Item 1. BUSINESS
Acquisition of Baja Aqua Farms and Oceanic
Following the completion of these acquisitions, our corporate
structure is as follows:
* Marpesca’s remaining
51% is owned by Baja’s General Manager, Victor Manuel Guardado France. Mr. Guardado is our nominee for Mexican regulatory
purposes, does not have decision-making authority and is not an executive officer or significant employee of Umami. Decision-making
authority for Marpesca lies solely with Baja’s management, including specifically Mr. Sarmiento.
Baja Aqua Farms S.A. de C.V
Prior and subsequent to our acquisition of Baja, its administrative
functions were performed by Oceanic Enterprises, Inc. (“Oceanic”). These functions included accounting,
payroll, human resources and related matters. While Oceanic does not have an ongoing sales function, in 2008 and 2009
it also sold Bluefin Tuna on Baja’s behalf and was responsible for overseeing the processing and shipping of that Bluefin
Tuna. In limited circumstances, Oceanic also acquires and exports certain equipment from U.S. vendors to Baja in cases where the
U.S. vendors require a U.S. entity as a counterparty. It has no other functions or operations beyond providing these services to
Baja and is not a significant subsidiary. Oceanic, which was formed in California in 2000 under the name Agritrade USA, Inc., was
an affiliate of Baja that we acquired concurrently with the Baja acquisition. Oceanic holds no intellectual property, does not
require any government approval to conduct its operations as currently conducted, has not engaged in research and development activities
or incurred any costs or experienced any effects related to compliance with environmental laws. As of June 30, 2011, Oceanic had
8 employees, all of whom were full time employees.
Industry Overview
Aquaculture Industry
A study covering the year in 2008, entitled “Blue Frontiers:
Managing the Costs of Aquaculture,” and published in 2011 by the WorldFish Center (“WFC”) in Penang, Malaysia,
using data from FAO FishStat, shows the growth continuing unabated. In 2009, world fisheries production was 145.1 million
metric tons. According to WFC, worldwide aquaculture production grew at an average annual rate of 8.4% from 1970 to
2008, which means that the growth in aquaculture has ‘significantly outpaced growth in world population.’
Global aquaculture accounted for 6% of the fish available
for human consumption in 1970. In 2009, assuming that all fish grown by global aquaculture is allocated to fish
available for human consumption, global aquaculture accounted for 46.8% of the fish available for human consumption according
to the WFC. The FAO report also describes that over half of the global aquaculture in 2008 was freshwater
fin-fish. Based on the FAO’s projections, it is estimated that in order to maintain the current level of per
capita consumption, global aquaculture production will need to reach in excess of 80 million metric tons of fish by
2050. WFC’s projections are even more aggressive. WFC estimates world aquaculture production to
rise to 75 million tons by 2020, and to 95 million tons by 2030.
Sales and Customers
Sales
In 2005, Kali Tuna, a limited liability company organized under
the laws of the Republic of Croatia, was acquired by Atlantis Group hf, or Atlantis, an Icelandic holding company with its key
market in Japan that seeks to produce, market and distribute sustainable seafood, with a focus on aquaculture. Atlantis is our
largest stockholder and an affiliate of our Chief Executive Officer. Atlantis or Atlantis Co., Ltd., (“Atlantis Japan”),
a wholly-owned subsidiary of Atlantis, served as our exclusive sales agent through the 2011 harvest season. In addition, for the
year ended June 30, 2011, Atlantis Japan, and other Atlantis subsidiaries, purchased from us, for their own account and not as
sales agents, approximately $ 40.9 million worth of Bluefin Tuna, representing approximately 71.9% of our total sales for that
period. There were no sales to Atlantis Japan or other Atlantis subsidiaries in the year ended June 30, 2010. We have adopted policies
that prohibit future related-party transactions with Atlantis. Except for this sales relationship, Atlantis Japan did not provide
any other function to us.
Our Growth Strategies
We believe that the following will be some of the critical elements
in fulfilling our strategy to become the world leader in the Bluefin tuna trade:
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Build up enough livestock to create carry-over inventories.
Our objective has been to lengthen the farming cycle. This is expected to result in the greatest weight growth and an
increase in the price paid per kilogram of fish by our buyers (the bigger the fish, the better the price per kilogram). In
addition, it will mitigate the effects of short-term fluctuations in catching due to weather or other abnormal situations that
may occur. Kali Tuna’s live stock inventories biomass increased from 1,315 metric tons at June 30, 2009 to 1,880 metric tons
at June 30, 2011. Baja’s live stock inventories totaled 1,530 metric tons at June 30, 2011.
