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Progress Reports

Company Update

12 September 2011

It is with pleasure that we report the progress on the company after the completion of its first major harvest.

1.      Harvest Results
The company was very pleased with the results of its initial harvest.  Overall we harvested in excess of 50 tonnes of premium greenlip abalone.  This has been by far the greatest harvest achievement of the company since its inception.  We were hoping, more than expecting, to be closer to 80 tonnes but in hindsight this was over optimistic based upon the quality of the stock that was inherited after we took over from the Administrator.
There were a number of extremely encouraging outcomes from the recent harvest:
·         The quality of the product was clearly very superior to the land based product;
·         The company developed and improved the harvesting techniques steadily over the harvest period;
·         The results from the cages we seeded on a 12 month in sea process achieved our expectations and gave the company confidence in the newly defined vertically integrated business model;
·         There has been a substantial increase in staff morale now that product has been harvested and there is uniform belief and confidence in our farming practices;
·         We are experiencing improved demand for our product – a challenge for the future will be to satisfy demand expectations;
 
2.      Personnel
The Board has been delighted to see the continued development of the senior operations team and all staff working with them.  The last 2 years have been exceptionally challenging.  The operations team and senior management have accepted far greater responsibilities over this period.  They have all willingly worked excessive hours without additional remuneration and at a cost to their families and partners.  The achievements of the company to date are as a direct result of their commitment and passion to succeed.
It is clear that the skill and knowledge base or our management and operations team has greatly improved and will be a valuable and capable resource for the business into the future.
The contribution of Professor Anthony Cheshire and Stephan Schilling continues to add greater knowledge and depth of skills to the management team in areas of animal husbandry, infrastructure development, harvesting and processing our premium product and their support and experience has been invaluable.  They have also enabled us to open up more opportunity areas for the business to progress into the future.
 
3.  Acquisition of the SAS Hatchery
Your company is in the final stages of completing the execution of the agreement to purchase this hatchery which is a key strategic step.  Initially this was contemplated to occur as part of the capital injection of a cornerstone investor, however due to the critical strategic nature of the nursery acquisition, AIL has had to put other arrangements in place to secure the hatchery facilities whilst discussions with the strategic investment parties have continued.  Timing is critical to the operational demands and to ensure we achieve the advantages that flow from a hatchery we have had to progress this acquisition without the completion of a cornerstone investment into AIL.

4.      The Financial Position of the Business
Investor contributions from deferred fees initially enabled us to acquire the assets from the Administrators as was planned.  This also provided a limited amount of working capital for wages, feed and operational expenses to enable us to work through to a harvest.  Since the harvest we have generated revenues from the sale of the product.  We have not been able to generate as much revenue from sales as expected due to the poor stock we inherited leading to reduced volumes.  Also the currently unfavourable US exchange rates took almost 20% off our sales revenue expectations.
Working capital has been very tight but has been well managed by our office manager, Karen Quinn.  All investors will be aware of Karen’s contribution as she has diligently managed our day to day financials but also provided much needed additional support to all investors through the recapitalisation process.
The business now has an extremely sound knowledge base and a very competent operations team.  The foundations of the business have now been very well established to enable the anticipated growth in production to occur.
However we remain reliant on the anticipated capital injection from a cornerstone investor to enable the business to achieve its growth objectives.  This was highlighted from the outset when the recapitalisation of the company was contemplated and the efforts and focus of your Board over the last twelve months have been directed towards the securing of a cornerstone investor.  This is now a critical component for the future in order to achieve our growth objectives and allow scale up to a level of production to meet operational costs and return consistent levels of profitability.
Shareholders will be aware of course that access to the equity investment market has been very difficult over the past couple of years due to the Global financial conditions.

5.      Progress with Cornerstone Investors
The Board of AIL has been working through due diligence since April of this year with several parties that have expressed interest in the AIL operations.  Generally, much of the interest has come from Asia and consequently the due diligence process has been extensive and lengthy.  Notably however, investor interest in the company has not lessened throughout the process.  All levels of senior management have been required to support the due diligence process which has required several lengthy visits and inspections at both the hatchery site in Port Lincoln and the sea farm operations at Elliston.  All site inspections have progressed very well and generally provided greater levels of comfort to the proposed investors.
Throughout the due diligence processes operations have continued, including the harvesting of our superior greenlip product.
Despite the best efforts of all concerned, it appears that we are still around 2 – 3 months from securing the necessary cornerstone investment.  This is because of the parties involved, the difficulties in translation, the geographic locations involved and the necessity to fully understand the operations of AIL and its fully integrated business model which is unique to this industry.
Because of the extended due diligence and likely investment time frame there has been additional pressure on the business in managing its cash resources through to completion as well as conforming with the company’s proposed operational timeframe for spawning and translocation of stock.  We have had to be reasonably flexible in these areas but have continued in line with our plans in order to ensure the production targets can be achieved.
Cash flow, as anticipated, remains tightly managed and every effort is being made to be prudent with the company’s resources without endangering the opportunity for a cornerstone investor.
We are anticipating completing a cornerstone investment in the near future and are committed to ensure we are well placed to do so.

