Management s Discussion & Analysis. For the three and nine months ended December 31, 2014 and AgriMarine Holdings Inc.

Transcription

1 Management s Discussion & Analysis For the three and nine months ended December 31, 2014 AgriMarine Holdings Inc. February 26, 2015

2 The following ( MD&A ) for the three and nine months ended December 31, 2014 has been prepared in accordance with the requirements of National Instrument Continuous Disclosure Obligations as at February 26, 2015 for AgriMarine Holdings Inc. and its subsidiaries (collectively, AgriMarine or the Company ). The MD&A should be read in conjunction with the corresponding interim financial statements of the Company for three and nine months ended December 31, 2014 and related notes attached thereto (collectively, the December 2014 Interim Consolidated Financial Statements ), as well as the audited consolidated annual financial statements, related notes thereto (collectively, the Audited Consolidated Financial Statements ) and MD&A for the year ended March 31, All tabular dollar amounts in this MD&A are expressed in thousands of Canadian dollars, except for the price per share. The number of shares is expressed in thousands. The consolidated financial statements upon which this MD&A is based, and comparative information presented therein, have been prepared in accordance with International Financial Reporting Standards, ( IFRS ) as issued by the International Accounting Standards Board ( IASB ) and interpretations issued by the IFRS Interpretations Committee ( IFRS IC ). The preparation of consolidated financial statements under IFRS requires management to make estimates and assumptions that affect amounts reported and disclosed in such consolidated financial statements and related notes. The Board of Directors has reviewed the MD&A and other publicly reported financial information for usefulness, reliability and accuracy. Additional information relevant to the Company is available for review on SEDAR at

3 TABLE OF CONTENTS CAUTIONARY NOTE REGARDING FORWARD-LOOKING INFORMATION... 3 DESCRIPTION OF BUSINESS... 4 DISCUSSION OF OPERATIONS AND SIGNIFICANT EVENTS... 5 SUBSEQUENT EVENTS... 7 OUTLOOK... 7 SELECTED FINANCIAL INFORMATION... 8 RESULTS FROM OPERATIONS... 8 COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 2014 AND SUMMARY OF QUARTERLY RESULTS FINANCIAL CONDITION REVIEW COMMITMENTS AND CONTINGENCIES MANAGEMENT OF CAPITAL FINANCIAL INSTRUMENTS AND RISK MANAGEMENT DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL CONTROLS OVER FINANCIAL REPORTING RELATED PARTY TRANSACTIONS OUTSTANDING SECURITIES SIGNIFICANT ACCOUNTING POLICIES, ESTIMATES AND JUDGMENTS RISKS AND UNCERTAINTIES

4 CAUTIONARY NOTE REGARDING FORWARD-LOOKING INFORMATION This MD&A contains certain forward-looking information and forward-looking statements, as defined in applicable securities laws (collectively referred to herein as forward-looking statements ). These statements relate to future events or the Company s future performance. All statements other than statements of historical fact are forward-looking statements. Often, but not always, forward-looking statements can be identified by the use of words such as seeks, anticipates, plans, continues, estimates, expects, may, will, projects, predicts, potential, intends, could, might, should, believe and similar expressions. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results to differ materially from those anticipated in such forward-looking statements. The forward-looking statements in this MD&A speak only as of the date of this MD&A or as of the date specified in such statement. Specifically, this MD&A includes, but is not limited to, forward-looking statements regarding: the validation of and commercial viability of the Company s technology; the environmental friendliness of the technology; the schedule for certain events to occur in regard to production; capital efficacy and economics of the technology; the Company s ability to meet its working capital needs; the plans, costs, timing and capital for future development and expansion of the Company s operations, including the costs and potential impact of complying with existing and proposed laws and regulations; management s outlook regarding future trends; sensitivity analysis on financial instruments and biomass, which may vary from amounts disclosed; and general business and economic conditions. Inherent in forward-looking statements are risks, uncertainties and other factors beyond the Company s ability to predict or control. These risks, uncertainties and other factors include, but are not limited to, price volatility, changes in debt and equity markets, timing and availability of external financing on acceptable terms, increases in costs, environmental compliance and changes in environmental and other local legislation and regulation, interest rate and exchange rate fluctuations, changes in economic and political conditions and other risks involved in the aquaculture industry, as well as those risk factors listed in the Risk Factors section below. Readers are cautioned that the foregoing list of factors is not exhaustive of the factors that may affect the forward-looking statements. Actual results and developments are likely to differ, and may differ materially, from those expressed or implied by the forward-looking statements contained in this MD&A. Such statements are based on a number of assumptions that may prove to be incorrect, including, but not limited to, assumptions about the following: the availability of financing for the Company s activities; capital and operating costs; the Company s ability to attract and retain skilled staff; timing of the receipt of regulatory and governmental approvals for expansion projects and other operations; market competition; and general business and economic conditions. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the Company's actual results, performance or achievements to be materially different from any of its future results, performance or achievements expressed or implied by forward-looking statements. All forward-looking statements herein are qualified by this cautionary statement. Accordingly, readers should not place undue reliance on forward-looking statements. The Company undertakes no obligation to update publicly or otherwise revise any forward-looking statements, whether as a result of new information or future events or otherwise, except as may be required by law. If the Company does update one or more forward-looking statements, no inference should be drawn that it will make additional updates with respect to those or other forward-looking statements, unless required by law. 3

