a wholly-owned subsidiary of Atlantis, served as our exclusive sales agent through the 2011 harvest season. In addition, for the
year ended June 30, 2011, Atlantis Japan, and other Atlantis subsidiaries, purchased from us, for their own account and not as
sales agents, approximately $ 40.9 million worth of Bluefin Tuna, representing approximately 71.9% of our total sales for that
period. There were no sales to Atlantis Japan or other Atlantis subsidiaries in the year ended June 30, 2010. We have adopted policies
that prohibit future related-party transactions with Atlantis. Except for this sales relationship, Atlantis Japan did not provide
any other function to us.
On June 30, 2010, Umami entered into a sales agency agreement
with Atlantis pursuant to which Atlantis was granted the exclusive right to sell, on Kali Tuna’s behalf, all of its Bluefin
tuna products into the Japanese market. Following the acquisition of Baja, Umami agreed to extend the sales agency agreement
to most of Baja’s sales. Umami paid Atlantis an agency commission of 2% on all sales made under this agreement, resulting
in payments of $1.0 million for the year ended June 30, 2011. In June 2011, the agreement was terminated.
In October 2011, we entered into a sales agency agreement with
Atlantis Co., Ltd. (“Atlantis Japan”), giving Atlantis Japan exclusive rights to sell our Bluefin tuna in Japan.
We will pay Atlantis Japan 2% for all sales up to 4.0 billion Japanese Yen (approximately $52.0 million) and 1.0% for all sales
above that amount. Commissions under the agreement are payable quarterly. The agreement was effective retroactively
to July 1, 2011 and expires March 31, 2012. Atlantis Japan is a wholly owned subsidiary of Atlantis.
It is contemplated that pricing of products sold through Atlantis
Japan will be based on negotiation between Atlantis Japan and the customers based on criteria set by us. All sales are
subject to our review and approval.
Customers
For the year ended June 30, 2011, Atlantis Japan, Atlantis’s
wholly owned subsidiary, purchased from us approximately $40.6 million worth of products, representing approximately 71% of our
total sales for the year. An additional 27% was sold to large Japanese importers.
The following table shows our principal customers and the amount
purchased by each as a percentage of our total sales for the years ended June 30, 2011 and 2010.
|
|
Year Ended June 30
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
Atlantis Japan and other Atlantis Group Subsidiaries
|
|
|
71.9
|
%
|
|
|
—
|
|
Mitsubishi Corporation
|
|
|
10.8
|
%
|
|
|
—
|
|
Global Seafoods Co., LTD
|
|
|
9.3
|
%
|
|
|
—
|
|
Sirius Ocean Inc.
|
|
|
6.9
|
%
|
|
|
16.5
|
%
|
Daito Gyorui Co., Ltd
|
|
|
—
|
|
|
|
82.6
|
%
|
Frozen and Fresh Fish
Harvesting tuna from Kali Tuna occurs typically during the months
of November to March when low water temperatures optimize the quality of tuna meat. Over 98% of our production at Kali Tuna
is sold as frozen fish which typically will be picked up by the customer in its own specially equipped freezer vessels for transport
to Japan. When selling fresh fish to a customer, Kali Tuna ships the processed fish by overnight delivery to the requested
location. Kali Tuna does not intend to make significant sales of fresh fish during the current year.
Harvesting tuna from Baja occurs typically during the months
from September through March when low water temperatures optimize the quality of tuna meat. When selling fresh fish, Baja
will ship the processed fish by overnight delivery to the requested location.
Baja sells approximately 85% of its fish as frozen product. The
remaining 15% is sold fresh where the fish is harvested, cooled, packed in ice and then sent via air-freight to Japan. Baja
has sold frozen fish through both land-based (rented) containers and specially equipped freezer vessels. In the future we
expect most frozen product will be sold utilizing freezer vessels as the freezer vessels are currently more efficient from a processing
standpoint.
Raw Materials
Our raw materials consist primarily of bait, including sardines,
anchovies, mackerel, and other small fish used as fish feed. We strive to catch as much as possible of the bait ourselves. Kali
Tuna purchases most of the bait from third party vendors. Baja catches most of the bait itself with the balance being
purchased from third parties. Raw materials may be subject to price fluctuations, as further explained in the Risk Factor
beginning, “We may be adversely affected by fluctuations in raw material prices.”