6.      The Future Challenges
A great deal of progress has been made to date and the future holds a number of known challenges that we are well positioned to manage.
Subject to securing a cornerstone investor, AIL will be working on the following challenges:
·         Bedding down the operations at the hatchery
·         Improving the translocation procedures for stock transfers between the hatchery and the land farm (already progressing well)
·         Ensuring husbandry practices provide the best genetic stock for the sea cages
·         Improving the feed recipe and suitability for sea farm environment
·         Establishing additional sea cages on our existing lease sites
·         Looking for other areas of operational efficiency and productive capacity (already well progressed but more work required
 
7.      Opportunities
There are a host of other opportunities that are available for the company to progress with in the near future.
For example, with the assistance of Professor Cheshire we have been invited to participate in the Australian Seafood CRC.  We see AIL’s participation in this and the Premiers Science and Research Council projects as providing substantial opportunity for AIL to be well positioned for the future in terms of its access to the latest research and technologies that will assist us meet many of the challenges above..

The Board believes AIL is well positioned and has been ideally placed for future growth and success.  However, as we have always said, the ability to finalise a cornerstone investor is still needed to provide the opportunity for the company’s plans to be realised.

 

PROGRESS REPORT MAY 30, 2011

We are pleased to provide an update since our last report in February 2011.

 Operations      

 1.            We completed some trial harvests of stock in February/March 2011 whereby we harvested 3 cages and extracted around 10 tonnes of abalone.  This was all sold by our processor – Western Abalone processors.  The product was all converted to meat and shipped to Hong Kong.  This exercise was undertaken as a trial because the company had never previously been in a position of conducted a significant harvest and we needed to establish the procedures and test the systems from both the farm and the processing end.  The end result was quite successful but highlighted a number of areas where improvements could be made which were subsequently incorporated into our systems and processes.

2.            As a result of the above trials we commenced harvesting all remaining cages from 11 April 2011 and have been harvesting everyday with the exception of a week over Easter and a week in late May due to unsuitable weather.  All harvested stock has been sent to the processor and subsequently sold.  We are harvesting almost one tonne per day, as the processor cannot handle any more from the processing end. Up to the date of this report our harvesting has produced in excess of a further 30 tonnes.

3.            Based upon our current progress we will be continuing to harvest throughout June and anticipate that this will extend into July.

 It should be noted that a fair proportion of the current stock being harvested is the 2008 growers stock.  This is by no means the most favourable stock as it was put into the water under the old business model and is therefore largely sub-optimal in terms of grades, growth rates and development characteristics.  Despite the growth & mortality problems the product does, however, present well to the consumer.  As we have already made clear, the company’s future plans will not be to use stock of this age, grade or size for our sea cages.  Nonetheless we are pleased that the work we have done has resulted in some recovery of this stock.  A full analysis of the stock performance will be done once the harvest is completed and made available to all investors.

Strategic and Governance Matters


1.            The company has over the recent months completed its investigation, due diligence and negotiations to acquire its own hatchery in Port Lincoln and an agreement is in the final stages of legal completion.  This is a major step forward for the company that will alleviate many of the past problems with quality of stock.  This has taken much of managements and the Board’s attention as it is a major acquisition but is absolutely vital for the company’s future strategic development.

2.       In order to fund this acquisition and support our growth plans (as outlined in the PDS to investors) the Board has also been active in seeking a major cornerstone investor.  This has required the issue of an Information Memorandum and associated documentation.  We have one party that has now completed due diligence with another 2 expressing interest to commence due diligence shortly.  The work involved in this process has been extensive and has also taken up much management and Board time.  We are hopeful of securing the cornerstone investor for the business over the next few months.

3.            As shareholders will have noted the 2009/10 Annual General Meeting has not yet occurred, the reason being the delay in obtaining the final audited accounts for 2009/10 as a result of the difficulties for the auditor in obtaining the necessary information for the period during administration and under the Deed of Company Arrangement.  These difficulties have now been largely surmounted and we anticipate that the postponed meeting can be called shortly.

Overall, the business has progressed essentially in accordance with our plans despite extensive challenges in a number of areas and certainly we now have a greater appreciation of how the business model needs to operate to provide a successful outcome to shareholders.  As investors would appreciate the business model, the infrastructure and legal problems we inherited from the Administrators has taken some time and has needed a huge effort to meet the challenges associated with this.

 
As a result of this effort we now have a far better foundation – certainly in terms of knowledge of what is required for both land and sea farming of abalone, as well as an improved level of infrastructure to support our operations.  The Board recognises there are still challenges remaining, including securing a major investor, but are pleased with what has been achieved to date.