5 DESCRIPTION OF BUSINESS AgriMarine Holdings Inc. The Company is in the business of rearing salmon and trout through its operating subsidiaries using net pens and its proprietary solid-wall closed containment technology and related systems (the AgriMarine System or the Technology ). AgriMarine Holdings Inc. is currently listed on the Canadian Securities Exchange ( CSE ) under the stock ticker symbol FSH. The Company is a reporting issuer in the Provinces of British Columbia and Alberta, Canada. Organizational Structure As at the date of this MD&A, the Company held four wholly owned subsidiaries directly and indirectly as reflected in the organizational chart below: AgriMarine Technologies Inc. was incorporated on February 14, 2014 to focus on technology design and development and to provide engineering and consulting services to the aquaculture industry. AgriMarine Industries Inc. ( AgriMarine Industries ) oversees farm operations and business development opportunities in Canada. West Coast Fishculture (Lois Lake) Ltd. ( WCFC ) was acquired on December 6, 2013 by AgriMarine Industries. WCFC was incorporated in British Columbia on October 16, 1979 and holds a freshwater fish hatchery and production facility at Lois Lake, near Powell River, BC. This acquisition marks the Company s transition into active commercial scale farming. The Company is now installing four closed containment vessels to improve and expand operations at the production farm. Benxi AgriMarine Industries Inc. ( Benxi AgriMarine ) is registered as a Wholly Foreign Owned Enterprise in China for the commercial application of the AgriMarine System and rears trout and salmon at its production facility located in Benxi County, Liaoning Province, China. Benxi AgriMarine is in active production of salmon and trout for the local market and continues to upgrade and modernize its production facilities and processes. Subsequent to December 31, 2014, the inactive subsidiaries, AgriMarine (Asia) Limited and AgriMarine Aquaculture Technologies (Beijing) Co. Ltd., were disposed of. 4

6 DISCUSSION OF OPERATIONS AND SIGNIFICANT EVENTS Operations Canada AgriMarine Holdings Inc. On December 6, 2013, the Company acquired all of the outstanding shares of West Coast Fishculture (Lois Lake) Ltd. and West Coast Fishculture Ltd. (collectively, WCFC ) for cash consideration of $5,220,000. WCFC is the largest producer of Steelhead salmon in the Province of British Columbia. Their product, Lois Lake Salmon is featured at premium restaurants and by quality fish distribution companies. The Company intends to demonstrate the anticipated benefits of its solid wall containment technology in a commercial environment with the initial installation of four rearing tanks at the Lois Lake production farm. During the nine months ended December 31, 2014, AgriMarine experienced extraordinary mortalities of fish in the net cages at Lois Lake due to unusually high surface water temperatures over the summer. This has resulted in a write-down of biological assets in the amount of $1,488,000. The transition to solid-wall containment rearing tanks, with their ability to supply cooler water from depth, is expected to largely mitigate these adverse environmental effects. As at the date of this MD&A, a total of four rearing tanks have been assembled, installed, and commissioned at Lois Lake, and an additional two tanks are planned to be installed over the coming months. Along with the installation of new tanks at Lois Lake, AgriMarine is also working to rapidly regrow the biomass at its farm sites. China During the fiscal year ended March 31, 2013, the Company was unable to make its scheduled progress payments to Benxi AgriMarine in support of continued operations and establishment of a self-sufficient sales and production base. As a result, operations at the Benxi farm, including sales, were disrupted. Reduction in feed supply led to an increase in mortalities at both the hatchery and grow-out tanks. During the fiscal year ended March 31, 2014 as well as the last three quarters, the Company has advanced sufficient funds to continue operations at Benxi. Restocking activity at the hatchery is underway and fish sales, largely to local markets, have resumed. Recapitalization Transactions From January 2013 to the date of issuance of this MD&A, Dundee Agriculture Corporation ( DAC ), a whollyowned subsidiary of Dundee Corporation ( Dundee ) has made a number of investments by way of debt and equity (please see Outstanding Securities convertible securities for more complete details). As detailed below, in July 2014, DAC exercised its right of conversion in regard to certain of its convertible loans. In accordance with the terms of the applicable loans, an aggregate of $18,529,000 of principal was converted into common shares of the Company at conversion prices ranging from $0.18 to $0.23 per common share and an aggregate of $2,234,000 of accrued interest was converted into common shares of the Company at a conversion price of $0.13 per common share. The Company now has 109,707,900 common shares issued and outstanding. Dundee held 94.53% of the shares of the Company as of the date of this MD&A, and as such Dundee has control over the Company, and these transactions are deemed to be from a related party. 5