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Strategic investments.
We will seek to acquire
stakes in tuna farming and fisheries with farming and/or fishing licenses in selected areas in countries with successful Bluefin
Tuna farming history that will complement our existing operations. We have identified a number of potential targets
but we have not yet entered into negotiations with any of them. We have had preliminary discussions with acquisition targets,
but no acquisitions are probable at this time. Progress in this area is dependent on available financing, including alternative
financing plans, such as refinancing or restructuring our debt, selling assets, reducing or delaying capital investments or seeking
to raise additional capital through the issuance of additional equity or debt.
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Cooperate closely with regulators.
Based on scientific
advice, we intend to assist regulators in formulating regulatory proposals aimed at the conservation of the Bluefin tuna. We
might also lobby for distribution of individual transferable quotas, or ITQs, and monitoring systems based on the experiences of
leading countries in the seafood industry that have historically had to rely on sustainable usage of their fishery by strictly
regulating and controlling the volume of catching.
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Consolidating and upgrading of the fleet.
We intend
to reduce the existing catching capacity to fewer and more efficient vessels as the quota system develops. One of the
important factors in sustainable fisheries management is to avoid overcapacity of fleet, which is caused by underdevelopment in
regulatory environments. We believe that a key part of sustainable resource management is to ensure that the harvesting
of resources is done in the most efficient and economic way while at the same time, maximizing the value and quality of each fish. However,
progress in this area is dependent on available financing.
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Increase our research and development.
We intend
to increase our efforts on closing the Northern Bluefin tuna cycle in cooperation with leading research institutes in this field
as well as enhancing feeding techniques to continue our efforts to minimize the food conversion ratio (FCR) of tuna. We also intend
to establish and fund a research center in Kali, Croatia to focus on these issues. However, progress in this area is
dependent on available financing.
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Upgrade and invest in feed procurement.
We intend
to achieve greater
cost efficiency in feed procurement by focusing on our catching and logistic activities. We
expect this to result in greater profitability, especially in light of our efforts to lengthen the farming cycle.
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We have historically leased vessels for our fishing operations
in Mexico for a ten-week period during the fishing season of May through August and have been required to select the lease period
well in advance of the fishing season. To reduce the risk of catching fewer Bluefin Tuna than anticipated due to the failure of
Bluefin Tuna schools to arrive in Mexican waters during our pre-committed vessel lease period, we may seek to acquire one or more
purse seiners in fiscal 2012, along with the requisite fishing licenses for our Mexican fishing operations. Purchasing fishing
vessels for our Mexican operations will allow us to be flexible with the timing of use of fishing vessels, which could substantially
increase the biomass caught in a season, as well as reduce our fishing costs over the longer term. We also believe we can significantly
lower our overall feed costs by purchasing sardine-fishing vessels for our Mexican operations. We estimate that each purse seiner
and sardine-fishing vessel acquisition would require approximately $5.0 to $8.0 million and $0.8 to $1.4 million, respectively,
until the purchase is consummated and the vessel reaches its ultimate destination. At that point, we believe we would be able to
mortgage the vessels or set up sale-leaseback arrangements and recover most of our initial cash outlay. Our current cash on hand
and capital needs for the foreseeable future may not allow us to fund these acquisitions. Therefore, to fund these acquisitions,
we may pursue joint ventures or debt or equity financing. Such funding may not be available on commercially reasonable terms or
at all. Similarly, we may not be successful in mortgaging or entering into sale-leaseback arrangements with respect to any vessels
we acquire on commercially reasonable terms or at all.
Competition
Our competitors in the Adriatic and Mediterranean that produce
Bluefin Tuna are Fuentes e Hijos (Spain), Aquadem (Turkey), Azzopardi (Malta), Sagun (Turkey) and Balfego (Spain). According
to a report issued by ICCAT, Kali Tuna has the largest output in the area based on output licenses granted to individual companies. As
of March 30, 2011, we held approximately 72% of all Bluefin Tuna production licenses issued in Croatia, or 5,030 metric tons out
of 6,980 issued in total. We are aware of competitors in the Mexican region that produce Bluefin Tuna, including Maricultura
del Norte (Mexico). Baja Aqua Farms occupies 60 cages out of less than a total of 100 cages in the area of its operation.