Research and Development
Our subsidiary, Kali Tuna, conducts research and development
in two specific areas: closed lifecycle bluefin tuna farming, known as the Propagation Program, and optimizing feed efficiencies
by way of studying nutrition and feeding habits of fish.
Propagation Program
Through Kali Tuna, we have been conducting research and testing
in the area of naturally spawning Bluefin tuna in captivity with the objective of closing the life cycle on a commercial scale
utilizing existing and newly purchased low-cost infrastructure (i.e. farming Bluefin tuna that is born and raised in captivity). The
Propagation Program is intended to produce self-sustaining quantities of Bluefin tuna juveniles ready for farm grow-out pending
environmental factors and hatchery technologies.
The initial stage of the program involved the capture of young
Bluefin tuna and keeping them in Kali Tuna’s cages until they reach sexual maturity (typically aged over three and a half
years old), at which point they become known as “brood stock.” The spawned eggs from Kali Tuna’s specially
nominated brood stock were collected and hatched over consecutive years. Eventually, we expect the Bluefin tuna hatched
through this process to grow into sexually mature fish that will spawn to be come first generation fully closed life-cycle blue
fin tuna. The program will accelerate as soon as we finalize customization of a hatching facility.
To that end, during the first half of 2011, Kali Tuna purchased
a vessel for customization into the world’s first floating Bluefin tuna hatchery. Kali Tuna also contracted local
dry dock and engineering service companies to paint and refurbish the vessel to ready it for hatchery customization. The floating
hatchery facilitates the transport of the newly hatched fish to locales where the water temperatures are high enough for young
fish transferred into sea cages located in that environment to survive. The hatchery is designed with a capacity to
produce approximately 15,000 juveniles per hatching batch for ocean transfer. Multiple hatching runs may be possible should the
brood stock spawn over a sufficient period to continue juvenile production.
Total funds spent to date on the procured vessel and refurbishment
costs are approximately $0.4 million. Total project infrastructure cost, including hatchery equipment procurement and
engineering customization, is estimated between $2.3 million to $2.7 million with an annual operational cost of approximately
$0.3 million, excluding depreciation and financing costs. Hatchery customization work agreements are on hold until such
time as we allocate funding expected to be available from sales proceeds.
We believe that the Propagation Program represents an important
long-term research and development project that it is not expected to yield a commercially viable business opportunity during the
first five years of the hatchery’s operation.
Major challenges to a successful completion of this research
program include:
|
·
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the lack of high quality fertilized eggs during the spawning season;
|
|
·
|
naturally high rate of mortality among juvenile fish exposed to varying water temperatures;
|
|
·
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fatal collisions that occur when juvenile tuna fins are underdeveloped which prevents them from maneuvering and causes them to crash into tank walls and ocean nets; and
|
|
·
|
possible disease exposure among juveniles, although no diseases have been identified in any of our tuna farming locations.
|
In addition to closing the life cycle, increased spawning and
hatching of our own propagated brood stock may reduce the need for catching fish in the wild. It may eventually result
in a release of self-propagated live stock into the wild.
Fish Feeding Habits
Kali Tuna researches the feeding habits of the Bluefin tuna
for the purpose of determining the optimal way of feeding the fish at its sites. Improving the Food Conversion Ratio
or FCR, which represents the number of kilograms of feed needed to produce one kilogram of fish, facilitates achieving maximum
feeding efficiencies and cost savings.
During the fiscal year ended June 30, 2011 we spent approximately
$0.6 million on research and development projects. During the fiscal year ended June 30, 2010, our R&D expenditures
were negligible.
Our Principal Competitive Strengths
We believe that we have the following competitive strengths:
We have the most seasoned operations in our geographic areas
. Kali Tuna was the first commercial tuna farm in the Mediterranean and Adriatic areas. The farm was built
by people who had previously been leaders in the tuna farming business in Port Lincoln, Australia. All farm operations
were set up according to the high standards used in Australia. Most of the key crew members have been with Kali Tuna
from inception. Baja was also founded by people who had previously been providers of feed and buyers in the tuna farming
business in Australia. Many of the key crew members have been with Baja since its early years.