7 Acquisition of Secured Loan In January 2013, DAC acquired a loan in default in the principal amount of $2,250,000 and secured against all of the assets of the Company (the Secured Loan ) payable to the original note holder. The Secured Loan continues to bear interest at 10% per annum. As at the date of this MD&A the default remains uncured. Conversion of Convertible Notes The Company issued convertible notes to DAC in the principal amounts of $5,000,000 and $10,000,000 on April 22, 2013 and September 20, 2013, respectively (the Convertible Notes ). The Convertible Notes bore interest at a rate of 12.68% per annum. Subject to applicable regulatory approval DAC could elect to convert all or a portion of the principal amount of the Convertible Notes into common shares of the Company at any time at a price of $0.225 and $0.23 per share, respectively. As the Secured Loan was already in default, based on the terms in the Convertible Notes agreement, the Convertible Notes were payable on demand. On July 2, 2014, the principal and accrued interest of the Convertible Notes were converted into the Company s common shares. Conversion of Bridge Loan, as amended On June 14, 2013, the Company made certain amendments to the terms of a loan advanced from DAC on February 7, 2013 in the amount of $1,750,000 (the Bridge Loan ). The Bridge Loan, as amended, was evidenced by an amended and restated promissory note in the principal amount of $3,529,000 (consisting of $1,750,000 principal amount of the Bridge Loan, $79,000 of accrued interest on the Bridge Loan and an additional advance of $1,700,000). The Bridge Loan continued to bear interest at a rate of 12.68% per annum, was collateralized by all of the assets of the Company, and was payable by the earlier of June 10, 2018 or at any time on demand. Pursuant to the terms of the Bridge Loan, and subject to applicable regulatory approval, DAC could elect to convert the principal balance of the Bridge Loan into common shares of the Company at any time at a price of $0.18 per share. The promissory note and any common shares issued upon such conversion were subject to a hold period that expired on October 11, On July 2, 2014, the principal and accrued interest of the Bridge Loan were converted into the Company s common shares. Short-term Loans On February 13, July 25, and August 7, 2014, the Company received loans advanced from DAC in the amounts of $5,000,000, $500,000, and $2,980,000, respectively, The Loans bear interest at a rate of 12.68% per annum, are collateralized by all of the assets of the Company and its subsidiaries, and mature one year from the respective dates of issuance. As at the date of this MD&A, the $5,000,000 loan matured. The Company is in negotiation with DAC regarding the terms and method of repayment. Credit Facilities On October 29, 2014, the Company entered into an agreement for a draw down credit facility from DAC in the amount of up to $4,359,000 (the Facility ). Funds drawn will bear interest at a rate of 12.68% per annum calculated pro rata as to the date of such advance. The Facility will mature one year from the date of issue and is secured by all of the assets of the Company and its subsidiaries. As at the date of this MD&A, $3,850,000 was drawn down under the Facility. Subsequent to December 31, 2014, the Company entered into an agreement for a second draw down credit facility from DAC in the amount of up to $5,000,000. Funds drawn will bear interest at a rate of 12.68% per annum calculated pro rata as to the date of such advance. The facility will mature one year from the date of issue and is secured by all of the assets of the Company and its subsidiaries. As at the date of this MD&A, 6