Regulation
Environmental Laws
We are subject to international quotas and to various national,
provincial and local environmental protection laws and regulations, including certifications and inspections relating to the quality
control of our production. During each of the years ended June 30, 2010 and June 30, 2011, we spent approximately $0.2
million on environmental law compliance, consisting primarily of various ICCAT and veterinary inspection fees, environmental monitoring
fees and biological waste disposal costs.
Croatian Environmental Law and Compliance
Our Croatian operation is subject to laws and rules that regulate
the location, design and operation of its farming sites. Under Croatia’s Environment Protection Act of 2007, we
are required to apply for location permits which are issued by the respective authority for each farming location and in accordance
with local ordinances. Applications must be accompanied by an environmental impact assessment that will identify, describe
and evaluate in an appropriate manner the impact of the relevant project on the environment, by establishing the possible direct
and indirect effects of the project on the soil, water, sea, air, forest, climate, human beings, flora and fauna, landscape, material
assets, cultural heritage, taking into account their mutual interrelations. Concession contracts (discussed below) relating
to each site are entered into based on the relevant location permits.
We are also subject to ongoing environmental monitoring requirements
in Croatia, including testing the quality of the water and performing emission measurements for all our installations. We are required
to conduct monitoring of our impact on the environment from two to four times per year at all our Croatian sites, which monitoring
is conducted by an independent company. The monitoring includes sea water analyses performed by the Institute for Public Health
in Zadar pursuant to rules established by the respective location permits. We also voluntarily monitor sea water daily.
Each of our farming locations in Croatia is provided with a
location permit approved by the Croatian Ministry of Environmental Protection. We believe that we are in material compliance with
applicable Croatian environmental laws and regulations.
Mexican Environmental Law and Compliance
The Mexican General Act for Ecologic Balance and the Protection
of the Environment of 1988, or the “General Act”, was influenced by U.S. environmental laws such as the Environmental
Impact Act, the Clean Water Act, the Clean Air Act and the National Environmental Policy Act. The General Act provides
for specific criminal and administrative sanctions assessable upon a failure to comply with regulations regarding hazardous materials
and also serves as the main legal framework of the federal environmental agency in charge of issuing the technological standards
for federal, state and local authorities to determine environmental non-compliance.
The General Act for Sustainable Fishing and Aquaculture (Ley
de Pesca, 2007) and its Regulations (Reglamento de la Ley de Pesca) constitute the main legal framework governing the conservation,
preservation, exploitation and management of all aquatic flora and fauna in Mexico. There are also certain secondary statutes,
such as Official Mexican Standards, or “NOMs.” NOMs applicable to our business are mainly related to water waste and
sanitary rules applicable to our product.
The Ministry of Agriculture, Livestock, Rural Development, Fisheries
and Food, or “SAGARPA.” and the National Commission of Aquaculture and Fisheries, or “CONAPESCA,” are the
authorities in Mexico responsible for the management, coordination and development of policies regarding the sustainable use and
exploitation of fisheries and aquatic resources.
Our aquaculture activities are developed in federal water bodies
under a concession title issued by CONAPESCA. In accordance with the General Act, the protection of aquatic ecosystems and their
ecological balance must be taken into account when granting concession titles for aquaculture activities. In this same regard,
as described herein, the application for a concession title must be accompanied with an environmental impact assessment. Authorization
by the Ministry of Environment and Natural Resources, or “SEMARNAT,” is required if the intended activities may cause
ecological imbalances or otherwise may surpass the limits and conditions set forth in the applicable regulations that protect
the environment and the preservation and restoring of the ecosystems. To initiate our activities, an application was filed before
SEMARNAT. SEMARNAT resolved that our activities cause no imbalances and are within the limits and conditions set forth in the
applicable regulations that protect the environment and the preservation and restoration of the ecosystems.
Under Mexican law, generators of waste are categorized in accordance
with the volume of waste they generate, as follows: (i) micro-generators (up to 400 kilograms per year); (ii) small-generators
(from 400 kilograms to 10 tons per year), and (iii) large-generators (more than 10 tons per year). Our activities produce a volume
of waste that categorizes us as micro-generators.
Our activities in Mexico produce hazardous and non-hazardous
waste. Hazardous waste includes industrial waste with corrosive, reactive, explosive, toxic, flammable or biological-infectious
characteristics. Although all residues may entail environmental obligations for generators, hazardous residues are subject to compliance
with the stringiest rules. In our case, our business generates waste oils. Therefore, among our obligations in respect of hazardous
waste are: (i) obtaining a registration before SEMARNAT of our management program for hazardous waste, and (ii) maintaining a record
for our disposals (through official forms). There is no obligation to report this information.
