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EX-32 - Umami Sustainable Seafood Inc. | v201914_ex32.htm |
EX-31 - Umami Sustainable Seafood Inc. | v201914_ex31.htm |
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
quarterly period ended September 30, 2010
OR
¨
|
TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
transition period from ______________ to ______________
Commission
File Number 000-52401
UMAMI
SUSTAINABLE SEAFOOD INC.
(Exact
name of registrant as specified in its charter)
Nevada
|
98-06360182
|
|
(State
or other jurisdiction of Incorporation or organization)
|
(I.R.S.
Employer Identification Number)
|
|
405
Lexington Avenue
26th
Floor, Suite 2640
New
York, New York
|
10174
|
|
(Address
of principal executive offices)
|
(Zip
Code)
|
|
Registrant's
telephone number, including area code:
|
212-907-6492
|
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer,” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check
One):
Large accelerated file ¨
|
Accelerated filer ¨
|
Non-accelerated filer ¨
|
Smaller reporting company x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes ¨
No x
The
number of shares outstanding of issuer's common stock, $0.001 par value as of
November 18, 2010 is 49,412,066
Page
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PART
I - Financial Information
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F-1
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Item
1: Financial Statements
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F-1
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2
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6
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8
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8
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8
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8
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8
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8
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8
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9
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i
Item
1. Financial Statements
UMAMI
SUSTAINABLE SEAFOOD INC.
CONSOLIDATED
BALANCE SHEETS
(in
thousands, except par value)
(Unaudited)
September 30,
2010
|
June 30,
2010
|
|||||||
ASSETS
|
||||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$ | 274 | $ | 215 | ||||
Accounts
receivable, escrow agent
|
- | 1,635 | ||||||
Accounts
receivable, trade
|
86 | 64 | ||||||
Accounts
receivable, shareholder and other related parties
|
9 | 681 | ||||||
Inventories
|
27,006 | 19,767 | ||||||
Other
current assets
|
903 | 781 | ||||||
Total
current assets
|
28,278 | 23,143 | ||||||
Property and
equipment, net
|
9,217 | 8,672 | ||||||
Investments
in and advances to unconsolidated affiliates
|
12,936 | - | ||||||
Other
assets
|
11 | 11 | ||||||
Total
assets
|
$ | 50,442 | $ | 31,826 | ||||
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||
Current
liabilities:
|
||||||||
Short-term
borrowings
|
$ | 13,664 | $ | 12,700 | ||||
Accounts
payable, trade
|
2,849 | 1,812 | ||||||
Accounts
payable to shareholder and other related parties
|
1,819 | 257 | ||||||
Accrued
liabilities
|
848 | 634 | ||||||
Income
taxes payable
|
88 | 157 | ||||||
Deferred
income taxes
|
149 | 135 | ||||||
Total
current liabilities
|
19,417 | 15,695 | ||||||
Long
term debt
|
2,119 | - | ||||||
Notes
payable to shareholder
|
11,589 | - | ||||||
Derivative
warrant liability
|
729 | 697 | ||||||
Obligations
under capital leases
|
27 | 28 | ||||||
Total
liabilities
|
33,881 | 16,420 | ||||||
Commitments
and contingencies (Note
13)
|
||||||||
Stockholders’
equity:
|
||||||||
Common
stock $0.001 par value, 100,000 shares
authorized
|
||||||||
46,745
and 45,261 shares issued and outstanding at September 30, 2010 and June
30, 2010, respectively
|
46 | 45 | ||||||
Additional
paid-in capital
|
7,634 | 6,308 | ||||||
Retained
earnings
|
6,028 | 7,514 | ||||||
Accumulated
other comprehensive income
|
3,500 | 2,401 | ||||||
Total
Umami stockholders’ equity
|
17,208 | 16,268 | ||||||
Noncontrolling
interests in VIE’s:
|
||||||||
Lubin
|
(1,981 | ) | (1,812 | ) | ||||
BTH
Joint Venture
|
1,334 | 950 | ||||||
Total
noncontrolling interests
|
(647 | ) | (862 | ) | ||||
Total
equity
|
16,561 | 15,406 | ||||||
Total
liabilities and stockholders’ equity
|
$ | 50,442 | $ | 31,826 |
The
accompanying notes are an integral part of these Consolidated Financial
Statements.
F-1
UMAMI
SUSTAINABLE SEAFOOD INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(in
thousands, except per share information)
(Unaudited)
Three Months Ended
|
||||||||
September 30,
2010
|
September 30,
2009
|
|||||||
Net
revenue
|
$ | - | $ | - | ||||
Cost
of goods sold
|
- | - | ||||||
Gross
profit
|
- | - | ||||||
Other
operating income
|
17 | 12 | ||||||
Selling,
general and administrative expenses
|
(1,308 | ) | (413 | ) | ||||
Research
and development expenses
|
(63 | ) | - | |||||
Operating
income (loss)
|
(1,354 | ) | (401 | ) | ||||
Gain
(loss) from foreign currency transactions
|
428 | (217 | ) | |||||
Gain
(loss) from revaluation of derivative warrant liablility
|
45 | - | ||||||
Loss from
investment in unconsolidated affiliates
|
(164 | ) | - | |||||
Interest income
|
1 | - | ||||||
Interest
expense
|
(485 | ) | (259 | ) | ||||
Loss
before provision for income taxes
|
(1,529 | ) | (877 | ) | ||||
Income
tax expense (benefit)
|
30 | (132 | ) | |||||
Net
loss
|
(1,559 | ) | (745 | ) | ||||
Add
net losses attributable to the non-controlling interests:
|
||||||||
Lubin
|
- | 194 | ||||||
BTH
Joint Venture
|
73 | 22 | ||||||
Net
loss attributable to Umami stockholders
|
$ | (1,486 | ) | $ | (529 | ) | ||
Basic
and diluted net loss per share attributable to Umami
stockholders
|
$ | (0.03 | ) | $ | (0.02 | ) | ||
Weighted-average
shares outstanding, basic and diluted
|
46,291 | 30,000 |
The
accompanying notes are an integral part of these Consolidated Financial
Statements.
F-2
UMAMI
SUSTAINABLE SEAFOOD INC.
CONSOLIDATED
STATEMENTS OF EQUITY
(in
thousands)
Common Stock
|
Additional
Paid-In
|
Retained
|
Accumulated
Currency
Translation
|
Total
Umami
Stockholders’
|
Non-Controlling
Interest in VIE
|
Total
|
||||||||||||||||||||||||||||||
Shares
|
Amount
|
Capital
|
Earnings
|
Adjustments
|
Equity
|
Lubin
|
BTH
|
Equity
|
||||||||||||||||||||||||||||
Equity
June 30, 2010
|
45,261 | 45 | 6,308 | 7,514 | 2,401 | 16,268 | (1,812 | ) | 950 | 15,406 | ||||||||||||||||||||||||||
Issuance
of common stock and warrants
|
1,484 | 1 | 1,363 | 1,364 | 1,364 | |||||||||||||||||||||||||||||||
Reclassification
of derivative warrant liability
|
(77 | ) | (77 | ) | (77 | ) | ||||||||||||||||||||||||||||||
Stock-based
compensation expense
|
40 | 40 | 40 | |||||||||||||||||||||||||||||||||
Contribution
to Joint Venture by partner
|
334 | 334 | ||||||||||||||||||||||||||||||||||
Comprehensive
income:
|
||||||||||||||||||||||||||||||||||||
Net
income (loss)
|
(1,486 | ) | (1,486 | ) | - | (73 | ) | (1,559 | ) | |||||||||||||||||||||||||||
Translation
adjustments
|
1,099 | 1,099 | (169 | ) | 123 | 1,053 | ||||||||||||||||||||||||||||||
Total
comprehensive income (loss)
|
(387 | ) | (169 | ) | 50 | (506 | ) | |||||||||||||||||||||||||||||
Equity
September 30, 2010
|
46,745 | $ | 46 | $ | 7,634 | $ | 6,028 | $ | 3,500 | $ | 17,208 | $ | (1,981 | ) | $ | 1,334 | $ | 16,561 |
Common
Stock
|
Additional
Paid-In
|
Retained
|
Accumulated
Currency
Translation
|
Total
Umami
Stockholders’
|
Non-Controlling
Interest
in VIE
|
Total
|
||||||||||||||||||||||||||||||
Shares
|
Amount
|
Capital
|
Earnings
|
Adjustments
|
Equity
|
Lubin
|
BTH
|
Equity
|
||||||||||||||||||||||||||||
Equity
June 30, 2009
|
30,000 | 30 | (26 | ) | 7,073 | 3,966 | 11,043 | (909 | ) | 1,374 | 11,508 | |||||||||||||||||||||||||
Comprehensive
income:
|
||||||||||||||||||||||||||||||||||||
Net
income (loss)
|
(529 | ) | (529 | ) | (194 | ) | (22 | ) | (745 | ) | ||||||||||||||||||||||||||
Translation
adjustments
|
418 | 418 | (40 | ) | 53 | 431 | ||||||||||||||||||||||||||||||
Total
comprehensive income (loss)
|
(111 | ) | (234 | ) | 31 | (314 | ) | |||||||||||||||||||||||||||||
Equity
September 30, 2009
|
30,000 | $ | 30 | $ | (26 | ) | $ | 6,544 | $ | 4,384 | $ | 10,932 | $ | (1,143 | ) | $ | 1,405 | $ | 11,194 |
The
accompanying notes are an integral part of these Consolidated Financial
Statements
F-3
UMAMI
SUSTAINABLE SEAFOOD INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(in
thousands)
(Unaudited)
Three Months Ended
|
||||||||
September 30,
2010
|
September 30,
2009
|
|||||||
Operating
activities
|
||||||||
Net
loss
|
$ | (1,559 | ) | $ | (745 | ) | ||
Adjustments
to reconcile to net cash used in operating activities:
|
||||||||
Depreciation
and amortization
|
328 | 269 | ||||||
Stock-based
compensation
|
40 | - | ||||||
Deferred
income tax
|
- | (128 | ) | |||||
Gain
on revaluation of derivative warrant liability
|
(45 | ) | - | |||||
Loss
from investment in unconsolidated affiliates
|
164 | - | ||||||
Interest
expense accrued and added to shareholder notes
payable
|
220 | - | ||||||
Expenses
paid by Atlantis and added to shareholder notes
payable
|
263 | - | ||||||
Changes
in assets and liabilities:
|
||||||||
Accounts
receivable, trade
|
(15 | ) | 120 | |||||
Inventories
|
(4,692 | ) | (5,189 | ) | ||||
Other
current assets
|
(45 | ) | 742 | |||||
Accounts
payable, trade
|
818 | (671 | ) | |||||
Income
taxes payable
|
(81 | ) | (34 | ) | ||||
Other
current liabilities
|
155 | (9 | ) | |||||
Net
cash used in operating activities
|
(4,449 | ) | (5,645 | ) | ||||
Investing
activities
|
||||||||
Investment
in and advances to unconsolidated affiliates
|
(5,100 | ) | - | |||||
Purchases
of fixed assets
|
(24 | ) | (586 | ) | ||||
Net
cash used in investing activities
|
(5,124 | ) | (586 | ) | ||||
Financing
activities
|
||||||||
Shareholder
loans
|
4,802 | 2,163 | ||||||
Repayments
of long-term liabilities
|
(4 | ) | (2 | ) | ||||
Borrowings
|
2,413 | 12,265 | ||||||
Repayments
of borrowings
|
(680 | ) | (9,853 | ) | ||||
Borrowings
from related parties
|
17 | 254 | ||||||
Proceeds
on the issuance of common stock and warrants
|
1,364 | - | ||||||
Funds released from escrow | 1,635 | - | ||||||
Net
cash provided by financing activities
|
9,547 | 4,827 | ||||||
Subtotal
|
(26 | ) | (1,404 | ) | ||||
Effects
of exchange rate changes on the balances of cash held in foreign
currencies
|
85 | 431 | ||||||
Cash
and cash equivalents at beginning of year
|
215 | 1,421 | ||||||
Cash
and cash equivalents at end of year
|
$ | 274 | $ | 448 | ||||
Supplemental
Cash Flow Information
|
||||||||
Cash
paid during the period for:
|
||||||||
Interest
|
211 | 186 | ||||||
Income
taxes
|
111 | 27 | ||||||
Non-cash
financing activities
|
||||||||
Advances
from shareholders for investment in and advances to unconsolidated
affiliates
|
8,000 | - | ||||||
Reclassification
of derivative warrant liability
|
77 | - | ||||||
Payment
by BTH to Atlantis Group, offset against shareholder
loan
|
334 | - |
The
accompanying notes are an integral part of these Consolidated Financial
Statements.