8 $2,025,000 has been drawn down under this facility. Approval of any subsequent draw requests will be made at DAC s discretion. Share Consolidation On May 27, 2013 the Company consolidated its common shares on the basis of one new common share for fifteen old common shares as approved by a majority of shareholders at the Company s Annual General and Special meeting held on April 26, No fractional shares were issued under the Consolidation and any fraction held after Consolidation was rounded to the nearest whole number. Following the consolidation, the Company had 7,217,147 common shares outstanding. All information related to common shares, share purchase options and warrants in this MD&A reflect the share consolidation as though it had taken place as at September 30, The share consolidation has also been reflected in the consolidated financial statements and all applicable references to the number of shares, warrants, stock options, exercise price and per share information have been restated. Other On September 5, 2014, West Coast Fishculture Ltd. ("WCF"), an inact ive holding company, was dissolved. WCF's sole asset was shares of WCFC and on dissolution those shares were transferred to AgriMarine Industries, which now holds 100% of WCFC's shares directly. SUBSEQUENT EVENTS Except as otherwise disclosed herein, no events of a materially significant nature occurred subsequent to the quarter s end. OUTLOOK The Board has provided a mandate to management to establish a base of operations in Canada with an emphasis on fish farming operations. Management is now refocusing its business plan going forward in order to meet this objective. The acquisition of WCFC is an important step in fulfilling this mandate, as the WCFC operation will continue to supply fish to the market as the Company installs its closed containment technology on the farm. The Company is also focused on aquaculture technology design and providing engineering and consulting services to the aquaculture industry through its wholly owned subsidiary, AgriMarine Technologies Inc. The Company will require additional financing in order to fund its plan of operations. The Company s ability to arrange such financing in the future will depend in part upon prevailing capital market conditions, as well as the Company s resulting business success. There can be no assurance that the Company will be successful in its efforts to arrange additional financing on satisfactory terms. If additional financing is raised, or existing or future debt is extinguished by the issuance of common shares from treasury, control of the Company may change and existing shareholders may suffer dilution. Events in the equity markets may impact the Company s ability to raise additional capital in the future. 7

9 SELECTED FINANCIAL INFORMATION AgriMarine Holdings Inc. A summary of selected financial information for the quarters ended December 31, 2014 are as follows: Three months ended December 31, Nine months ended December 31, $ $ $ $ Revenue 1, , Net loss (2,758) (406) (6,950) (3,011) Net loss per share - basic and diluted (0.03) (0.06) (0.09) (0.42) As at December 31, 2014 As at March 31, 2014 Total assets 25,421 23,750 Total non-current liabilities 500 1,248 For the quarters ended December 31, 2014, the Company reported no cash dividends. RESULTS FROM OPERATIONS Three months ended December 31, Nine months ended December 31, $ $ $ $ Revenue 1, , Cost of goods sold (1,900) (479) (6,270) (796) Gross profit (loss) (590) (6) (1,566) (189) Research and development expenses (144) (55) (299) (204) Selling, general and administrative expenses (1,216) (645) (3,665) (2,014) Fair value adjustment on biological assets (305) 121 (571) (72) Finance costs (288) (428) (1,175) (1,116) Foreign exchange loss Write-off of property and equipment - (26) - (26) Bargain purchase gain Other income (593) (69) (584) (51) Loss before income taxes (3,040) (406) (7,681) (3,011) Income taxes Net loss (2,758) (406) (6,950) (3,011) COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 2014 AND 2013 Revenue Revenue for the three months ended December 31, 2014 was generated by Benxi AgriMarine, the farming operation in China, and WCFC, the farming operation in Canada. For the three months ended December 31, 2014, the Company generated revenue of $1,310,000, of which $1,211,000 was generated by WCFC, compared to $338,000 generated from December 6, 2013 (date of acquisition) to December 31, The remaining revenue of $99,000 was generated by Benxi AgriMarine, representing a decrease of $36,000 or 27% compared to $135,000 generated in the same period last year. 8