We have strong personal relationships within our target market
. Following the acquisition of Kali Tuna by Atlantis Group in 2005, and our acquisition of Baja in 2010, both Kali Tuna
and Baja were able to enhance their already considerable reputation in the Japanese fish market as a result of strong personal
relationships between Atlantis executives and Japanese market leaders. Japanese business is generally built on personal
trust, extensive knowledge regarding product quality assurance and a high level of expertise. Oli Steindorsson, our
Chairman, CEO and President and a director of Atlantis, is fluent in Japanese and has spent extended periods of time residing in
that country. This has allowed us to capitalize on his experience, together with the team at Atlantis’ Japanese
subsidiary, and further solidify our position as a trusted source of high quality fish products.
We have a unique farming cycle
. Following
the catch of fish, they are transferred into cages where they are fed and nurtured for up to three and one-half years. As
a result, our output is less impacted by quota reductions and each wild caught fish (between 10-120 kilograms) can be leveraged
by a factor of up to 10 times given livestock gains over the period. Most of our competitors have shorter farming cycles
(up to six months) or they practice “catch and kill”.
Full traceability.
We also have full traceability on
each of the tuna caught and the tuna feed, which means that every batch of tuna and feed brought in may be tracked from the area
where it was caught, when it was caught, to the boat catching it and to any other intermediaries until its delivery to the farm
sites.
We operate in unique farming environments
. There
are no predators, such as sea otters, sea lions or sharks, in Adriatic waters that might attack the fish in captivity. In
the Pacific, where there are natural predators, we build the cages to keep the predators out. The waters where the farming
sites are located are pristine with few cases of red or blue tide caused by the damaging build-up of algae. There is
no industrial production nearby either area and there is exceptionally clean water in both places. With the islands surrounding
the farm sites, they are sheltered naturally against most storms. In addition, the salt and oxygen levels and the water
temperature offer a good combination of conditions for sustainable growth of our tuna.
We have an experienced and knowledgeable workforce and a
very low employee turnover at each of the operations.
Some of our employees have been working for us for more than
10 years. Kali Tuna employees have regularly been requested to assist in external operations worldwide as far as Australia
and Mexico. All of the management in Croatia is fluent in English while a number of our key marketing people have multilingual
skills that include Japanese. Most of the management in Mexico is fluent in English.
We have reached major breakthroughs in our research and development
efforts to close the full circle farming process.
If our success in spawning and hatching in captivity at Kali Tuna can be
commercially implemented, we will become less dependent on wild catches of tuna for both subsidiaries.
We possess valuable government farming input quotas, permits
and concessions at both locations.
Kali Tuna has farming concession permits for up to 4,800 metric tons of holding capacity
with an allowable input of 1,818 metric tons per annum granted by the government of Croatia. Baja has concessions in
Mexico from the government of Mexico which are not based upon a total mass of tuna at any point in time, but instead on limits
of the input of new fish. The concessions owned by Baja allow input of an additional 2,320 metric tons of new fish per
annum.
Our Growth Strategies
International concerns have been mainly focused on over-catching
and poaching of various tuna species, primarily concentrating on the Bluefin tuna’s stock situation in the Mediterranean
Sea.
In response, ICCAT has been taking measures to regulate the
catching of the Atlantic-Mediterranean territory covering the migration of Northern Bluefin tuna and looking at its “colleague
organization”, the Commission for the Conservation of Southern Bluefin tuna or CCSBT, and its measures taken to promote the
conservation of Southern Bluefin tuna in the southern hemisphere In addition, preliminary discussions are under way
between governments concerning further measures to preserve the stock of the Pacific Bluefin.
We endorse the efforts of these organizations and believe that
it is critical to create world-wide industry leadership that will regulate the fishing for all species. Otherwise, short-term
profit considerations could result in a failure to act and conserve and lead to extinction of, among others, the Bluefin tuna,
and thus the demise of our industry. We believe that we have an important role to play in the adoption of rules aimed
at ensuring the long-term survival of the Bluefin tuna, creating a sustainability model that can be applied to other fish species
as well. We further believe that we can be active in this area while generating profits for our shareholders, as reducing
the supply of bluefin tuna will increase its price.
We believe that the following will be some of the critical elements
in fulfilling our strategy to become the world leader in the Bluefin tuna trade:
|
·
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Build up enough livestock to create carry-over inventories.
Our objective has been to lengthen the farming cycle. This is expected to result in the greatest weight growth and an increase in the price paid per kilogram of fish by our buyers (the bigger the fish, the better the price per kilogram). In addition, it will mitigate the effects of short-term fluctuations in catching due to weather or other abnormal situations that may occur. Kali Tuna’s live stock inventories biomass increased from 1,315 metric tons at June 30, 2009 to 1,880 metric tons at June 30, 2011. Baja’s live stock inventories totaled 1,530 metric tons at June 30, 2011.
|
|
·
|
Strategic investments.