F-4
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.
|
Description
of business
|
Umami
Sustainable Seafood Inc. (Umami or Company) is one of the global leaders in the
Northern and Pacific Bluefin Tuna industry. Umami has two subsidiaries, Bluefin
Acquisition Group Inc. (Bluefin) and Kali Tuna d.o.o (Kali Tuna). In 2005, Kali
Tuna, a limited liability company organized under the laws of the Republic of
Croatia, was acquired by Atlantis Group hf (Atlantis). In March 2010, Atlantis
created Bluefin, a New York based holding company and wholly owned subsidiary of
Atlantis, for the purpose of holding the shares of Kali Tuna.
Kali Tuna
is incorporated as a limited liability company and operates in the Republic of
Croatia. The Company´s core business activity is farming and selling Bluefin
Tuna. The Company farms two different types of Bluefin Tuna: Mediterranean tuna
and Adriatic tuna. The production is seasonal as tuna is caught mostly during
May and June. Mediterranean tuna has an average farming period of six months and
Adriatic tuna requires a farming period between 1.5 years and 3 years. Most of
Kali Tuna’s sales transactions occur during the winter months, November through
February.
Lions
Gate Lighting Corp. (Lions Gate) was incorporated on May 2, 2005 in the state of
Nevada. Lions Gate was a shell company from August 31, 2007 until June 30,
2010, when the reverse merger described below occurred.
On May 3,
2010, a share exchange agreement was entered into among Lions Gate, Kali Tuna,
Bluefin and Atlantis, pursuant to which Lions Gate received from Atlantis on
June 30, 2010, all of the issued and outstanding shares of Bluefin in
consideration for the issuance to Atlantis of 30,000,000 shares of its common
stock resulting in a change of control of Lions Gate. As a result of this
transaction (Share Exchange), Kali Tuna became the indirect wholly owned
subsidiary of Lions Gate. Immediately prior to the Share Exchange, Lions Gate
divested its wholly-owned subsidiary, LG Lighting Corp., in consideration for
the satisfaction of debt owed to affiliated parties.
The
acquisition was accounted for as a recapitalization effected by a reverse
merger, wherein Bluefin and Kali Tuna were considered the acquirer for
accounting and financial reporting purposes. Because of Lions Gate’s
status as a shell company prior to the completion of the Share Exchange, Kali
Tuna is deemed to be the surviving entity for accounting purposes. All the
assets and liabilities of Kali Tuna were carried forward at historical cost and
no goodwill or intangible assets were recorded. The equity section of the
balance sheet and earnings per share of Kali Tuna were retroactively restated to
reflect the effect of the exchange ratio established in the merger
agreement.
As a
result of the Share Exchange, Lions Gate ceased to be a shell company as such
term is defined in Rule 12b-2 promulgated under the Securities Exchange Act of
1934, as amended. Further, Lions Gate’s fiscal year end has been changed
from February 28 to Kali Tuna’s fiscal year end, June 30.
Simultaneously
with completion of the Share Exchange on June 30, 2010, the Company completed a
private placement with a group of accredited investors and issued 7.3 million
units, with each unit consisting of one share of common stock and a five-year
warrant to purchase 0.2 shares of common stock at $2.00 per share. Each unit was
issued for $1.00, resulting in gross proceeds of $7.3 million. As
compensation for their services, the Company issued 0.5 million shares of stock
and 0.7 million additional whole-share three-year warrants to purchase
shares of its common stock at $2.00 per share to two firms who acted as
placement agents for the private placement. In addition, the Company
incurred cash costs of $0.3 million resulting in net proceeds of $7.0
million that have been recorded as common stock and additional paid-in
capital.
Upon the
completion of the Share Exchange, the Company issued one million three-year
warrants to purchase shares of its common stock at $1.00 to an investor in the
private placement, in order to replace an obligation to Atlantis as
described in Note 13.
In July,
2010, the Company issued 1.4 million units, with each unit consisting of one
share of common stock and a five-year warrant to purchase 0.2 shares of common
stock at $2.00 per share. Each unit was issued for $1.00, resulting in gross
proceeds of $1.4 million. As compensation for their services, the Company issued
0.1 million shares of stock and 0.1 million additional whole-share three-year
warrants to purchase shares of its common stock at $2.00 per share to two firms
who acted as placement agents for the private placement.
On August
20, 2010, Lions Gate changed its name to Umami Sustainable Seafood
Inc.
2.
|
Significant
accounting policies
|
Basis
of presentation
The
consolidated financial statements of Umami and its wholly-owned subsidiaries
have been prepared in accordance with accounting principles generally accepted
in the United States of America (US GAAP). All significant intercompany accounts
and transactions have been eliminated.
Kali
Tuna’s transactions and balances have been measured in Croatian Kunas (HRK), its
functional currency, and its financial statements have been translated into
United States dollars (USD), which is the reporting currency of the
Company.
All
amounts are stated in thousands of USD, unless indicated otherwise.
Transactions
in foreign currencies are initially recorded at the rates of exchange prevailing
on the dates of the transactions. Assets and liabilities are translated at the
rates prevailing on each balance sheet date. Revenue and expenses are translated
at average exchange rates in effect during the period. The results of
transaction gains and losses are reflected in the Statements of Operations.
Equity is translated at historical rates and the resulting translation
adjustments are reflected as accumulated other comprehensive
income.
In the
opinion of management, all adjustments considered necessary for a fair statement
of the results for the interim periods have been included. These adjustments are
of a normal recurring nature. However, the reported results for the interim
periods ended September 30, 2010 are not necessarily indicative of the results
that may be expected for the year ending June 30, 2011.
Accounting
estimates
The
preparation of financial statements in conformity with US 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 both the quantities and the fair value of tuna inventories. Actual
results may differ from those estimates.
Basis
of consolidation
Kali Tuna
has had relationships, through common control and various business transactions
(renting of ships, buying and farming of live tuna) with two companies, Kali
Tuna Trgovina d.o.o. (KTT) and MB Lubin d.o.o. (Lubin). Lubin is owned by Mr.
Dino Vidov, a manager for Kali Tuna; however, it is controlled by
Umami.
F-5
UMAMI
SUSTAINABLE SEAFOOD INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
Kali Tuna
owns a 50% interest in KTT. The remaining 50% interest in KTT is owned by
Bluefin Tuna Hellas S.A. (BTH). In accordance with its joint venture agreement
with BTH, Kali Tuna historically sold tuna inventory to KTT at its cost, and KTT
in turn sold the tuna to unrelated third parties. However, as a result of the
tax contingency matter described in Note 14, Kali Tuna and BTH modified their
joint venture agreement during the year ended June 30, 2009 so that the joint
venture activity was conducted entirely within Kali Tuna rather than through
KTT. As more fully described in Notes 11 and 13, BTH continued to provide
financing for the joint venture activities and participate in the profits
derived therefrom. The BTH share of profits or losses from the joint venture for
each period has been reflected as a noncontrolling interest in these
consolidated financial statements and described herein as “BTH Joint
Venture”.
The
fiscal year of KTT is from May 1 to April 30. Therefore, the difference in
fiscal year has no material effects on the results reported in the consolidated
financial statements.
The
Company has determined that KTT and Lubin are variable interest entities of
which Kali Tuna is the primary beneficiary. These companies are therefore
consolidated in Kali Tuna's 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
year. Diluted earnings per share is computed by dividing net
income attributable to Umami stockholders by the weighted average
number of common shares outstanding plus any shares that would be issued upon
exercise of outstanding options and warrants. However, for the three months
ended September 30, 2010 and 2009, outstanding options and warrants were
excluded from the calculation of weighted average shares because their inclusion
would have been anti-dilutive.
Risk
management
The
Company is exposed to financial risks arising from changes in tuna prices. The
Company does not anticipate that tuna prices will decline significantly in the
foreseeable future and, therefore, has not entered into derivative or other
contracts to manage the risk of a decline in tuna prices. The Company reviews
its outlook for tuna prices regularly in considering the need for active
financial risk management. The Company sells tuna in Japanese Yen so the Company
is exposed to fluctuations in the value of the Yen.
Revenue
recognition
Revenue
is recognized when tuna inventory is delivered and the Company has transferred
to the buyer the significant risks and rewards of ownership. Revenue is
presented net of value added taxes collected.
Fair
value of financial instruments
As
described below, the Company’s derivative warrant liability is recorded at
estimated fair value. The carrying values of the Company‘s other financial
instruments, including accounts receivable, borrowings and accounts payable are
believed to approximate their fair value. The Company does not hold any
financial instruments for trading purposes.
Leases
Leases
are classified as capital leases whenever the terms of the lease transfer
substantially all the risks and rewards of ownership to the lessee. All other
leases are classified as operating leases. Assets held under capital leases are
recognized as assets of the Company at their fair value at the inception of the
lease or, if lower, at the present value of the minimum lease payments. The
corresponding liabilities are included in the balance sheet as obligations under
capital leases.