10 The volume of fish sold was 194,000kg, of which 167,000kg was sold by WCFC during the period, compared to 49,000kg sold from date of acquisition to December 31, The average selling price at WCFC was $7.27/kg, representing an increase of $0.43/kg or 6% compared to $6.84/kg for the same period last year. The remaining 27,000kg was sold by Benxi AgriMarine, representing a decrease of 2,000kg or 7% compared to 29,000kg for the same period last year. The average selling price at Benxi AgriMarine was $3.60/kg, a decrease of $1.17/kg or 25% compared to $4.77/kg for the same period last year. For the nine months ended December 31, 2014, the Company generated revenue of $4,704,000, of which $4,356,000 was generated by WCFC, compared to $338,000 generated from date of acquisition to December 31, The remaining revenue of $243,000 was generated by Benxi AgriMarine, representing an increase of $79,000 or 29% compared to $269,000 for the same period last year. The volume of fish sold was 650,000kg, of which 593,000kg was sold by WCFC during the nine months ended December 31, 2014, compared to 49,000kg sold from date of acquisition to December 31, The average selling price was $7.35/kg, representing an increase of $0.51/kg or 7% compared to $6.84/kg in the same period last year. The remaining 57,000kg was sold by Benxi AgriMarine, representing a decrease of 8,000kg or 12% compared to 65,000kg for the same period last year. The average selling price at Benxi AgriMarine was $4.23/kg, which is consistent compared to $4.18/kg for the same period last year. In addition to the sale of fish, WCFC also sold 131,000 liters of fertilizer, for a total amount of $105,000 during the nine months ended December 31, Cost of Goods Sold The cost of goods sold for the three months ended December 31, 2014 was $1,900,000, of which $1,646,000 was incurred by WCFC during the period. Of the $1,646,000 cost of goods sold, $319,000 was attributed to a write-down of biological assets in the quarter. This write-down was largely due to extraordinary mortalities of fish at Lois Lake over the beginning of the quarter, as surface temperatures in the lake were unusually high. Cost of goods sold, net of the write-down, represents an increase of $1,035,000, compared to $292,000 for from the date of acquisition to December 31, The unit cost of fish sold net of the write-down was $7.96/kg, an increase of $2.05 or 35% from $5.91/kg last year. The increase was due to higher unit production costs, as a result of harvesting smaller fish to meet the market demand, after a significant loss of larger fish during the summer months mentioned earlier. The unit processing costs were also higher due to lower processing yield rate for the smaller fish that were harvested. The remaining $254,000 cost of goods sold was incurred by Benxi AgriMarine. Cost of goods sold, net of the write-down, represents an increase of $66,000 or 35% compared to $187,000 for the same period last year. The increased cost of goods sold at the Benxi farm was mainly due to the fact that the older stocks of fish had an extended lifecycle in the tanks, which resulted in higher accumulated production costs. The average unit cost of goods sold at Benxi AgriMarine for the three months ended December 31, 2014, net of the writedown, was $8.67/kg, an increase of $2.04 or 31% from $6.63/kg last year. The cost of goods sold for the nine months ended December 31, 2014 was $6,270,000, of which $5,719,000 was incurred by WCFC during the period, compared to $292,000 incurred by WCFC from the date of acquisition to December 31, Of the $5,719,000 cost of goods sold, $1,450,000 was attributed to the write-down of biological assets and $52,000 was attributed to the write down of fertilizer inventory in a prior quarter. The unit cost of fish sold, net of the write-down, was $6.91/kg, an increase of $1.01/kg or 17% from $5.91/kg for the same period in the prior year. The increased unit cost of fish sold is primarily due to the slower than expected growth of biomass. The unit cost of fertilizer sold net of the write-down was $0.90/L. The remaining $551,000 cost of goods sold was incurred by Benxi AgriMarine. Of the $551,000 cost of goods sold, $54,000 was attributed to a write-down of biological assets in a prior quarter. Cost of goods sold, net of 9