REPORT FEBRUARY 1, 2011.

The period since the last update has been the busiest and most successful period for the company in its history. The company completed a major clean up after the last winter storm and then embarked upon an aggressive restocking schedule. Major maintenance and sea cage infrastructure upgrades commenced in the spring and extended into the summer. The company now prepares to commence its first major harvesting program next month.

COMPANY STOCK

Over the spring months the company purchased an additional 200,000 larger sized juveniles (80mm and above) and placed these in 5 sea cages. These are growing very well in accordance with our plans and are expected to yield a harvest or around 30 tonnes in the autumn months of this year. Mortality of this stock is less than 2% per month on this stock. To date the performance of this stock is slightly exceeding our initial expectations and we are very encouraged that this stock result will reinforce our beliefs in the new business approach to seeding and husbandry operations.

In addition there has been plenty of work occurring on the stock that was seeded by the old administration in 2008. Despite the profile of this stock (poor growth rate and inefficient stocking density  a result of poor initial husbandry) the company has spent the last 3 months spreading this stock over spare cages, increasing the supplementary feed, extensive predator removal, surveying and measuring and general cage maintenance with the objective of achieving the maximum yield. Our analysis indicates that that there are between 750,000 and 800,000 animals spread across 15 cages. Harvesting of these animals will commence in autumn and will extend into the winter. The current intention is for all of the 2008 stock in the cages will be harvested before the end of the winter. This stock is expected to yield between 80 and 100 tonnes. Growers and shareholders will be updated throughout and upon completion of the harvest programme.

As well as the stock above the company purchased another 1.3 million juvenile animals (20-25mm average) whichwere transferred in the winter and autumn of last year to the land grow out facility in Streaky Bay. These animals will be grown out to a size suitable (60mm +) for placing into the Elliston sea cages later this year  transfer is expected between winter and spring months.

INFRASTRUCTURE MAINTENANCE

Following the end of winter substantial maintenance schedules have been implemented to ensure grid security and net integrity. This involved replacement of grip ropes where necessary, repositioning of anchors and additional anchors for additional security on the grid and has been a major work schedule over the last few months. The work has included decommissioning of certain nets and relocating ring tops on the lease to best use our existing sea cage configuration.

The company purchased a 21m vessel in November 2010 to assist on site with the grid maintenance program. The benefits of this acquisition are now being fully realised as this vessel has been fully deployed to date and will be central to our harvesting program for lift cages, baskets and stock from the water.

The company has also purchased a second hand truck for stock transfers and a shark cage for diver security when inspecting the grid and anchors.

STRATEGIC INITIATIVES

AIL is well advanced in its discussions with a hatchery and grow out farm with a view to combining the business operations and provide the company with a fully integrated business whereby the production process is controlled from the hatchery through the grow-out on land and sea. This will provide the company with security of stock quality and quantity for its future production plans.

The company is also well progressed with plans for additional grids and cages on the Elliston lease site.

For the above initiatives to be fully realised the company will need to secure a significant cornerstone investor for the business. The company has been developing plans for this for over six months and believes it is well positioned to achieve further investment later this year.

MANAGEMENT AND WORKFORCE

Since the last report to investors, the company has appointed Stephan Schilling as the acting General Manager of the company operations. Stephan has had lengthy experience in the seafood industry in Australia in senior positions and has deep industry knowledge in managing fishing fleets, harvesting and processing of a range of seafood has already provided the company with a broad range of additional knowledge and structure that will be important for its future growth. Stephan joined the company in October 2010.

During the last 3 months the operations team which includes Matthew Wohling (Husbandry Manager), Elliott Nunan (Sea Cage Maintenance Manager). Clay Dehle (Chief Diving Officer) and Christian Weetra (Land Support Manager) have all demonstrated their capacities and commitment to the future of the company. Because of the increased workload they have assumed additional responsibilities and have applied themselves very well. The operations team led by Stephan Schilling have worked enormous additional hours and we thank them all for their commitment throughout this very busy period.

The Administration team led by Karen Quinn has also been working at full capacity supporting the workforce, maintaining the accounts of the company and co-ordinating the very many individual investor communications that have been necessary.

We have continued to have some difficulties securing skilled divers and support workers throughout the summer months. Here, Lindy Henriksen has done a great job, managing our existing resources and procuring divers and other workers to ensure we are adequately resourced.

Professor Anthony Cheshires continued and extensive involvement in the improvement of husbandry and the strategic directions of the business has been greatly appreciated by management and all levels of staff.

SUMMARY

The last 3 to 6 months have been exceptionally busy and exhausting for all involved with the company. The Board would like to thank the entire workforce for their dedication, persistence and commitment which will give the company the best opportunity to be successful.