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. The Company has identified no such impairment
losses as of September 30, 2010.
Income
taxes
Deferred
income taxes are provided under the liability method and reflect the net tax
effects of temporary differences between the tax bases of assets and liabilities
and their reported amounts in the consolidated financial statements, using the
enacted tax rates expected to be in effect when those differences reverse. The
Company establishes valuation allowances when the realization of specific
deferred tax assets is subject to uncertainty.
F-6
UMAMI
SUSTAINABLE SEAFOOD INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 50 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 profit
or loss.
Inventories
Inventories
consist primarily of live tuna stock that Kali Tuna farms until the tuna reaches
desirable market size. Management systematically monitors the size, growth and
growth rate of the tuna to estimate the quantity at each balance sheet date.
Live stock inventories are stated at the lower of cost or market value using the
average cost method. Inventories of fish feed and supplies are stated at the
lower of cost or market, using the average cost method.
Management
periodically reviews inventory balances and purchase commitments 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 adjusts its inventory balances through a charge to cost of goods
sold.
Trade
accounts receivable
Trade
accounts receivable represents the balance owed to the Company by its customers
in connection with sales transactions. An allowance for uncollectible accounts
is determined by management based on a review of the Company’s 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.
Cash
and cash equivalents
For
purposes of the statements of cash flows, 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.
Investments in
Unconsolidated Affiliates
The
Company accounts for its investments in unconsolidated affiliates by either the
equity or cost methods, generally depending upon ownership levels. The equity
method of accounting is used when the Company’s investment in voting stock gives
it the ability to exercise significant influence over operating and financial
policies of the investee and when the Company holds 20% or more of the voting
stock of the investee, but no more than 50%.
The
Company accounts for its 33% investments in Baja Aqua Farms, S.A. de C.V. and
Oceanic Enterprises, Inc. at September 30, 2010 using the equity method of
accounting. See note 7 for further discussion of the Company’s
investments.
Accounting
for Employee Stock Options
Stock-based
compensation cost is estimated at the grant date based on the fair value of the
award, and the cost is recognized as expense ratably over the vesting period.
Determining the fair value model to use requires judgment. Determining the
assumptions that enter into the model is highly subjective and also requires
judgment. The significant assumptions include long-term projections regarding
stock price volatility, expected term of the awards, interest rates and dividend
yields. The Company uses the Black-Scholes model for estimating the fair value
of stock options. Since the Company has no prior trading history, expected
volatility is estimated based on the historical volatility of similar companies
in the same industry as the Company. The expected term of awards granted is
estimated based on the minimum vesting period of the awards since there is no
historical exercise behavior. The risk-free interest rate is estimated based
upon rates for long-term U.S. Treasury securities. The Company does not
presently pay dividends.
Accounting
for Derivative Warrant Liabilities
As
described above, the Company’s reporting currency is the US dollar and its
functional currency is the Croatian Kuna, as virtually all current operations
are in Croatia. Capital raising efforts are conducted primarily in US dollars
and the Company has and will continue to issue warrants to purchase common
shares at prices denominated in US dollars.
The fact
that the exercise prices of the warrants are not denominated in the functional
currency requires that the warrants be considered derivatives and recorded at
their estimated fair value as liabilities. As of each reporting date, the
estimated fair value of the warrants that remain outstanding are re-assessed and
the recorded liabilities are adjusted. If the warrants increase in fair
value, the increase is shown as an expense in the income statement and if the
warrants decrease in fair value, a gain is recorded for such
decrease.
Future
increases in the share value of the Company’s common stock will increase the
value of the outstanding warrants. Accordingly, during periods when the
share price increases, expenses will be recorded related to the warrant
liabilities which may be larger than the operating income of the Company.
Conversely, during periods when the share price decreases, gains will be
recorded related to the warrant liabilities which may bear no relationship to
the operating income or loss of the Company. Such gains and losses will
not be tax-effected.
The
warrant liabilities will not require the use of cash in order to be
settled. The warrant liabilities will remain outstanding until i) the
warrants are exercised, ii) the warrants expire unexercised or iii) the
Company’s functional currency becomes the US dollar.
If the
warrants are exercised, cash will be received for the exercise price, net of any
applicable placement agent costs, and recorded as increases to common stock and
additional paid in capital will be recorded equivalent to the total of net
cash proceeds received and the value of the warrants immediately prior to
exercise. If the warrants expire unexercised or in the event the Company’s
functional currency becomes the US dollar, the Company will reclassify the
recorded liability to stockholders’ equity, after first adjusting its fair value
and recording a gain or loss on the income statement.
Recent
Accounting Pronouncements
In
January 2010, the FASB issued new accounting guidance that requires new
disclosures related to fair value measurements. The new guidance requires
expanded disclosures related to transfers between Level 1 and 2 activities
and a gross presentation for Level 3 activity. The new accounting guidance is
effective for fiscal years and interim periods beginning after December 15,
2009, except for the new disclosures related to Level 3 activities, which
are effective for fiscal years beginning after December 15, 2010 and for
interim periods within those years. The new guidance was effective in the third
quarter of fiscal year 2010 for Level 1 and Level 2 activities but disclosures
related to Level 3 activities, will not be effective until the first quarter of
fiscal year 2012.
As the
Company does not have any assets or liabilities that are categorized in Levels 1
and 2, the adoption of this guidance will have no impact on our financial
statements until the first quarter of fiscal year 2012.
Reclassifications
Certain
items in the June 30, 2010 balance sheet have been reclassified to conform with
the September 30, 2010 presentation, with no effects on previously reported
equity.
F-7
UMAMI
SUSTAINABLE SEAFOOD INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3.
|
Significant
concentrations
|
Due to
the seasonality of the business, there were no sales of tuna in the three months
ended September 30, 2010 and 2009. Sales of tuna to two customers in Japan
accounted for approximately 99.1% of the Company's net revenue for the year
ended June 30, 2010, with one customer accounting for 82.6% and the other for
16.5%. For the year ended June 30, 2009, sales to three customers in Japan
accounted for approximately 99.5% of the Company's net revenue.
4.
|
Inventories
|
Inventories
are comprised as follows as of September 30, 2010 and June 30,
2010:
September 30,
2010
|
June 30,
2010
|
|||||||
Live
stock inventories:
|
||||||||
Adriatic
tuna
|
||||||||
0-30
kg.
|
$ | 2,333 | $ | 7,132 | ||||
30-60
kg.
|
20,234 | 8,925 | ||||||
60+
kg.
|
864 | 720 | ||||||
Mediterranean
tuna + 60kg.
|
2,857 | 2,354 | ||||||
26,288 | 19,131 | |||||||
Fish
feed and supplies
|
718 | 636 | ||||||
Total
inventories
|
$ | 27,006 | $ | 19,767 |
Inventories
are stated at the lower of cost or net realizable value. 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. International regulations
prohibit the sale for consumption of tuna under 30 kg. The Company
evaluates the net realizable value of its inventories on a regular basis and
records a provision for loss to reduce the computed weighted average cost
if it exceeds the net realizable value.
The fair
value of live tuna stock inventories at September 30, 2010 and June 30, 2010 is
estimated at $35.8 million and $26.1 million, respectively. The fair value
of live tuna stock under 30 kg. that was caught in the 2010 fiscal year is
estimated to equal its cost. There were no fish caught in the three months ended
September 30, 2010 due to fishing quota restrictions. The fair value of
inventory that was caught in prior years is estimated based upon the market
prices that an unrelated third party would be willing to pay for the inventory,
less estimated selling costs.
5.
|
Other
current assets
|
The
Company’s other current assets as of September 30, 2010 and June 30, 2010 were
as follows:
September 30,
2010 |
June 30,
2010
|
|||||||
Refundable
value added tax
|
$ | 272 | $ | 463 | ||||
Refundable
income taxes
|
17 | 16 | ||||||
Prepaid
expenses
|
267 | 24 | ||||||
Other
receivables
|
266 | 278 | ||||||
Prepaid
insurance
|
16 | - | ||||||
Prepaid
offering costs
|
65 | - | ||||||
$ | 903 | $ | 781 |
6.
|
Property
and equipment
|
The
Company´s property and equipment as of September 30, 2010 and June 30, 2010 were
as follows:
September 30,
2010 |
June 30,
2010 |
|||||||
Cost:
|
||||||||
Land
|
$ | 474 | $ | 431 | ||||
Buildings
|
2,745 | 2,495 | ||||||
Vessels
|
8,941 | 8,143 | ||||||
Machinery
and equipment
|
7,596 | 6,884 | ||||||
Fixtures
and office equipment
|
129 | 110 | ||||||
Construction
in progress
|
38 | 34 | ||||||
19,923 | 18,097 | |||||||
Less
accumulated depreciation:
|
||||||||
Buildings
|
1,045 | 918 | ||||||
Vessels
|
4,526 | 3,982 | ||||||
Machinery
and equipment
|
5,025 | 4,428 | ||||||
Fixtures
and office equipment
|
110 | 97 | ||||||
10,706 | 9,425 | |||||||
Property
and equipment, net
|
$ | 9,217 | $ | 8,672 |
F-8
UMAMI
SUSTAINABLE SEAFOOD INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
7.
Investments in unconsolidated affiliates
As of
June 30, 2010, Atlantis, the Company’s principal stockholder, had advanced $4.9
million as a deposit toward the purchase price of the anticipated
acquisition by Umami of Baja Aqua Farms, S.A. de C.V., a Mexican
corporation (Baja) and its affiliate Oceanic Enterprises, Inc., a California
corporation (Oceanic). Baja owns and operates facilities and equipment in Mexico
where it farms Pacific Northern Bluefin Tuna for sale primarily into the
Japanese sushi and sashimi market.
On July
20, 2010, the Company entered into a stock purchase agreement with Corposa, S.A.
de C.V., Holshyrna ehf, and certain other parties, providing for the sale from
Corposa and Holshyrna of 33% of the equity of Baja and Oceanic. The agreement
provided for acquisition of 33% interests in each entity for $8 million, which
was funded by Atlantis and charged against the Company’s line of credit from
Atlantis. During the quarter ended September 30, 2010, the Company also advanced
$5.1 million to Baja and Oceanic.
Under the
terms of an option agreement, the Company also acquired the option, exercisable
by September 15, 2010, to purchase all remaining Baja shares in consideration
for the issuance of a) 10,000,000 restricted shares of common stock of the
Company and b) the payment in cash of $10.0 million. On September 15, 2010, the
Company exercised the option and on September 27, 2010, the parties to the
Agreements entered into amendments to each of the agreements requiring certain
capital distributions to be made to the selling parties on or before November
30, 2010 and for the closing date and final transfer of shares to be completed
on or before November 30, 2010. The Company has agreed to fund Baja as necessary
to continue its operations as well as fund the capital distributions required to
the selling parties.