11 the write-down, represents an increase of $47,000 or 9% compared to $504,000 for the same period last year. The increased cost of goods sold at the Benxi farm was mainly due to the increased volume of sales compared to the same period in the prior year. The average unit cost of goods sold at Benxi AgriMarine for the nine months ended December 31, 2014, net of the write-down, was $8.67/kg, an increase of $0.83 or 11% from $7.84/kg last year. Research and Development Expenses Research and Development ( R&D ) expenses for the three months ended December 31, 2014 were $144,000, representing an increase of $89,000 or 162% as compared to $55,000 for the same period last year. R&D expenses for the nine months ended December 31, 2014 were $299,000, representing an increase of $95,000 or 47% as compared to $204,000 for the same period last year. The increase is primarily due to increased salaries and employee benefits due to increased activity at the Company s aquaculture technology subsidiary. Selling, General and Administrative Expenses Selling, general and administrative ( SG&A ) expenses for the three months ended December 31, 2014 were $1,216,000, of which $299,000 was incurred by WCFC during the period, including $120,000 of selling expenses on fish sales at WCFC. The remaining $917,000 represents an increase of $321,000 or 54% compared to $596,000 SG&A expenses excluding WCFC for the same period last year. SG&A expenses for the nine months ended December 31, 2014 were $3,665,000, of which $949,000 was incurred by WCFC during the period, including $422,000 of selling expenses on fish sales at WCFC. The remaining $2,716,000 represents an increase of $751,000 or 38% compared to $1,965,000 SG&A expenses excluding WCFC for the same period last year. The increase over the three and nine month periods was mostly due to increased salaries and employee benefits related to the expanded business activity of the Company and greater consulting and business development fees related to the Company s ongoing search for potential projects and business opportunities within and outside of the province of British Columbia. Significant items included in SG&A expenses for the three and nine months ended December 31, 2014 and 2013 are as follows: Three months ended December 31, Nine months ended December 31, $ $ $ $ Selling expenses Salary and employee benefits , Consulting fees 31 (49) Depreciation Rent and utilities Legal and accounting fees Regulatory filing fees Office and general expenses 117 (8) Travel Business development Other , ,665 2,014 Finance Costs Finance costs for the three months ended December 31, 2014 were $288,000, representing a decrease of $140,000 or 33% compared to $428,000 for the same period last year. The decrease was due to a lower amount of loans outstanding, from $20,882,000 as at December 31, 2013 to $14,659,000 as at December 31, 10

12 2014. As noted earlier, Dundee exercised its common share conversion rights with respect to certain loans in the amount of $18,529,000 and accrued interest of $2,234,000. Finance costs for the nine months ended December 31, 2014 were $1,175,000 representing an increase of $60,000 or 5% compared to $1,116,000 for the same period last year. The increase was due to an overall average increased loans balance over the nine months ended December 31, 2014 compared to the nine months ended December 31, During the three and nine months ended December 31, 2014, the Company capitalized borrowing costs of $133,000 and $408,000 at an interest rate of 12.68% in Construction in Progress ( $nil). Fair Value Adjustment on Biological Assets The fair value adjustment on biological assets for the three and nine months ended December 31, 2014 resulted in a loss of $302,000 and $374,000 for WCFC, and a loss of $3,000 and $197,000 for Benxi AgriMarine, respectively. The fair value loss for WCFC was due to the increased estimated unit cost at harvest, given the higher mortality rate presented in the current fish stocks as a result of high surface water temperatures during the summer. The fair value loss for Benxi AgriMarine was due to additional cost overruns at the Benxi farm operation. SUMMARY OF QUARTERLY RESULTS The following table summarizes selected financial information from the Company s past eight quarters: Three months ended Revenue Net Loss Loss Per Share (1) $'000 $'000 $ December 31, ,310 2, September 30, ,626 2, June 30, ,768 1, March 31, ,477 2, December 31, September 30, , June 30, , March 31, , (1) All per share amounts have been adjusted to reflect the 15-to-1 share consolidation that occurred during the year ended March 31, FINANCIAL CONDITION REVIEW Balance Sheet Review Total assets were $25,421,000 as at December 31, 2014, representing an increase of $1,671,000 or 7% from the total assets of $23,750,000 as at March 31, The increase of the total assets was largely due to increased biological assets and property and equipment balances, offset by a decrease in cash. Total liabilities were $18,805,000 as at December 31, 2014, representing a decrease of $12,249,000 or 39% as compared to total liabilities of $31,054,000 as at March 31, The decrease was primarily due to decreased loans after the conversion of the Convertible Notes and the Bridge Loan detailed earlier, and a decreased deferred tax liability. 11