We may seek to acquire stakes in tuna farming and fisheries with farming and/or fishing licenses in selected areas in countries with successful Bluefin Tuna farming history that will complement our existing operations. We have previously identified a number of potential targets but we have not yet entered into negotiations with any of them. We had preliminary discussions with certain potential acquisition targets, but those discussions have ceased. No acquisitions are probable for the foreseeable future. Any future acquisition will be subject to available financing, which could include cash on hand, the issuance of additional debt or equity, or alternative financing plans, such as refinancing or restructuring our debt, selling assets, or reducing or delaying capital investments.
|
|
·
|
Cooperate closely with regulators.
Based on scientific advice, we intend to assist regulators in formulating regulatory proposals aimed at the conservation of the Bluefin tuna. We might also lobby for distribution of individual transferable quotas, or ITQs, and monitoring systems based on the experiences of leading countries in the seafood industry that have historically had to rely on sustainable usage of their fishery by strictly regulating and controlling the volume of catching.
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|
·
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Consolidating and upgrading of the fleet.
We intend to reduce the existing catching capacity to fewer and more efficient vessels as the quota system develops. One of the important factors in sustainable fisheries management is to avoid overcapacity of fleet, which is caused by underdevelopment in regulatory environments. We believe that a key part of sustainable resource management is to ensure that the harvesting of resources is done in the most efficient and economic way while at the same time, maximizing the value and quality of each fish. However, progress in this area is dependent on available financing.
|
|
·
|
Increase our research and development.
We intend to increase our efforts on closing the Northern Bluefin tuna cycle in cooperation with leading research institutes in this field as well as enhancing feeding techniques to continue our efforts to minimize the food conversion ratio (FCR) of tuna. We also intend to establish and fund a research center in Kali, Croatia to focus on these issues. However, progress in this area is dependent on available financing.
|
|
·
|
Upgrade and invest in feed procurement.
We intend to achieve greater
cost efficiency in feed procurement by focusing on our catching and logistic activities. We expect this to result in greater profitability, especially in light of our efforts to lengthen the farming cycle.
|
We expect that these factors will enhance sustainability and traceability of the final products that we are offering to the market.
These actions will also help prevent a collapse in the natural fish stocks and ensure food security for one of the most popular
sashimi grade products of the world.
We have historically leased vessels for our fishing operations
in Mexico for a ten-week period during the fishing season of May through August and have been required to select the lease period
well in advance of the fishing season. We believe we can significantly lower our overall feed costs by purchasing sardine-fishing
vessels for our Mexican operations. We estimate that each sardine-fishing vessel acquisition would require approximately $0.8 to
$1.4 million until the purchase is consummated and the vessel reaches its ultimate destination. At that point, we believe we would
be able to mortgage the vessels or set up sale-leaseback arrangements and recover most of our initial cash outlay. Our current
cash on hand and capital needs for the foreseeable future may not allow us to fund these acquisitions. Therefore, to fund these
acquisitions, we may pursue joint ventures or debt or equity financing. Such funding may not be available on commercially reasonable
terms or at all. Similarly, we may not be successful in mortgaging or entering into sale-leaseback arrangements with respect to
any vessels we acquire on commercially reasonable terms or at all.
Sustainable Farming
The concept of sustainable development has been popularized
by the 1987 World Commission on Environment and Development. It defined “sustainable development” as meeting
the needs of the present generation, without compromising the needs of future generations. The idea of sustainability
has caught up with aquaculture partly because of pressure from environmental groups. In 1998, the Holmenkollen Guidelines
for Sustainable Aquaculture were formulated. These guidelines recommended, among other things, that new technologies
and management procedures should be utilized so that the quality and quantity of aquaculture products is improved and the risk
of adverse effects on the environment and on the livelihood of other people, including future generations, is reduced. The
guidelines also recommended:
|
(1)
|
strict compliance with internationally agreed food safety, environmental safety and ethical criteria if genetically modified organisms or hormones are utilized in the production, as well as;
|
|
(2)
|
giving priority to the development of integrated fish farming and of sources for animal feed other than fish protein and fish lipid.
|
We fully endorse the idea of sustainable farming. Our
scientists have achieved some encouraging results in the area of breeding tuna in captivity. Nevertheless, we believe
that commercialization of this propagation program is still a number of years away. We are committed to continuing this
research project with the ultimate goal of commercializing the full circle farming process. We have consistently worked
closely with the local fisheries ministry in Croatia to formulate rules governing the industry and we are committed to working
closely with the local fisheries for both operations.