Through
November 18, 2010 the Company has funded Baja to the extent required and Baja
has made all required payments under the amendments resulting in a remaining
amount due for the final option cash payment of $4.7 million. Additionally, the
Company will be required to issue the 10 million option shares due under the
option agreement on or before the delivery of the Baja shares to the
Company.
In the
event closing does not occur, Umami will remain a 33% shareholder in Baja. Any
Umami loans remaining shall remain a debt of Baja due to Umami and repaid
through future operating cash flow of Baja.
The
Company’s consolidated statement of operations includes the loss from the
unconsolidated investment in Baja and Oceanic for the period of its ownership
during the three months ended September 30, 2010.
Selected balance sheet information for Baja and Oceanic as of
September 30, 2010 and the results of their operations for the three months
ended September 30, 2010 were as follows:
Balance
Sheets
|
||||||||||||
September
30, 2010
|
||||||||||||
(Unaudited)
|
||||||||||||
Baja
|
Oceanic
|
Total
|
||||||||||
Total
assets
|
$ | 35,526 | $ | 3,860 | $ | 39,386 | ||||||
Total
liabilities
|
42,009 | 3,705 | 45,714 | |||||||||
Stockholders'
equity
|
(6,483 | ) | 155 | (6,328 | ) |
Statements
of Operations
|
||||||||||||
Three
months ended September 30, 2010
|
||||||||||||
(Unaudited)
|
||||||||||||
Baja
|
Oceanic
|
Total
|
||||||||||
Net
revenue
|
$ | 4,376 | $ | 600 | $ | 4,976 | ||||||
Gross
profit
|
1,415 | - | 1,415 | |||||||||
Operating
income
|
244 | 45 | 289 | |||||||||
Net
loss
|
(264 | ) | (362 | ) | (626 | ) | ||||||
Net
loss attributable to Umami's ownership
|
$ | (69 | ) | $ | (95 | ) | $ | (164 | ) |
The
following table presents pro forma information for the company as if the
investment in Baja and Oceanic has occurred at the beginning of each period
presented:
Three Months
Ended
September 30,
2010
|
Three Months
Ended
September 30,
2009
|
|||||||
Net
revenue
|
—
|
—
|
||||||
Net
loss
|
(1,602
|
)
|
(1,276
|
) | ||||
Net
loss attributable to Umami stockholders
|
(1,529
|
)
|
(1,060
|
) | ||||
Basic
and diluted net loss per share attributable to Umami
stockholders
|
$
|
(.03
|
)
|
$
|
(.04
|
) |
8.
|
Borrowings
|
The
Company's borrowings as of September 30, 2010 and June 30, 2010 were as
follows:
Facility
|
Interest rate
|
Effective rate
at September 30,
2010
|
September 30,
2010 |
June 30,
2010
|
||||||||||||||
Erste&Steiermaerkische
bank d.d.
|
HRK
19,240,000
|
5%
|
5 | % | $ | 3,582 | $ | 3,258 | ||||||||||
Erste&Steiermaerkische
bank d.d.
|
HRK
30,000,000
|
5%
|
5 | % | 5,587 | 5,080 | ||||||||||||
Erste&Steiermaerkische
bank d.d.
|
EUR
1,375,000
|
EURIBOR
+7%
|
8.07 | % | 1,867 | 1,675 | ||||||||||||
Erste&Steiermaerkische
bank d.d.
|
JPY 180,000,000
|
3M
JPY LIBOR+6.5%
|
8.19 | % | 2,149 | 2,025 | ||||||||||||
Erste&Steiermaerkische
bank d.d.
|
CHF
707,000
|
3M
EURIBOR +5.25%
|
8.42 | % | 723 | 649 | ||||||||||||
Volksbank
d.d.
|
HRK
10,000,000
|
40%
at HBOR + 60% at 5.9%
|
5.55 | % | 1,861 | - | ||||||||||||
Total
obligations under capital leases (Note 9)
|
41 | 41 | ||||||||||||||||
Total
borrowings
|
$ | 15,810 | $ | 12,728 | ||||||||||||||
Presented in consolidated balance sheets as follows: | ||||||||||||||||||
Short-term
borrowings
|
13,664 | 12,700 | ||||||||||||||||
Long
term debt
|
2,119 | - | ||||||||||||||||
Obligations
under capital leases
|
27 | 28 | ||||||||||||||||
Total
borrowings
|
$ | 15,810 | $ | 12,728 |
Kali Tuna
has a credit facility with Erste&Steiermaerkische bank. d.d. that consists
of four revolving credit lines amounting to HRK 19,240,000 ($3.6 million), HRK
30,000,000 ($5.6 million), EUR 1,375,000 ($1.9 million), and JPY 180,000,000
($2.1 million) which mature on February 15, 2011, March 15, 2011, March 1, 2011
and March 1, 2011, respectively.
The
weighted average effective rate of interest on short-term borrowings was 5.9% at
September 30, 2010 and 5.7% at June 30, 2010 and 5.8% for the three months
ended September 30, 2010. The average borrowings outstanding during the
three months ended September 30, 2010 were $14.8 million.
All of
the Company's fixed assets are pledged to the bank in connection with these
loans. The loan from Erste&Steiermaerkische bank. d.d. for 1,375,000 Euros
is collateralized by certain inventory of the business.
The loan
from Volksbank d.d. matures December 31, 2013 and is payable in quarterly
installments of $0.2 million beginning March 31, 2011. The terms of the loan
call for a variable interest rate based on 40% at HBOR rate plus 60% at a rate
of 5.9%. The loan is collateralized by certain inventory of the
business.
The loan
from Erste&Steiermaerkische bank. d.d. for 707,000 CHF matures March 1,
2012 with interest payable monthly based on the three-month EURIBOR
rate plus 5.25%. The loan is collateralized by the fixed assets and
certain inventory of the business.
9.
|
Obligations
under capital leases
|
The
Company leases equipment under arrangements classified as capital
leases, and had the following obligations as of September 30, 2010 and June 30,
2010:
September 30,
2010 |
June 30,
2010
|
|||||||
Total
obligations under capital leases
|
$ | 41 | $ | 41 | ||||
Current
maturities (classified as borrowings within the consolidated balance
sheets)
|
(14 | ) | (13 | ) | ||||
Non-current
obligations
|
$ | 27 | $ | 28 | ||||
Aggregated
annual maturities under capital leases as of September 30, 2010 were as
follows:
|
||||||||
Year
ending September 30, 2011
|
$ | 17 | ||||||
Year
ending September 30, 2012
|
14 | |||||||
Year
ending September 30, 2013
|
7 | |||||||
Year
ending September 30, 2014
|
7 | |||||||
Year
ending September 30, 2015
|
1 | |||||||
46 | ||||||||
Less
interest
|
(5 | ) | ||||||
Total
obligations under capital leases
|
$ | 41 |
F-9
UMAMI
SUSTAINABLE SEAFOOD INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
10.
|
Income
taxes
|
Income
tax expense for the three months ended September 30, 2010 and 2009 is comprised
as follows:
2010
|
2009
|
|||||||
Current
expense (benefit)
|
$ | 30 | $ | (132 | ) | |||
Deferred
expense (benefit)
|
- | - | ||||||
Total
income tax provision
|
$ | 30 | $ | (132 | ) |
The
Company’s effective tax rates for the three months ended September 30, 2010 and
2009 are higher than the Croatian statutory rate of 20% primarily because the
potential future tax benefits from Umami’s and Lubin’s loss carryforwards have
been fully offset by valuation allowances as of each balance sheet date. In
addition, during the three months ended September 30, 2010, Croatia passed a law
retroactively requiring interest income to be imputed on loans made to entities
not making a profit. This resulted in additional taxes of $65
thousand related to the year ended June 30, 2010 being recorded in the
three months ended September 30, 2010.
Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statements carrying amounts of
existing assets and liabilities and their respective tax bases. 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 as income in the period that includes the
enactment date. A valuation allowance is provided for the amount of deferred tax
assets that, based on available evidence, are not expected to be
realized.
Deferred
tax liabilities and assets have been recognized as of September 30, 2010 and
June 30, 2010 in the following amounts based upon the indicated temporary
differences:
September 30,
2010
|
June 30, 2010
|
|||||||
Inventories
|
$ | (149 | ) | $ | (135 | ) | ||
Tax
loss carryforwards
|
1,326 | 859 | ||||||
Other
items
|
- | - | ||||||
Valuation
allowance
|
(1,326 | ) | (859 | ) | ||||
Net
deferred income tax liability
|
$ | (149 | ) | $ | (135 | ) |
At
September 30, 2010, the Company has tax loss carryforwards available for offset
against future taxable income as follows:
Available
through June 30, 2014 related to MB Lubin
|
$ | 752 | ||
Available
through June 30, 2015 related to MB Lubin
|
877 | |||
Available
through June 30, 2016 related to MB Lubin
|
157 | |||
Available
through June 30, 2017 related to Umami
|
1,569 | |||
Available
through June 30, 2018 related to Umami
|
1,279 |
F-10
UMAMI
SUSTAINABLE SEAFOOD INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
11.
|
Variable
interest entities
|
The
company has determined that Kali Tuna and its affiliates provided the majority
of financial support to Lubin and KTT through various sources including the
purchase and sale of inventory, rental income and unsecured loans. In addition,
as of September 30, 2010, Kali Tuna was a guarantor for repayment of Lubin´s
note payable to Erste&Steiermaerkische bank d.d. in the amount of CHF
707,000 ($0.7 million).