In respect of the non-hazardous waste generated by our activities
(mainly animal organic waste), we are subject to the provisions of the Environmental Protection Act of Baja California, or the
“Environmental Provincial Act.” This statute provides for the management of special waste and the generators’
responsibility to handle, transport and dispose of solid waste, unless that waste is transferred to the competent authority or
to an authorized private company. Liability ceases upon deposit of the waste in authorized containers or at sites approved by the
competent authority. In addition, the Environmental Provincial Act establishes that generators of special waste must maintain a
Waste Management Program that specifies the form in which special waste is selected, gathered, transported and recycled after treatment
or their final disposal in controlled terms. All non-hazardous waste must be handled by authorized companies registered as non-hazardous
waste generators. It is mandatory to file annual reports to the relevant authority.
As mentioned above, we are also subject to the National Waters
Act and the General Act for Sustainable Fishing and Aquaculture in Mexico, which, among other things, governs the grant of concessions
for commercial fisheries. Concession holders have, among others, the following environmental obligations:
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assist in the preservation of the environment and the conservation
and reproduction of species, including repopulation programs;
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comply with the NOMs and measures of aquatic health; and
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maintain in good condition land-based establishments and permanent
or temporary cultivation equipment in water bodies.
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We are also required to monitor our activities on all our farming
sites for ongoing compliance and we are subject to periodic inspections. Our environmental monitoring requirements in Mexico include
testing the quality of the water for harm caused by normal daily feeding activities (including the water’s oxygen level,
temperature and visibility), performing bi-weekly nutrient analysis of the water column, and performing sediment testing at each
site twice per year to measure any impact on the local marine environment.
We have obtained permits for each farming location in Mexico
and believe that we are in material compliance with applicable environmental laws and regulations.
Fishing Quotas
Internationally, ICCAT regulates Atlantic Bluefin Tuna quotas
that are allocated to and enforced by individual countries, including Croatia. ICCAT quotas for individual countries can vary each
year depending on the status of tuna stock worldwide. The Croatian Fishing Ministry allocates the ICCAT-mandated quota for Croatia
annually on a boat-by-boat basis. Each boat permitted to engage in fishing activities each year by the Croatian Fishing Ministry
is allocated a percentage of the total annual ICCAT fishing quota for that calendar year by the Croatian Fishing Ministry. For
calendar year 2011, ICCAT allocated a quota of 367 metric tons to Croatia, of which we secured 36%, or 133 metric tons.
Fishing quotas in Croatia can be transferred, leased, or assigned
to other boat operators. We regularly lease quota from other boat operators. The Croatian Fishing Ministry also limits the number
of boats that can fish for Bluefin Tuna in any given fishing season. In calendar year 2011, of the 39 boats allocated fishing quotas
by ICCAT, only twelve were permitted by the Croatian Fishing Ministry to engage in fishing activities. We had the right to receive
the fish caught by four of those boats. In 2013, the number of boats will be decreased to seven. The number of boats allowed in
subsequent years has not yet been determined.
ICCAT divides the boat allocations into three categories—boats
up to 24 meters, boats from 24 meters to 40 meters and boats over 40 meters. ICCAT determines which boats to allow to fish by reviewing
the fish quota allocations for all the boats over the past several years. The boats with the highest quotas (either quotas expressly
granted to the boat or assigned to the boat by another operator) are granted fishing permits.
If any boat violates a provision of the ICCAT regulations, its
fishing license is revoked and it is prohibited from any further fishing.
Farming Concessions
We operate our farming sites under concession permits granted
by the applicable national authorities of Croatia and Mexico.
In Croatia, we operated five farming sites with an aggregate
input quota of 1,818 metric tons of new Bluefin Tuna per annum as of June 30, 2011. Following is a detailed breakdown of our farming
sites and the terms of our concessions in Croatia as of June 30, 2011, which are based both on new fish allowed to enter farms
annually and total farm fish holding capacity:
Site
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Annual New
Fish Input
Quota (in metric
tons) (1)
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Maximum
Farming
Capacity (in
metric tons)
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Surface (in
m2)
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Expiration Date
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Renewal
Process
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Mrdjina
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674
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1,240
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160,000
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February 28, 2026
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Restricted public bid
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Fulija-Kudica
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(2)
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500
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120,000
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December 23, 2018
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Restricted public bid
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Zverinac
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314
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1,500
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140,000
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December 14, 2026
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Restricted public bid
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Kluda
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830
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1,000
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157,000
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October 31, 2016
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Restricted public bid
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Ispred Morotove Glave
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—
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560
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40,000
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April 30, 2012
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Restricted public bid
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Total:
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1,818
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4,800
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617,500
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(1) Each input quota is based on historical records of the respective
farm location. We believe the quotas can be re-allocated to other existing farms (to the extent it would not exceed the farm’s
maximum farming capacity) or to any new farming site, although any change to the terms of the permit (including the farming quotas)
are subject to approval.