Competition
In general, the aquaculture industry is intensely competitive
and highly fragmented. We compete with various companies, many of which are producing products similar to ours. Some
of our competitors may be – in certain parts of their business - more established and may have significantly greater financial,
technical, marketing and other resources than we presently possess. Some of our competitors may have a larger customer
base. These competitors may be able to respond more quickly to new or changing opportunities and customer requirements,
and may be able to undertake more extensive promotional activities, offer more attractive terms to customers, and adopt more aggressive
pricing policies.
Our
competitors in the Adriatic and Mediterranean that produce Bluefin Tuna are Fuentes e Hijos (Spain), Aquadem (Turkey), Azzopardi
(Malta), Sagun (Turkey) and Balfego (Spain). According to a report issued by ICCAT, Kali Tuna has the largest output
in the area based on output licenses granted to individual companies.
11
As
of March 30, 2011, we held approximately 72% of all Bluefin Tuna production licenses issued in Croatia, or 5,030 metric tons out
of 6,980 issued in total. We are aware of competitors in the Mexican region that produce Bluefin Tuna, including Maricultura
del Norte (Mexico). Baja Aqua Farms occupies 60 cages out of less than a total of 100 cages in the area of its operation.
Through our senior management and our largest shareholder, Atlantis
Group, we maintain strong relationships with Japanese purchasers, which greatly enhances our ability to market and sell our products
into the world’s largest market and maintain and expand our competitive position. We produce a premium, sashimi
grade product “toro” tuna, which is a high fat content belly tuna commanding the highest prices at auctions in Tokyo. We
will continue building on our reputation and personal relationships to ensure strong demand for our products in Japan.
With respect to potential new competitors, although there are
no formal barriers to entry for engaging in similar aquaculture processing production and activities in Croatia and Mexico, we
believe that it is difficult and costly to start an operation comparable in size to ours. The principal barriers to
entry are the shortage of available sites for farms in the local Croatian waters and the reluctance of Mexican officials to grant
new permits and concessions for farming in Mexico so as to discourage additional Bluefin fishing. As a result, concessions
for such sites are difficult to obtain. In addition, our labor force is highly specialized and individuals with the
requisite expertise who could manage this type of business are in short supply. Finally, to build a consistent farming
cycle of two or three years, as we have already achieved, is highly capital intensive, time consuming and can only be done with
high expertise, experience and research.
Regulation
Environmental Laws
We are subject to international quotas and to various national,
provincial and local environmental protection laws and regulations, including certifications and inspections relating to the quality
control of our production. During each of the years ended June 30, 2010 and June 30, 2011, we spent approximately $0.2
million on environmental law compliance, consisting primarily of various ICCAT and veterinary inspection fees, environmental monitoring
fees and biological waste disposal costs.
Croatian Environmental Law and Compliance
Our Croatian operation is subject to laws and rules that regulate
the location, design and operation of its farming sites. Under Croatia’s Environment Protection Act of 2007, we
are required to apply for location permits which are issued by the respective authority for each farming location and in accordance
with local ordinances. Applications must be accompanied by an environmental impact assessment that will identify, describe
and evaluate in an appropriate manner the impact of the relevant project on the environment, by establishing the possible direct
and indirect effects of the project on the soil, water, sea, air, forest, climate, human beings, flora and fauna, landscape, material
assets, cultural heritage, taking into account their mutual interrelations. Concession contracts (discussed below) relating
to each site are entered into based on the relevant location permits.
We are also subject to ongoing environmental monitoring requirements
in Croatia, including testing the quality of the water and performing emission measurements for all our installations. We are required
to conduct monitoring of our impact on the environment from two to four times per year at all our Croatian sites, which monitoring
is conducted by an independent company. The monitoring includes sea water analyses performed by the Institute for Public Health
in Zadar pursuant to rules established by the respective location permits. We also voluntarily monitor sea water daily.