Financial
support provided by Kali Tuna and its affiliates to Lubin and KTT as of
September 30, 2010 and June 30, 2010 and during the three months ended September
30, 2010 and 2009 follows:
Lubin
|
KTT
|
|||||||||||||||
September 30,
2010 |
September 30,
2009 |
September 30,
2010 |
September 30,
2009 |
|||||||||||||
Rental
income and sale of inventory
|
$ | 356 | $ | 708 | $ | - | $ | - | ||||||||
Purchase
of inventory
|
- | 13 | - | - |
September 30,
2010 |
June 30,
2010
|
September 30,
2010 |
June 30,
2010
|
|||||||||||||
Unsecured
loans
|
6,936 | 6,028 | - | - |
Selected
information from the balance sheets of Lubin and KTT as of September 30, 2010
and 2009, and the results of operations for the three months ended September 30,
2010 and 2009:
Lubin
|
KTT
|
|||||||||||||||
September 30,
2010 |
June 30,
2010
|
September 30,
2010 |
June 30,
2010
|
|||||||||||||
Total
assets
|
$ | 5,200 | $ | 5,123 | $ | - | $ | 51 | ||||||||
Total
liabilities
|
7,908 | 7,308 | - | - | ||||||||||||
Stockholders’
equity
|
(2,708 | ) | (2,185 | ) | - | 51 | ||||||||||
September 30,
2010 |
September 30,
2009 |
September 30,
2010 |
September 30,
2009 |
|||||||||||||
Net
sales
|
356 | 730 | - | - | ||||||||||||
Net
income (loss)
|
- | (194 | ) | - | (2 | ) |
As
described in Note 2, the BTH joint venture activities previously conducted
through KTT were, beginning during the year ended June 30, 2009, conducted
within Kali Tuna. As described in Note 13, BTH contributed livestock to the
joint venture during 2009 and its 50% share in the profits generated has
been reflected as a noncontrolling interest within these consolidated financial
statements. Selected balance sheet information related to these activities as of
September 30, 2010 and June 30, 2010, and the results of its operations for the
three months ended September 30, 2010 and 2009 were as
follows:
September 30,
2010 |
June 30,
2010
|
|||||||
Total
assets
|
$ | 2,857 | $ | 2,354 | ||||
Total
liabilities
|
- | - | ||||||
Venturers’
equity
|
2,857 | 2,354 |
September 30,
2010 |
September 30,
2009 |
|||||||
Net
sales
|
- | - | ||||||
Net
income (loss)
|
(146 | ) | (22 | ) |
12.
|
Stock
options and warrants
|
The
Company does not currently have a formal stock option plan. On June 30, 2010,
stock options were granted to two employees to purchase 1,100,000 shares of
common stock of the Company at $1.00 per share. Of these options, 183,333 vested
immediately, with an additional 183,333 shares vesting on the first anniversary
of the grant. An additional 366,667 shares will vest on each of the second and
third anniversary dates of the grant.
The fair
value of each option award is estimated on the date of grant using the
Black-Scholes option valuation model, and the following
assumptions:
Average
risk-free interest rate
|
1.91 | % | ||
Expected
dividend yield
|
None
|
|||
Expected
volatility
|
50 | % | ||
Expected
term (years)
|
2.75 |
The
risk-free interest rate is estimated based upon rates for long-term U.S.
Treasury securities. Since the Company has no prior trading history, expected
volatility is estimated based on the historical volatility of similar companies
in the same industry as the Company. The expected term of awards granted is
estimated based on the minimum vesting period of the awards since there is no
historical exercise behavior.
Stock
option activity during the three months ended September 30, 2010 and the year
ended June 30, 2010:
Shares
|
Exercise Price
|
Remaining
Contractual
Term
|
|||||||
Outstanding
as of June 30, 2009
|
- | - | |||||||
Options
granted
|
1,100,000 | $ | 1.00 | ||||||
Options
exercised
|
- | ||||||||
Options
forfeited
|
- | ||||||||
Outstanding
as of June 30, 2010
|
1,100,000 | $ | 1.00 |
5.0
years
|
|||||
Options
granted
|
- | ||||||||
Options
exercised
|
- | ||||||||
Options
forfeited
|
- | ||||||||
Outstanding
as of September 30, 2010
|
1,100,000 | $ | 1.00 |
4.75
years
|
|||||
Exercisable
as of September 30, 2010
|
183,333 | $ | 1.00 |
4.75
years
|
|||||
Vested
as of September 30, 2010
|
183,333 | $ | 1.00 |
4.75
years
|
|||||
Nonvested
as of September 30, 2010
|
916,667 | $ | 1.00 |
4.75
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
September 30, 2010, there was limited trading of the Company’s stock, so the
fair value was estimated by reference to the 7.3 million share units sold for
$1.00 each on June 30, 2010 and the 1.4 million share units sold for $1.00 each
in August, 2010, as described in Note 1. The fair value for each share and
each warrant was estimated using a Black-Scholes pricing model. The share value
was estimated to be $0.96 and the warrant value was estimated to be $0.04; thus,
the exercise price of $1.00 per share is greater than the estimated fair value
of $0.96 and there is zero intrinsic value at September 30, 2010.
The
weighted-average grant-date fair value of options granted during the year ended
September 30, 2010 has been estimated at $0.33 and the total grant-date fair
value of stock options vested during the year ended September 30, 2010 has
been estimated at $0.1 million. There was no tax benefit related to the stock
based compensation because the Company has incurred losses in the U.S. and it is
not probable that the Company would be able to use any such losses in the
future. Stock-based compensation expense recognized as selling, general and
administrative expenses in the consolidated statement of operations was $40
thousand for the three months ended September 30, 2010 and zero for the three
months ended September 30, 2009. As of September 30, 2010, total unrecognized
compensation expense related to stock-based compensation is $0.3 million, which
is expected to be recognized over the remaining vesting period of two and three
quarters years.
At
September 30, 2010, warrants were outstanding as follows in connection with the
transactions described in Note 1:
Number
|
Exercise Price
|
Term
|
|||||||
Subscription
agreements
|
1,744,000 | $ | 2.00 |
5
years
|
|||||
Investor
agreement
|
1,000,000 | $ | 1.00 |
3 years
|
|||||
Placement
agent payments
|
872,000 | $ | 2.00 |
3 years
|
|||||
Total
warrants at September 30, 2010
|
3,616,000 |
13.
|
Related
parties
|
Related
parties are those parties which have influence with the Company, directly or
indirectly, either through common ownership or other relationship.
Related
party transactions during the three months ended September 30, 2010 and 2009
were as follows:
September 30,
2010 |
September 30,
2009 |
|||||||
Purchase
of services- Atlantis Group hf
|
$ | 200 | $ | - |
Related
party balances as of September 30, 2010 and June 30, 2010 were as
follows:
September 30,
2010 |
June 30,
2010
|
|||||||
Accounts
receivable from related parties, Atlantis and its
affiliates
|
$ | 9 | $ | 681 | ||||
Notes
payable to related party, Atlantis Group hf
|
11,589 | - | ||||||
Accounts payable to related parties | ||||||||
Aurora
Investments ehf (shareholder)
|
1,545 | - | ||||||
Thynnus
d.o.o.
|
17 | - | ||||||
Atlantis
Resources Australia Pty. Ltd.
|
257 | 257 |
During
the quarter ended September 30, 2010, the Company entered into an agreement with
Atlantis, providing for a $15 million loan facility consisting of two
components: a line of credit for the amount of $9.9 million and a term loan
of $5.1 million. As of November 17, 2010, the total principal balance advanced
under the facility was approximately $15 million, which was used for the
purchase of the initial 33% of Baja and the financing of Baja's operations,
financing Kali Tuna's operations, and for Umami corporate expenses. Funds
advanced under the facility accrue interest at the rate of 1% per month which is
payable monthly. Advances under the facility may be made upon ten days prior
written notice to Atlantis and are collateralized by a pledge of certain of the
Company's inventory. Interest expense for the three months ended September 30,
2010 was $0.2 million; this amount has been paid by addition to the outstanding
loan balance. The facility must be repaid in its entirety by June 30, 2012. At
the discretion of Atlantis, the facility may be terminated and all amounts may
be declared due and payable immediately if Atlantis ceases to be a greater
than 50% shareholder of the Company and Atlantis ceases to act as the Company's
exclusive agent for the sale of the Company's Bluefin tuna into the Japanese
market. In addition, under the terms of the facility, Atlantis has the right to
cancel the facility and demand all outstanding amounts immediately due and
payable in the event of a change of control of the Company. Atlantis’s rights to
have the loan repaid below $8.0 million are restricted while the borrowings from
the private party described in Note 15 are outstanding. The
average borrowings outstanding from Atlantis during the three months ended
September 30, 2010 were $6.0 million. Additionally, Atlantis has provided
loan guarantees and other credit support through its banking
relationships.
In
connection with a financing transaction in October 2009 between Atlantis and a
third party, Atlantis granted the third party the right to acquire a 1.82%
equity interest in Kali Tuna for a five-year period for $1 million. In the event
that Kali Tuna completed a merger transaction with a publicly traded shell
company in the United States, the right would be replaced by a three-year
warrant to purchase one million shares of the public company at $1.00 per share.
The warrants were issued to the third party on the date of the Share
Exchange.
Contemporaneously
with the completion of the Share Exchange, the Company entered into a
sales agency agreement with Atlantis. Under the terms of the agreement,
Atlantis was granted the exclusive right to sell, on the Company’s behalf, all
of its Northern Bluefin Tuna products into the Japanese market. The Company will
pay to Atlantis a commission of 2% of all net sales proceeds under the
agreement. The agreement may be terminated at any time by either party
upon six months prior notice. In addition, it may be terminated immediately by
the Company if Atlantis defaults in its obligations under the agreement
following a 21-day notice and cure period.
Contemporaneously
with the completion of the Share Exchange, the Company entered into a call
option agreement that grants the Company, until December 1, 2010, the right to
purchase from Atlantis the following assets at the prices set forth
below:
Asset
|
Option Exercise Price
|
|||
The
patent and the U.S. ownership rights to Freshtec, a method to treat food,
fish and meat to improve storage durability of the food being
treated. The patent application is pending.
|
$ | 2,300,000 | ||
Farming
Concession for up to 1,000 tons stocking rights for for striped sea
bass, yellow tail tuna and king fish with necessary farming equipments, at
Todos Santos, Mexico.
|
$ | 1,500,000 | ||
Factory
equipment for food processing, packaging and processing using the Freshtec
method.
|
$ | 1,500,000 | ||
The
entire share capital in Havetorsk AS, Mausund, Norway, a Norwegian cod
farming company.
|
$ | 7,000,000 |
The
options are exercisable at the Company’s sole discretion and may be exercised as
to each individual asset or all of the listed assets on a combined
basis.
F-11
UMAMI
SUSTAINABLE SEAFOOD INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
14.
|
Commitments
and contingencies
|
During
June 2008, the Financial Police of Ministry of Finance of the Republic of
Croatia (FP) concluded an inspection of certain of the Company’s transactions
and alleged the following underpayments of taxes and related
interest:
Underpayment
of value added taxes for calendar year 2006 and related interest, which total
approximately $1.5 million, in connection with sales of tuna inventory by the
Company to its 50%-owned subsidiary, Kali Tuna Trgovina, at its purchase
cost.
Underpayment
of tax on profit for the year ended June 30, 2007 and related interest, which
total approximately $0.1 million, in connection with sales of tuna inventory by
the Company to Atlantis Resources ehf (an Icelandic subsidiary of Atlantis
Group, which was the Company’s ultimate parent).