13 Liquidity, Cash Flow and Capital Resources AgriMarine Holdings Inc. Conditions exist, as described in the December 2014 Interim Consolidated Financial Statements, which cast significant doubt over the Company s ability to continue as a going concern. As at December 31, 2014, the Company had a cash balance of $1,125,000 compared to $4,640,000 at March 31, The Company had negative working capital of $10,671,000 as at December 31, The Company s primary source of cash flow is from debt financing. The primary use of proceeds from financing activities included the construction and installation of closed-containment rearing tanks at WCFC, corporate expenditures, and fish production at WCFC and Benxi AgriMarine. Net cash used in operating activities during nine months ended December 31, 2014 was $5,743,000, an increase of $608,000 from $5,135,000 for the same period last year. Net cash used in investing activities during nine months ended December 31, 2014 was $5,075,000, a decrease of $3,533,000 from $8,647,000 for the same period last year. The decrease was largely due to the acquisition of WCFC in the prior year. Net cash provided by financing activities was $7,312,000 during nine months ended December 31, 2014, a decrease of $8,293,000 from $15,605,000 for the same period last year. Future operating and capital expenditures and the settlement of debt in excess of the Company s currently available resources are expected to be satisfied through a combination of debt and equity, with the relative proportion to be determined based on the Company s operating performance from time to time, as well as the conditions, cost, and availability of capital. COMMITMENTS AND CONTINGENCIES The following table summarizes the commitments and contingencies as at December 31, 2014 and March 31, 2014: December 31, 2014 March 31, 2014 Less than 1 1 to 5 More than 5 Less than 1 to 5 More than Contractual Obligations Total year years (2) years Total 1 year years (2) 5 years Commitments ($'000) ($'000) ($'000) ($'000) ($'000) ($'000) ($'000) ($'000) Operating Leases (1) Financial Liabilities Accounts payable and accrued liabilities 3,693 3, ,994 3, Customer advance Loans 14,659 14, ,874 25, Total Contractual Obligations 19,141 18, ,184 29, (1) The operating leases are mainly related to office rental and equipment leases. (2) Given that the amount is not material, the amounts for the years 1-3 and 4-5 were not separated. Middle Bay Sustainable Aquaculture Institute ( MBSAI ) claim During the year ended March 31, 2014, the Company received a demand letter from MBSAI for approximately $2,900,000, in which MBSAI alleged that the Company had failed to perform certain obligations under the Design Build Stipulated Price Contracts between the two parties. The Company replied to MBSAI denying these alleged failures to perform and rejecting all claims of amounts owing. On October 14, 2014, the demand letter was withdrawn by MBSAI. 12

14 Wrongful dismissal claim During the year ended March 31, 2014, the Company was served a Notice of Civil Claim which was filed in the Supreme Court of British Columbia by a former officer of the Company alleging, among other things, wrongful dismissal, and seeking relief of approximately $300,000. As of December 31, 2014, a settlement between the parties was reached. MANAGEMENT OF CAPITAL The Company s capital management objective is to safeguard the Company s assets and ensure the Company s ability to continue as a going concern while at the same time maximizing the growth of its business and return to its shareholders. This objective is achieved by prudently managing the capital generated through internal growth and external fund raising, optimizing the use of lower cost capital and raising share capital when required to fund growth initiatives. There were no changes in the Company s approach to its capital management during the nine months ended December 31, The Company s capital consists of debt (including loans and due to related parties) and equity (including share capital, reserves and deficit): December 31, 2014 March 31, 2014 $ $ Loans 14,659 25,874 Share capital 45,620 24,857 Reserves 4,013 4,013 Deficit (43,699) (36,749) 20,593 17,995 There are no externally imposed capital requirements and the Company intends to maintain a flexible capital structure consistent with the objectives stated above and to respond to changes in economic conditions and the risk characteristics of underlying assets. In order to maintain or adjust its capital structure, the Company may issue new shares, raise debt (secured, unsecured, convertible and/or other types of available debt instruments) or refinance existing debt with different characteristics. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT As at December 31, 2014, the Company s financial instruments included cash, restricted cash, accounts receivable and other receivables, accounts payable and accrued liabilities, due to related parties and loans. The carrying value of cash, restricted cash, accounts receivable and other receivables approximates their fair value due to their short-term nature. The fair value of accounts payable and accrued liabilities and loans cannot be determined at this time due to the difficult financial situation of the Company. The Company is exposed to various risks associated with its financial instruments. These risks include: credit risk, foreign currency risk, interest rate risk and liquidity risk. 13