11
The report may be viewed at
http://iccat.org/en/ffbres.aspcajaFlag=checkbox&cajaFFBName=checkbox&cajaOwna=checkbox&cajaOwad=
checkbox&cajaReg=checkbox&cajaOpna=checkbox&cajaOpad=checkbox&selectOrder=1&selectOrder2=6&selectInterval=-1&Submit=Search
Each of our farming locations in Croatia is provided with a
location permit approved by the Croatian Ministry of Environmental Protection. We believe that we are in material compliance with
applicable Croatian environmental laws and regulations.
Mexican Environmental Law and Compliance
The Mexican General Act for Ecologic Balance and the Protection
of the Environment of 1988, or the “General Act”, was influenced by U.S. environmental laws such as the Environmental
Impact Act, the Clean Water Act, the Clean Air Act and the National Environmental Policy Act. The General Act provides
for specific criminal and administrative sanctions assessable upon a failure to comply with regulations regarding hazardous materials
and also serves as the main legal framework of the federal environmental agency in charge of issuing the technological standards
for federal, state and local authorities to determine environmental non-compliance.
The General Act for Sustainable Fishing and Aquaculture (Ley
de Pesca, 2007) and its Regulations (Reglamento de la Ley de Pesca) constitute the main legal framework governing the conservation,
preservation, exploitation and management of all aquatic flora and fauna in Mexico. There are also certain secondary statutes,
such as Official Mexican Standards, or “NOMs.” NOMs applicable to our business are mainly related to water waste and
sanitary rules applicable to our product.
The Ministry of Agriculture, Livestock, Rural Development, Fisheries
and Food, or “SAGARPA.” and the National Commission of Aquaculture and Fisheries, or “CONAPESCA,” are the
authorities in Mexico responsible for the management, coordination and development of policies regarding the sustainable use and
exploitation of fisheries and aquatic resources.
Our aquaculture activities are developed in federal water bodies
under a concession title issued by CONAPESCA. In accordance with the General Act, the protection of aquatic ecosystems and their
ecological balance must be taken into account when granting concession titles for aquaculture activities. In this same regard,
as described herein, the application for a concession title must be accompanied with an environmental impact assessment. Authorization
by the Ministry of Environment and Natural Resources, or “SEMARNAT,” is required if the intended activities may cause
ecological imbalances or otherwise may surpass the limits and conditions set forth in the applicable regulations that protect the
environment and the preservation and restoring of the ecosystems. To initiate our activities, an application was filed before
SEMARNAT. SEMARNAT resolved that our activities cause no imbalances
and are within the limits and conditions set forth in the applicable regulations that protect the environment and the preservation
and restoration of the ecosystems.
Under Mexican law, generators of waste are categorized in accordance
with the volume of waste they generate, as follows: (i) micro-generators (up to 400 kilograms per year); (ii) small-generators
(from 400 kilograms to 10 tons per year), and (iii) large-generators (more than 10 tons per year). Our activities produce a volume
of waste that categorizes us as micro-generators.
Our activities in Mexico produce hazardous and non-hazardous
waste. Hazardous waste includes industrial waste with corrosive, reactive, explosive, toxic, flammable or biological-infectious
characteristics. Although all residues may entail environmental obligations for generators, hazardous residues are subject to compliance
with the stringiest rules. In our case, our business generates waste oils. Therefore, among our obligations in respect of hazardous
waste are: (i) obtaining a registration before SEMARNAT of our management program for hazardous waste, and (ii) maintaining a record
for our disposals (through official forms). There is no obligation to report this information.
In respect of the non-hazardous waste generated by our activities
(mainly animal organic waste), we are subject to the provisions of the Environmental Protection Act of Baja California, or the
“Environmental Provincial Act.” This statute provides for the management of special waste and the generators’
responsibility to handle, transport and dispose of solid waste, unless that waste is transferred to the competent authority or
to an authorized private company. Liability ceases upon deposit of the waste in authorized containers or at sites approved by the
competent authority. In addition, the Environmental Provincial Act establishes that generators of special waste must maintain a
Waste Management Program that specifies the form in which special waste is selected, gathered, transported and recycled after treatment
or their final disposal in controlled terms. All non-hazardous waste must be handled by authorized companies registered as non-hazardous
waste generators. It is mandatory to file annual reports to the relevant authority.