Any
underpayments that are ultimately upheld at the conclusion of a permitted appeal
process would also be subject to liability for additional interest penalties. In
addition, the Company could potentially be held liable for similar transactions
in subsequent years; as the applicable amounts of additional taxes and interest
for those periods are dependent upon assessment of the Company´s transactions by
FP, such amounts cannot be reasonably estimated. The Company filed an
appeal to contest these allegations. The claim was dismissed by the Appellate
Body of Ministry of Finance. Dismissal did not terminate the process, but has
obliged the Financial Authorities in Croatia to repeat the performed procedure,
taking into account all facts and proof being proposed and disclosed by KT in
their appeal. Management expects, based upon the facts and circumstances
of the relevant transactions, that the Company should ultimately prevail and
incur no material liability. Accordingly, the accompanying consolidated
financial statements do not reflect any adjustments related to this
contingency.
In March
2010, Kali Tuna purchased certain assets of another Croatian fish farming
business, consisting of farming equipment and about 400 metric tons of live
Bluefin tuna, for an aggregate cost of $3.7 million. Title was
transferred and payment was made, except in relation to a liability of $0.6
million for about 70 tons out of the total tuna quantity, because the
contract states that the payment does not become due until receipt of legal
documentation proving good title for this 70 tons and because this tuna is not
salable by the Company unless this documentation is available. The
seller has filed a lawsuit against Kali Tuna to reclaim the disputed 70 tons but
the Company is confident that the suit is without merit and that it will prevail
in this matter.
15.
|
Subsequent
events
|
Bank
borrowing. Kali Tuna entered into an agreement on October 7, 2010 with
Erste&Steiermaerkische bank d.d. providing for a 6.7 million Euros ($9.3
million) loan. The loan matures March 31, 2011, with interest payable monthly
based on the three-month EURIBOR rate plus 5.25%. The loan is
collateralized by the fixed assets and certain inventory of the business. As of
November 17, 2010, the total principal advanced under the loan was $3.1
million.
Issuance of
equity. On October 20, 2010, the Company issued 1 million units, with
each unit consisting of one share of common stock and one warrant to purchase
one share of common stock at $1.80 per share. Each unit was issued for $1.50,
resulting in gross proceeds of $1.5 million. The company paid $0.3 million in
costs related to the offering.
From October
28, through November 18, 2010, the Company issued 1.7 million units, with
each unit consisting of one share of common stock and a warrant to purchase one
share of common stock at $1.80 per share. Each unit was issued for $1.50,
resulting in gross proceeds of $2.5 million. As compensation for their services,
the Company issued 0.3 million five-year warrants to purchase shares of its
common stock at $1.80 per share and $0.4 million to two firms who acted as
placement agents for the private placement. The company paid $30 thousand in
costs related to the offering.
Borrowing from
private party. On October 7, 2010, the Company entered into a note and
warrant purchase agreement with a third party lender. The Company
received gross proceeds of $5 million in exchange for: (i) a note payable of
$2.5 million which matures on March 31, 2011, (ii) a note payable of $3.1
million which matures on March 31, 2012, and (iii) warrants to purchase 3
million shares of the Company's common stock. Both
notes bear interest at 9% per year. However, additional interest
expense between $0.3 million and $1.5 million would become due and payable over
the terms of the notes if the Company does not achieve certain EBITDA
thresholds. Further, the interest rate is subject to increase to 13.5% in the
event that (i) certain assets of Kali Tuna or Baja are not pledged to the lender
by November 16, 2011, or (ii) the acquisition of Baja is not completed by
December 16, 2010. Each of the notes may be accelerated if certain events of
default were to occur, including failure to complete the acquisition of Baja by
January 1, 2011 or failure of the Company to secure sufficient
pledges of the assets of its subsidiaries or Baja prior to December 16, 2010.
The note also restricts repayments of the Atlantis notes payable to amounts
lower than $8.0 million while the notes are outstanding. The notes
are collateralized by certain assets of the Company, Kali and
Baja. In addition, the Company has pledged its shares in Bluefin, and
Baja has guaranteed the Company's obligations to the lender.
The
exercise prices for common stock underlying the warrants are $1.50 for 1 million
shares and $1.00 for the remaining 2 million shares. The exercise
price and number of shares issuable upon exercise of the warrants are subject to
anti-dilution provisions for subsequent issuances of the Company's common stock
at prices below the exercise prices of the warrants. The lender also
received demand and piggy-back registration rights in connection with the shares
issuable upon exercise of the warrants. In
connection with this transaction, the Company paid an advisor a fee consisting
of (i) $0.5 million and (ii) warrants to purchase 0.3 million shares of the
Company's common stock, at exercise prices equal to 110% of those
applicable to the warrants that were issued to the lender, but otherwise on the
same terms and conditions. The lender also received a closing fee of
$25 thousand and was reimbursed for costs of $0.1 million from the gross
proceeds. Additional closing costs of $0.1 million will be paid to the
lender.
Borrowing
from third party. On
November 15, 2010, the Company entered into a note purchase agreement with third
party lenders. The Company received gross proceeds of $2.8 million in exchange
for promissory notes in the aggregate principal amount of $2.8
million which mature on January 14, 2011. The notes
bear interest at the rate of 6% per month; however, the interest rate, on a
retroactive basis, shall be increased to 12% per month for that portion of the
notes that have not been repaid by December 15, 2010. The interest rate is also
subject to increase to 18% per month in the event that certain assets of the
Company's subsidiary or Baja are not pledged to the lenders by November 30,
2010. The notes may be accelerated if an event of default were to occur. In
addition to standard events of default, events of default which would lead to
the acceleration of the debt include the failure to complete the acquisition of
Baja by December 6, 2010 or the failure of the Company to secure sufficient
pledges of the assets of its subsidiaries or Baja prior to December 16, 2010.
The notes and any accrued interest are payable on the maturity date. The notes
can be repaid at any time upon one day’s prior written notice to the lenders.
The notes are collateralized by certain assets of the Company and
Baja.
Termination of
BTH joint venture. On September 30, 2010, the Company entered into
an agreement with Bluefin Tuna Hellas S.A. to terminate the BTH joint venture
arrangement described in Note 11 and to transfer to the Company the 50% interest
owned by BTH in exchange for 1.2 million Euros ($1.6 million), with payment in
two installments on October 15, and October 19, 2010 which were made as agreed.
The termination agreement also contemplates that BTH will relinquish its 50%
interest in KTT in exchange for consideration equal to the estimated value of
that entity.
F-12
ITEM
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OPERATIONS
The
following is management’s discussion and analysis of the financial condition of
the Company as of September 30, 2010 and the results of operations of the
Company for the three months ended September 30, 2010 and 2009. Refer to the
company’s Annual Report on Form 10-K for the year ended June 30, 2010 (2010
Annual Report), including management’s discussion and analysis
therein.
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) completed a transaction in which Lions Gate purchased from Atlantis
all of the issued and outstanding shares of its wholly-owned subsidiary, Bluefin
Tuna Acquisition Group (Bluefin) in consideration for the issuance to Atlantis
of 30,000,000 shares of Lions Gate common stock, resulting in a change of
control of Lions Gate. As a result of this transaction, Kali Tuna d.o.o. (Kali
Tuna), a wholly-owned subsidiary of Bluefin and indirect subsidiary of Atlantis,
became the indirect wholly-owned subsidiary of the Company. 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. Accordingly, the consolidated financial statements presented in this
Form 10-Q include the consolidated financial position and results of operations
of Bluefin (consisting primarily of Kali Tuna and its subsidiaries and variable
interest entities) rather than Lions Gate. Further, as a result of the
transaction, the Company ceased to be a shell company. Therefore,
comparisons of financial results with prior year periods may not be
meaningful.
Forward-Looking
Statements
Some of
the statements contained in this Form 10-Q that are not historical facts are
“forward-looking statements” which can be identified by the use of terminology
such as “estimates,” “projects,” “plans,” “believes,” “expects,” “anticipates,”
“intends,” or the negative or other variations, or by discussions of strategy
that involve risks and uncertainties. We urge you to be cautious of
the forward-looking statements, in that such statements, which are contained in
this Form 10-Q, reflect our current beliefs with respect to future events and
involve known and unknown risks, uncertainties, and other factors affecting our
operations, market growth, services, products, and licenses. No
assurances can be given regarding the achievement of future results, as actual
results may differ materially as a result of the risks we face, and actual
events may differ from the assumptions underlying the statements that have been
made regarding anticipated events. Such statements reflect our
current view with respect to future events and are subject to risks,
uncertainties, assumptions and other factors (including the risks contained in
the section of this report entitled “Risk Factors”) relating to our industry,
operations and results of operations and any businesses that we may acquire, and
include, without limitation:
1. Our
ability to attract and retain management, and to integrate and maintain
technical information and management information systems;
2. Our
ability to generate customer demand for our products;
3. The
intensity of competition; and
4.
General economic conditions.
Should
one or more of these risks or uncertainties materialize, or should the
underlying assumptions prove incorrect, actual results may differ significantly
from those anticipated, believed, estimated, expected, intended or
planned.
All
forward-looking statements made in connection with this Form 10-Q that are
attributable to us or persons acting on our behalf are expressly qualified in
their entirety by these cautionary statements. Although we believe
that the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of activity, performance
or achievements. Except as required by applicable law, including the securities
laws of the United States, we do not intend to update any of the forward-looking
statements to conform these statements to actual results. Given the
uncertainties that surround such statements, you are cautioned not to place
undue reliance on such forward-looking statements.
In this
report, unless otherwise specified, all dollar amounts are expressed in United
States dollars and all references to “common shares” refer to shares of our
common stock. The following discussion should be read in conjunction with the
audited annual financial statements and the related notes filed
herein.
General
Overview
We are a
leader in long term farming of Northern Bluefin Tuna in the Mediterranean
through our wholly-owned subsidiary Kali Tuna with farming facilities located in
Kali, Croatia, along with a processing plant, freezing storage and
wharf. Kali Tuna cultivates its tuna with special reliance on
technology and experience to grow the tuna for one and one-half to three and
one-half years following their capture in the wild. Kali Tuna’s
operations include farming, feeding and harvesting Northern Bluefin Tuna that
was caught in the Mediterranean and the Adriatic Sea. During
the past three years, Kali Tuna has been increasing its carry-over stock of tuna
to increase output quantities each year.
Kali Tuna
has marketed almost all of its products in Japan through Atlantis Group
hf. Recently, Atlantis entered into an agreement for the sale and
delivery of at least 500 metric tons of frozen Northern Bluefin Tuna on an
annual basis. It is contemplated that tuna to be delivered under this
agreement by Atlantis will be filled by fish farmed by Kali Tuna under the terms
of a sales agency agreement entered between Umami and Atlantis on June 30,
2010. Under the terms of the agreement, Atlantis was granted the
exclusive right to sell on Kali Tuna’s behalf all of its Northern Bluefin Tuna
products into the Japanese market. Umami has agreed to pay Atlantis
an agency commission of 2% of all sales to be made under this
agreement.