(2) Fulija’s annual new fish input quota is combined with
Mrdjina.
All concession permits are awarded until the indicated expiration
dates. Concession permits can be revoked due to a violation or breach of the respective concession permit, including
failure to pay the concession fees or misuse, such as using the farming sites in contravention of the purpose set out in the permit,
failing to comply with environment protection regulations and damaging the area surrounding farming sites. Prior to the revocation
of the respective permit due to the violation and breach of the permit terms, the competent state authority gives the permit holder
a chance to cure the non-compliance. Upon expiration, each of these concessions will be open for public bid if the competent local
authority determines it is appropriate to subject the concession to a public bidding process. Concession permits may be terminated
prior to the expiration of the term, even without any breach or violation, if the Croatian Parliament determines it is in the public
interest to terminate the concession permit. Upon such termination, the concession user is entitled to recover damages.
In Mexico, we operated four sites, which are allowed an aggregate
input of 2,320 additional metric tons of Bluefin Tuna per annum as of June 30, 2011. Following is a detailed breakdown of our farming
sites and the terms of our concessions in Mexico as of June 30, 2011:
Site
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Farm (in metric
tons)(1)
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Maximum
Number of Cages
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Expiration Date
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Renewal Process
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Isla Coronado
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720
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18
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November 23, 2020
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Auto-renewal by the Mexico Department of Fisheries
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Bahia Salsipuedes 1
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400
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10
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May 2, 2012
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Auto-renewal by the Mexico Department of Fisheries
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Isla de Cedros
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800
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20
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October 10, 2014
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Auto-renewal by the Mexico Department of Fisheries
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Bahia Salsipuedes
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400
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10
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October 10, 2015
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Auto-renewal by the Mexico Department of Fisheries
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Total:
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2,320
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58
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(1) Based on maximum input per annum.
All concession permits are awarded until the indicated expiration
dates, but can be suspended or revoked by the authorities citing the public interest. All four of these concessions may be extended
with CONAPESCA’s approval. For such purposes, an application requesting the extension of the concession period must be filed
with CONAPESCA at least 30 days in advance of expiration; where applicable, the environmental impact authorizations must be in
full force and effect. A concession title may be extended for an equivalent period, and the extension is subject to (i) assessment
of compliance with all the obligations established in the concession title; (ii) the opinion of the National Institute of Fishing,
or “INAPESCA”, and (iii) compliance with the Programs of Aquaculture Management. Like in Croatia, we monitor various
indicators of sea water quality in our Mexico operations daily or monthly, as applicable.
In addition, Croatian and Mexican governmental agencies require
commercial fishing vessels to be licensed. Individual operators of the vessels are also subject to permit requirements.
In Mexico, in connection with applicable regulations, these permits are issued by CONAPESCA. The permits require us to inform the
competent authorities of the volume and location of the catch and report all the activities in the vessel through a log book.
We believe that our Croatian and Mexican operations are currently
in compliance with all material aspects of these quota and licensing requirements.
Staff
As of June 30, 2011, we directly, through contract with an independent
labor contractor or indirectly, through one of our variable interest entities, employed 523 persons globally, including 28 part-time
employees. Of these, Umami employed 11 individuals, including executive and finance personnel. Kali Tuna had 97 employees (including
27 part-time employees), Oceanic had 8 employees, including executive, finance and administrative personnel and MB Lubin had 47
employees (including one part-time employee). Baja had 360 full-time staff most of whom were employed pursuant to an agreement
with Servicios Administrativos BAF, an independent labor contractor, including 19 administrative staff members, 200 farm workers,
121 fishermen and 20 employees active in other operations. Seasonal changes occur as a result of additional hires required during
the fishing season. None of our staff is represented by a labor union, and Kali Tuna, Oceanic and Baja consider their staff relations
to be excellent.