As mentioned above, we are also subject to the National Waters
Act and the General Act for Sustainable Fishing and Aquaculture in Mexico, which, among other things, governs the grant of concessions
for commercial fisheries. Concession holders have, among others, the following environmental obligations:
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assist in the preservation of the environment and the conservation
and reproduction of species, including repopulation programs;
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·
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comply with the NOMs and measures of aquatic health; and
|
|
·
|
maintain in good condition land-based establishments and permanent
or temporary cultivation equipment in water bodies.
|
We are also required to monitor our activities on all our farming
sites for ongoing compliance and we are subject to periodic inspections. Our environmental monitoring requirements in Mexico include
testing the quality of the water for harm caused by normal daily feeding activities (including the water’s oxygen level,
temperature and visibility), performing bi-weekly nutrient analysis of the water column, and performing sediment testing at each
site twice per year to measure any impact on the local marine environment.
We have obtained permits for each farming location in Mexico
and believe that we are in material compliance with applicable environmental laws and regulations.
Fishing Quotas
Internationally, ICCAT regulates Atlantic Bluefin Tuna quotas
that are allocated to and enforced by individual countries, including Croatia. ICCAT quotas for individual countries can vary each
year depending on the status of tuna stock worldwide. The Croatian Fishing Ministry allocates the ICCAT-mandated quota for Croatia
annually on a boat-by-boat basis. Each boat permitted to engage in fishing activities each year by the Croatian Fishing Ministry
is allocated a percentage of the total annual ICCAT fishing quota for that calendar year by the Croatian Fishing Ministry. For
calendar year 2011, ICCAT allocated a quota of 367 metric tons to Croatia, of which we secured 36%, or 133 metric tons.
Fishing quotas in Croatia can be transferred, leased, or assigned
to other boat operators. We regularly lease quota from other boat operators. The Croatian Fishing Ministry also limits the number
of boats that can fish for Bluefin Tuna in any given fishing season. In calendar year 2011, of the 39 boats allocated fishing quotas
by ICCAT, only twelve were permitted by the Croatian Fishing Ministry to engage in fishing activities. We had the right to receive
the fish caught by four of those boats. In 2013, the number of boats will be decreased to seven. The number of boats allowed in
subsequent years has not yet been determined.
ICCAT divides the boat allocations into three categories—boats
up to 24 meters, boats from 24 meters to 40 meters and boats over 40 meters. ICCAT determines which boats to allow to fish by reviewing
the fish quota allocations for all the boats over the past several years. The boats with the highest quotas (either quotas expressly
granted to the boat or assigned to the boat by another operator) are granted fishing permits.
If any boat violates a provision of the ICCAT regulations, its
fishing license is revoked and it is prohibited from any further fishing.
Farming Concessions
We operate our farming sites under concession permits granted
by the applicable national authorities of Croatia and Mexico.
In Croatia, we operated five farming sites with an aggregate
input quota of 1,818 metric tons of new Bluefin Tuna per annum as of June 30, 2011. Following is a detailed breakdown of our farming
sites and the terms of our concessions in Croatia as of June 30, 2011, which are based both on new fish allowed to enter farms
annually and total farm fish holding capacity:
Site
|
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Annual New Fish Input Quota (in metric tons) (1)
|
|
|
Maximum Farming Capacity (in metric tons)
|
|
|
Surface (in m2)
|
|
|
Expiration Date
|
|
Renewal
Process
|
Mrdjina
|
|
|
674
|
|
|
|
1,240
|
|
|
|
160,000
|
|
|
February 28, 2026
|
|
Restricted public bid
|
Fulija-Kudica
|
|
|
(2
|
)
|
|
|
500
|
|
|
|
120,000
|
|
|
December 23, 2018
|
|
Restricted public bid
|
Zverinac
|
|
|
314
|
|
|
|
1,500
|
|
|
|
140,000
|
|
|
December 14, 2026
|
|
Restricted public bid
|
Kluda
|
|
|
830
|
|
|
|
1,000
|
|
|
|
157,000
|
|
|
October 31, 2016
|
|
Restricted public bid
|
Ispred Morotove Glave
|
|
|
—
|
|
|
|
560
|
|
|
|
40,000
|
|
|
April 30, 2012
|
|
Restricted public bid
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
|
1,818
|
|
|
|
4,800
|
|
|
|
617,500
|
|
|
|
|
|
_________________________________________________
|
(1)
|
Each input quota is based on historical records of the
respective farm location. We believe the quotas can be re-allocated to other existing farms (to the extent it would not exceed
the farm’s maximum farming capacity) or to any new farming site, although any change to the terms of the permit (including
the farming quotas) are subject to approval.
|
|
(2)
|
Fulija’s annual new fish input quota is combined
with Mrdjina.