2
On July
20, 2010, Umami acquired 33% of the outstanding common shares of both Baja Aqua
Farms, S.A. de C.V., a Mexican corporation (Baja) and Oceanic Enterprises, Inc.,
a California corporation (Oceanic) in exchange for a cash purchase price of
$8 million and an option to acquire substantially all of the remaining
outstanding shares of both entities in exchange for the issuance of 10 million
shares of the Company’s common stock and $10 million of cash. See Note 7 to the
Company’s consolidated financial statements for additional details.
Critical
Accounting Policies and Estimates
We
prepare our consolidated financial statements in accordance with accounting
principles generally accepted in the United States of America. The preparation
of these financial statements requires the use of estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amount of revenues and expenses during the reporting period. Our
management periodically evaluates the estimates and judgments
made. Management bases its estimates and judgments on historical
experience and on various factors that are believed to be reasonable under the
circumstances. Actual results may differ from these
estimates.
The
following critical accounting policies affect the more significant judgments and
estimates used in the preparation of the Company’s consolidated financial
statements.
Reporting
Currency and Functional Currency
Our goal
is to become the world leader in the Bluefin tuna industry. As such
we are positioning the Company to be able to seek out opportunities worldwide
and operate with a United States home base with our strategy based on maximizing
our returns as measured in US dollars. Accordingly, we will be
continuing to raise capital in US dollars and evolve our financial operations to
maximize our returns in US dollars. Our reporting currency is the US
dollar.
We are
planning to become a US dollar centric company and our treasury function will
strive to minimize foreign currency risk against the US dollar with investments,
loans and advances denominated in US dollars and if appropriate we will enter
into hedging transactions that we believe will maximize our returns in US
dollars.
At June
30, 2010 and September 30, 2010, our functional currency was the Croatian Kuna
as our Kali Tuna operation is in Croatia, our only wholly-owned operation
on those dates. We expect to evolve from a Croatian Kuna functional
currency to a US dollar functional currency in the near future as we continue to
raise capital in US dollars and transition our treasury operations to maximize
our return in US dollars and as we begin to acquire operations outside of
Croatia. We have already made a significant investment in Baja Aqua
Farms and hope to complete this acquisition during the quarter ending December
31, 2010.
We expect
to seek opportunities and invest our available capital in investments that we
believe will provide the greatest return in US dollars.
Accounting
for Derivative Warrant Liabilities
As
described above, the Company’s reporting currency is the US dollar and its
functional currency is the Croatian Kuna, as virtually all current operations
are in Croatia. Capital raising efforts are conducted primarily in US dollars
and the Company has and will continue to issue warrants to purchase common
shares at prices denominated in US dollars.
The fact
that the exercise prices of the warrants are not denominated in the functional
currency requires that the warrants be considered derivatives and recorded at
their estimated fair value as liabilities. As of each reporting date,
the estimated fair value of the warrants that remain outstanding will be
re-assessed and the recorded liabilities will be adjusted. If the
warrants increase in fair value, the increase will be shown as an expense in the
income statement and if the warrants decrease in fair value, a gain is recorded
for such decrease.
Future
increases in the share value of the Company’s common stock will increase the
value of the outstanding warrants. Accordingly, during periods when
the share price increases, expenses will be recorded related to the warrant
liabilities which may be larger than the operating income of the
Company. Conversely, during periods when the share price decreases,
gains will be recorded related to the warrant liabilities which may bear no
relationship to the operating income or loss of the Company. Such
gains and losses will not be tax-effected.
The
warrant liabilities will not require the use of cash in order to be
settled. The warrant liabilities will remain outstanding until (i)
the warrants are exercised, (ii) the warrants expire unexercised, or (iii) the
Company’s functional currency becomes the US dollar.
If the
warrants are exercised, cash will be received for the exercise price, net of any
applicable placement agent costs, and recorded as increases to common stock and
additional paid in capital equivalent to the total of net cash proceeds received
and the value of the warrants immediately prior to exercise. If the
warrants expire unexercised or in the event the Company’s functional currency
becomes the US dollar, the Company will reclassify the recorded liability to
stockholders’ equity, after first adjusting its fair value and recording a gain
or loss on the income statement.
Until we
have evolved Umami to a US dollar functional currency, due to the large amount
of warrants outstanding and expected to be outstanding, and the expected
volatility of our share price, our reported net income will be unpredictable,
with potentially large gains or losses resulting from recording changes in the
fair value of the warrants affecting each reporting period.
Our
financial statements will not be comparable to another entity’s financial
statements with a similar capital structure, with the only difference being that
their warrants are priced in their functional currency; because such a
company would not be required to record the estimated fair value of their
outstanding warrants as derivative liabilities with corresponding changes
affecting their income statement. Accordingly, given comparable
results and capital structure, such companies will have less volatility in
reported earnings, as their net income would be based only on operating results,
while our net income will be the sum of our operating results plus or minus
changes in the fair value of the warrants.
3
Inventories
Inventories
are stated at the lower of cost or net realizable value.
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 Company
evaluates the net realizable value of its inventories on a regular basis and
records a provision for loss to reduce the computed weighted average cost if it
exceeds the net realizable value.
The fair
value of live tuna stock under 30 kg. that was caught in the 2010 fiscal year is
estimated to equal its cost. The fair value of inventory that was
caught in prior years is estimated based upon the market price that an unrelated
party would be willing to pay for the inventory, less estimated selling
costs.
Consolidation
The
Company has determined that (i) Kali Tuna Trgovina d.o.o., a joint venture owned
50% each by Kali Tuna and Bluefin Tuna Hellas A.E, (“BTH Joint Venture”) and
(ii) MB Lubin d.o.o. (Lubin), an entity owned by one of the Kali Tuna’s
executive officers, are variable interest entities of which the Company is the
primary beneficiary. These entities are therefore consolidated
in the Company’s financial statements. The 50% of the BTH Joint
Venture owned by Bluefin Tuna Hellas A.E. has been reflected as non-controlling
interest in the financial statements. All material inter-company
transactions and balances have been eliminated in consolidation. On
September 30, 2010, the Company entered into an agreement with Bluefin Tuna
Hellas S.A. to terminate the BTH joint venture arrangement and to transfer to
the Company the 50% interest owned by BTH in exchange for 1.2 million Euros
($1.6 million), with payment in two installments on October 15, and October 19,
2010. The termination agreement also contemplates that BTH will relinquish its
50% interest in KTT in exchange for consideration equal to the estimated value
of that entity. The acquisition date for the Company’s acquisition of the
remaining 50% interest in the joint venture has been deemed not to have occurred
until the transfer of cash in October, and the transaction will therefore be
recorded during the quarter ending December 31, 2010.
Related
Parties
Parties
are considered to be related if one party has the ability, directly or
indirectly, to control the other party or exercise significant influence over
the other party in making financial and operational decisions. Parties are also
considered to be related if they are subject to common control or common
significant influence. Related parties may be individuals or corporate
entities.
Revenue
Recognition
The
Company recognizes revenue when the significant risks and rewards of ownership
have been transferred to the customer, including factors such as when persuasive
evidence of an arrangement exists, delivery has occurred, the sales price is
fixed and determinable, and collectability is probable. The Company recognizes
sales when its tuna inventory is shipped, title has passed to the customers and
collectability is reasonably assured.
Results
of Operations
Three
months ended September 30, 2010 compared to three months ended September 30,
2009.
Sales, Cost of
Sales and Gross
Profit. Sales by the Company take place in the winter months, typically
from October to March. As a result there were no sales, cost of sales
or gross profit in the three months ended September 30, 2010 and
2009.
Selling, General
and Administrative Expenses. Selling, general and administrative costs
increased by $895,000 from 2009 to 2010. Kali Tuna expenses declined by
$28,000 due to more favorable exchange rates while Umami incurred $883,000 of
corporate expenses, primarily related to salaries, travel, insurance and
consultant, audit and legal fees. Stock option expense accounts for an
additional $40,000.
Research and
Development Expenses. The Company is in the process of developing a
hatchery for Bluefin tuna in the Mediterranean Sea related to its research and
development efforts. The expense in the three months ended September
30, 2010 was $63,000, primarily related to salaries and travel to conventions
for research, while similar costs were not incurred in the three months ended
September 30, 2009.
Foreign Currency
Gains and Losses. In the three months ended September 30, 2010 the Kuna
rose by 10% against the US Dollar, contributing to a gain in foreign currency
translation adjustments of $428,000, primarily related to dollar-denominated
debt. In the three months ended September 30, 2009 due to unfavorable currency
fluctuations, the Company incurred a net loss on foreign currency transaction of
$217,000.
Gain from
revaluation of derivative warrant liability. As explained above, derivative
warrant liabilities are revalued each quarter. Due to the decrease in the
remaining term of the warrants, the warrants fell in value and a gain of $45,000
was recorded for the three months ended September 30, 2010. There were no
warrants outstanding in the three months ended September 30,
2009.
4
Loss from
investment in unconsolidated affiliates. A loss of $164,000 was incurred
in the three months ended September 30, 2010 related to the Company’s equity
investments in unconsolidated affiliates Baja and Oceanic.
Interest
Expense. Interest expense increased from $259,000 to $485,000
reflecting an increase in bank and shareholder borrowings to acquire the 33% of
Baja, to fund farming operations at Kali Tuna and Baja, and for Umami corporate
expenses.
Income Tax
Expense. In the three months ended September 30, 2010 there was a $35,000
income tax benefit at Kali Tuna, but it was offset by a $65,000 tax provision
for a change in the Croatian tax law that retroactively taxed imputed interest
income for the year ended June 30, 2010. Umami’s and Lubin’s loss carryforwards
have been fully offset by valuation allowances. For the three months ended
September 30, 2009, there was a $132,000 income tax benefit at Kali
Tuna.
Net Loss
Attributable to the Non-controlling Interests. The net losses
attributable to the non-controlling interests, Lubin and the BTH Joint Venture,
decreased by $143,000 to $73,000 in the three months ended September 30, 2010
from $216,000 in the three months ended September 30, 2009, as Lubin broke even
compared to a prior period loss of $194,000 while the BTH Joint Venture’s losses
increased by $51,000.
Liquidity
and Capital Resources
At
September 30, 2010, we reported working capital of approximately $8,861,000
compared to approximately $7,448,000 at June 30, 2010. At September
30, 2010, we had cash and cash equivalents in the amount of
$274,000.
Cash
Flows
The
following table summarizes our cash flows for the three months ended September
30, 2010 and 2009
Three Months Ended September 30,
|
||||||||
2010
|
2009
|
|||||||
Total
cash provided by (used in):
|
||||||||
Operating
activities
|
$ | (4,449,000 | ) | $ | (5,645,000 | ) | ||
Investing
activities
|
(5,124,000 | ) | (586,000 | ) | ||||
Financing
activities
|
9,547,000 | 4,827,000 | ||||||
Effects
of exchange rate changes on cash balances
|
85,000 | 431,000 | ||||||
Increase
(decrease) in cash and cash equivalents
|
$ | 59,000 | $ | (973,000 | ) |
Net cash
used in operating activities for the three months ended September 30, 2010
totalled $4,449,000 compared to $5,645,000 used in operating activities for the
three months ended September 30, 2009. The change is primarily due to
the increases in accounts payable and other current liabilities during the
current period.
Cash used
in investing activities for the three months ended September 30, 2010 was
$5,124,000 compared to $586,000 for the three months ended September 30,
2009. The change is due primarily to advances of $5,100,000 to Baja
and Oceanic.
Cash
provided by financing activities for the three months ended September 30, 2009
totalled $9,547,000, compared to $4,827,000 for the three months ended September
30, 2009. The change is due primarily to issuance of common stock and
warrants for net proceeds of $1,364,000, an increase in the shareholder loans
from Atlantis of $4,802,000, funds released from escrow of $1,635,000 and
new borrowings of $1,733,000 from Volksbank in the three months ended September
30, 2010. This compares to increases in the shareholder loans from Atlantis of
$2,163,000 and net new borrowings of $2,142,000 from Erste & Steirmaerkische
Bank and $254,000 from related parties in the three months ended September 30,
2009.
Sources
of Liquidity
The
Company’s most significant sources of liquidity have been cash from lines of
credit with commercial banks, advances and loans made by Atlantis, and the
issuance of common stock. Additionally, Atlantis has provided loan
guarantees and other credit support through its banking
relationships.
Sales of
tuna occur during the winter when the sea temperature is lowest to maximize the
quality and value of the product (October to March). There are
generally no sales generated during the rest of the
year. Accordingly, the Company and Kali Tuna need to finance
operations with available capital during the non-selling months.
We raised
initial net proceeds of approximately $7,000,000 in a financing transaction that
was completed on June 30, 2010. Subsequent to June 30, 2010 another
$4,675,000
in net proceeds related to the same financing transaction and two new
financing transactions were raised. Additionally, we have a credit facility
with Atlantis providing for a $9.9 million line of credit and a $5.1 million
term loan. As of November 8, 2010, the total principal balance
advanced under the facility was approximately $15.0 million, which was used for
the purchase in July 2010 of the initial 33% of Baja and the financing of Baja's
farming operations, financing Kali Tuna's farming operations and for Umami
corporate expenses.
We
believe that the net proceeds from the transactions described above and cash
generated by operations will be sufficient to continue to finance our present
operations through the harvest season and for the remainder of our fiscal year
ending June 30, 2011.
We will
need to obtain additional capital and/or debt financing in order to complete the
Baja acquisition and expand operations. In order
to complete the Baja acquisition, the Company will need to raise funds in excess
of amounts currently available. If additional funds cannot be raised on
reasonable terms when needed, the Company may not be able to complete the
acquisition of the remaining 67% of the Baja operation. In the event that
closing does not occur, Umami would remain a 33% stockholder in Baja. Any Umami
loans remaining would remain a debt of Baja due to Umami and be repaid through
future operating cash flows of Baja.
We plan
to pursue sources of additional capital by issuing securities through various
financing transactions or arrangements, including joint venturing of projects,
debt financing, equity financing or other means. We may also consider
advance sales and/or outright sales of tuna to customers. Since
September 30, 2010, we have entered into a new line of credit with a bank for an
additional $9,100,000 in financing for Croatia, obtained net proceeds of
$4,300,000 million from a private investor loan and issued stock and warrants in
two offerings totalling $3,275,000. There
can be no assurance that any additional financing will be available when needed
on commercially reasonable terms or at all. The inability to obtain
additional capital may reduce our ability to continue to conduct business
operations as currently contemplated. Any additional equity financing
may involve substantial dilution to our then existing
stockholders.
5
Seasonality
As
explained above, sales of tuna in the Mediterranean occur during the winter from
October to March. There are generally no sales generated during the
rest of the year. In the Pacific, due to lower water temperatures,
the season is longer, starting in September and ending in
April.
Off-Balance
Sheet Arrangements
We do not
have any off balance sheet arrangements that are reasonably likely to have a
current or future effect on our financial condition, revenues, results of
operations, liquidity or capital expenditures.
Item
4. Controls and Procedures
Disclosure
controls and procedures are controls and other procedures that are designed to
ensure that information required to be disclosed in our reports filed or
submitted under the Securities Exchange Act of 1934 (the “Exchange Act”) is
recorded, processed, summarized and reported, within the time periods specified
in the Securities and Exchange Commission's rules and forms. Disclosure controls
and procedures include controls and procedures designed to ensure that
information required to be disclosed in our reports filed or submitted under the
Exchange Act is accumulated and communicated to management to allow timely
decisions regarding required disclosure.
As required by paragraph (b) of
Rules 13a-15 or 15d-15 under the Exchange Act, our management, with the
participation of our president (our principal executive officer) and our chief
financial officer (our principal financial officer and principal accounting
officer) evaluated the effectiveness of our disclosure controls and procedures
as of the end of the period covered by this quarterly report, being September
30, 2010. Our president and our chief financial officer evaluated our
company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) of the Exchange Act) as of September 30, 2010.
Based on
this evaluation, these officers concluded that, as of September 30, 2010, these
disclosure controls and procedures were not effective. The conclusion that our
disclosure controls and procedures were not effective was due to the presence of
material weaknesses in internal control over financial reporting as identified
below under the heading “Management’s Report on Internal Control Over Financial
Reporting.” Management anticipates that our disclosure controls and procedures
will not be effective until the material weaknesses are remediated.
Because
of the inherent limitations in all control systems, no evaluation of controls
can provide absolute assurance that all control issues, if any, within our
company have been detected. These inherent limitations include the realities
that judgments in decision-making can be faulty and that breakdowns can occur
because of simple error or mistake.
Management’s
Report on Internal Control over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting. The term “internal control over financial
reporting” is defined as a process designed by, or under the supervision of, an
issuer’s principal executive and principal financial officers, or persons
performing similar functions, and effected by the issuer’s board of directors,
management and other personnel, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles and includes those policies and procedures that:
(1)
|
pertain
to the maintenance of records that in reasonable detail accurately and
fairly reflect the transactions and dispositions of the assets of the
issuer;
|
(2)
|
provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the issuer
are being made only in accordance with authorizations of management and
directors of the issuer;
and
|
(3)
|
provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, or use or disposition of the issuer’s assets
that could have a material effect on the financial
statements.
|
6
Under the
supervision of our president, being our principal executive officer, and our
chief financial officer, being our principal financial officer and principal
accounting officer, we conducted an evaluation of the effectiveness of our
internal control over financial reporting as of September 30, 2010 using the
criteria established in Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). This
evaluation included review of the documentation of controls, evaluation of the
design effectiveness of controls, testing of the operating effectiveness of
controls and a conclusion on this evaluation. Based on this evaluation, our
management concluded our internal control over financial reporting was not
effective as at September 30, 2010.
A
material weakness is a deficiency, or combination of deficiencies, in internal
control over financial reporting, such that there is a reasonable possibility
that a material misstatement of our company’s annual or interim financial
statements will not be prevented or detected on a timely basis. In its
assessment of the effectiveness of our internal control over financial reporting
as of September 30, 2010, we determined that there were control deficiencies
that constituted material weaknesses which are indicative of many small
companies with small staff, such as:
(1)
|
inadequate
segregation of duties and effective risk
assessment;
|
(2)
|
insufficient
written policies and procedures for accounting and financial reporting
with respect to the requirements and application of both generally
accepted accounting principles in the United States and guidelines of the
Securities and Exchange Commission;
and
|
(3)
|
inadequate
security and restricted access to computers, including insufficient
disaster recovery
plans.
|
These
control deficiencies resulted in a reasonable possibility that a material
misstatement of the annual or interim financial statements could not have been
prevented or detected on a timely basis. As a result of the material
weaknesses described above, we concluded that we did not maintain effective
internal control over financial reporting as of September 30, 2010 based on
criteria established in Internal Control—Integrated
Framework issued by COSO. Our management is currently evaluating
remediation plans for the above deficiencies. During the period
covered by this quarterly report on Form 10-Q, we have not been able to
remediate the weaknesses described above. However, we plan to
take steps to enhance and improve the design of our internal control over
financial reporting.
Changes
in Internal Control
There was
no change in our internal control over financial reporting identified in
connection with the evaluation of our internal control over financial reporting
described above that occurred during our most recent fiscal quarter that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
7
PART
II - OTHER INFORMATION
Item
1. Legal Proceedings
From time
to time, we may become involved in various lawsuits and legal proceedings which
arise in the ordinary course of business. However, litigation is subject to
inherent uncertainties, and an adverse result in these or other matters may
arise from time to time that may harm our business.
From time
to time we may be named in claims arising in the ordinary course of business.
Currently, no legal proceedings or claims are pending against or involve us that
are required to be disclosed herein.
Item
2. Unregistered Sales of Equity Securities and Use of Proceeds
Nothing
that has not been reported previously.
Not
applicable
Item
4. Removed and Reserved
Item
5. Other Information
On
November 15, 2010, the Company entered into a Note Purchase Agreement (the
“Agreement”) with third party lenders (the “Lenders”). Pursuant to the
Agreement, the Company was paid gross proceeds of $2,750,000 in exchange for
promissory notes in the aggregate principal amount of $2,750,000, which notes
mature on January 14, 2011 (the “Notes”).
The Notes
bear interest at the rate of 6% per month; provided, however, the interest rate,
on a retroactive basis, shall be increased to 12% per month for that portion of
the Notes that have not been repaid by December 15, 2010. The interest rate is
subject to an increase to 18% per month in the event that certain assets of the
Company’s subsidiary or Baja are not pledged to the Lenders by November 30,
2010. The Notes may be accelerated if an event of default were to occur. In
addition to standard events of default, events of default which would lead to
the acceleration of the debt include the failure to complete the acquisition of
Baja by December 6, 2010 or the failure of the Company to secure sufficient
pledges of the assets of its subsidiaries or Baja prior to December 16, 2010.
The Notes and any accrued interest are payable on the maturity date of the
Notes. The Notes can be repaid at any time upon one day’s prior written notice
to the Lenders. The Notes are secured by certain assets of the Company and
Baja.
Item
6. Exhibits
31
|
Certifications
of the Chief Executive Officer and Chief Financial Officer pursuant to
Rule 13a-14(a)
|
32
|
Certifications
of Chief Executive Officer and Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
8
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
Umami
Sustainable Seafood Inc.
|
||
Date:
November 20, 2010
|
/s/ Oli Valur
Steindorsson
|
|
President
and
|
||
Chief
Executive Officer
|
||
/s/ Daniel G. Zang
|
||
Chief
Financial
Officer
|
9