|
All concession permits are awarded until the indicated expiration
dates. Concession permits can be revoked due to a violation or breach of the respective concession permit, including
failure to pay the concession fees or misuse, such as using the farming sites in contravention of the purpose set out in the permit,
failing to comply with environment protection regulations and damaging the area surrounding farming sites. Prior to the revocation
of the respective permit due to the violation and breach of the permit terms, the competent state authority gives the permit holder
a chance to cure the non-compliance. Upon expiration, each of these concessions will be open for public bid if the competent local
authority determines it is appropriate to subject the concession to a public bidding process. Concession permits may be terminated
prior to the expiration of the term, even without any breach or violation, if the Croatian Parliament determines it is in the public
interest to terminate the concession permit. Upon such termination, the concession user is entitled to recover damages.
In Mexico, we operated four sites, which are allowed an aggregate
input of 2,320 additional metric tons of Bluefin Tuna per annum as of June 30, 2011. Following is a detailed breakdown of our farming
sites and the terms of our concessions in Mexico as of June 30, 2011:
Site
|
|
Farm (in metric tons)(1)
|
|
|
Maximum
Number of Cages
|
|
|
Expiration Date
|
|
Renewal Process
|
Isla Coronado
|
|
|
720
|
|
|
|
18
|
|
|
November 23, 2020
|
|
Auto-renewal by the Mexico
Department of Fisheries
|
Bahia Salsipuedes 1
|
|
|
400
|
|
|
|
10
|
|
|
May 2, 2012
|
|
Auto-renewal by the Mexico
Department of Fisheries
|
Isla de Cedros
|
|
|
800
|
|
|
|
20
|
|
|
October 10, 2014
|
|
Auto-renewal by the Mexico
Department of Fisheries
|
Bahia Salsipuedes
|
|
|
400
|
|
|
|
10
|
|
|
October 10, 2015
|
|
Auto-renewal by the Mexico
Department of Fisheries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
|
2,320
|
|
|
|
58
|
|
|
|
|
|
(1) Based on maximum input per annum.
All concession permits are awarded until the indicated expiration
dates, but can be suspended or revoked by the authorities citing the public interest. All four of these concessions may be extended
with CONAPESCA’s approval. For such purposes, an application requesting the extension of the concession period must be filed
with CONAPESCA at least 30 days in advance of expiration; where applicable, the environmental impact authorizations must be in
full force and effect. A concession title may be extended for an equivalent period, and the extension is subject to (i) assessment
of compliance with all the obligations established in the concession title; (ii) the opinion of the National Institute of Fishing,
or “INAPESCA”, and (iii) compliance with the Programs of Aquaculture Management. Like in Croatia, we monitor various
indicators of sea water quality in our Mexico operations daily or monthly, as applicable.
In addition, Croatian and Mexican governmental agencies require
commercial fishing vessels to be licensed. Individual operators of the vessels are also subject to permit requirements.
In Mexico, in connection with applicable regulations, these permits are issued by CONAPESCA. The permits require us to inform the
competent authorities of the volume and location of the catch and report all the activities in the vessel through a log book.
We believe that our Croatian and Mexican operations are currently
in compliance with all material aspects of these quota and licensing requirements.
Staff
As of June 30, 2011, we directly, through contract with an independent
labor contractor or indirectly, through one of our variable interest entities, employed 523 persons globally, including 28 part-time
employees. Of these, Umami employed 11 individuals, including executive and finance personnel. Kali Tuna had 97 employees (including
27 part-time employees), Oceanic had 8 employees, including executive, finance and administrative personnel and MB Lubin had 47
employees (including one part-time employee). Baja had 360 full-time staff most of whom were employed pursuant to an agreement
with Servicios Administrativos BAF, an independent labor contractor, including 19 administrative staff members, 200 farm workers,
121 fishermen and 20 employees active in other operations. Seasonal changes occur as a result of additional hires required during
the fishing season. None of our staff is represented by a labor union, and Kali Tuna, Oceanic and Baja consider their staff relations
to be excellent.
Reports to Securityholders
We file annual reports on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and proxy and information statements and amendments to reports filed or furnished
pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended. You may read and copy these materials
at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation
of the public reference room by calling the SEC at 1-800-SEC-0330. The SEC also maintains a website (http://www.sec.gov) that contains
reports, proxy and information statements and other information regarding us and other companies that file materials with the SEC
electronically.