15 Credit risk Credit risk is the risk of financial loss caused by a counterparty by failing to discharge an obligation. Financial instruments that are subject to credit risk include cash, restricted cash, accounts receivable and other receivables. The maximum exposure to credit risk is equal to the carrying value of the financial assets. Management mitigates this risk by placing cash in high quality financial institutions. The majority of the Company s sales are made through a single broker who takes on the credit risk related to the end-customers. Management believes the risk associated with accounts receivable and other receivables is not significant, as the Company receives advance payments on the sales of fish, and the remaining balances are mainly related to the Goods and Services Tax ( GST ) receivable and the Scientific Research and Experimental Development ( SR&ED ) receivable in Canada. Foreign currency risk The Company operates in Canada and China. The functional currency of the parent company is the Canadian dollar. The assets, liabilities, revenues and expenses of Chinese operations are denominated in Renminbi ( RMB ), which is not a freely convertible currency. The Company has sales and purchase contracts denominated in US dollars ( USD ). The Company is exposed to foreign exchange risks arising from the fluctuation of exchange rates between foreign currencies and the Canadian dollar. The Company does not hedge its exposure to currency fluctuation. As at December 31, 2014 and March 31, 2014, the Company was exposed to currency risk through fluctuations in the foreign exchange rate with respect to the following financial assets and liabilities, excluding intercompany balances: Financial instruments denominated in RMB December 31, 2014 March 31, 2014 $ $ Cash Accounts receivable and other receivables Accounts payable and accrued liabilities (87) (72) Net exposure Financial instruments denominated in USD December 31, 2014 March 31, 2014 $ $ Cash Accounts receivable - 12 Accounts payable (251) (1) Net exposure Based on the above net exposure at December 31, 2014, and assuming all other variables remain constant, a 10% depreciation or appreciation of the Canadian dollar against RMB would result in a change of approximately $20,000 in the Company s other comprehensive income (loss) (March 31, 2014 $72,000). A 10% depreciation or appreciation of the Canadian dollar against USD would result in a change of approximately $5,000 in the Company s other comprehensive income (loss) (March 31, 2014 $11,000). Interest rate risk Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. Interest rate risk arises from interest bearing financial liabilities of the Company. The Company is not exposed to interest rate risk, as the Company currently only has fixed interest rate debt instruments. 14

16 Liquidity risk Liquidity risk is the risk that the Company is not able to meet its financial obligations as they become due. The Company s is financed mainly through borrowings under existing credit facilities, issuance of promissory notes, convertible debentures and common shares. The Company establishes budget and cash flow projections and manages liquidity risk by continuously monitoring actual cash flows against its projections to ensure it has the necessary funds to fulfill its obligations. As at December 31, 2014, the Company had a cash balance of $1,125,000 (March 31, $4,640,000) to settle current liabilities of $18,305,000 (March 31, $29,806,000). DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL CONTROLS OVER FINANCIAL REPORTING The Company s management, including the Chief Executive Officer and Chief Financial Officer, believe that any disclosure controls and procedures or internal control over financial reporting, no matter how well conceived and operated, can provide only reasonable and not absolute assurance that the objectives of the control system are met. Further, the design of a control system reflects the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, they cannot provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been prevented or detected. The Company s management has evaluated the design and effectiveness of the Company s disclosure controls and procedures. Based upon the results of that evaluation, the Company s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this report, the Company s disclosure controls and procedures were effective to provide reasonable assurance that the information required to be disclosed in reports it files is recorded, processed, summarized and reported within the appropriate time periods and forms. The Company s management has also evaluated the design and operating effectiveness of the Company s internal control over financial reporting as of the end of the period covered by this report. The risk of a significant error is mitigated by the active involvement of senior management and the Board of Directors in all the affairs of the Company; open lines of communication within the Company; the present levels of activities and transactions within the Company being readily transparent; and the thorough review of the Company s financial statements by management and the Board of Directors. Based on the result of the assessment, the Company s Chief Executive Officer and Chief Financial Officer have concluded that the Company s internal controls over financial reporting have been adequately designed. There have been no changes in the Company s internal control over financial reporting during nine months ended December 31, 2014 that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting. RELATED PARTY TRANSACTIONS During the three and nine months ended December 31, 2014, the Company had the following related party transactions: Loans from Related Party As at December 31, 2014, the Company had $14,580,000 of drawn credit facilities and loans payable to the controlling shareholder, DAC and had accrued interest of $1,820,000 included in accounts payable and accrued liabilities. Refer to notes 9(a)-(d) of the December 2014 Interim Consolidated Financial Statements for further disclosure. 15

17 Advances from Directors of Benxi AgriMarine During the year ended March 31, 2013, Benxi AgriMarine received advances in the total amount of $205,000 (RMB1,257,000) from two directors of Benxi AgriMarine. As at December 31, 2014, $75,000 (RMB400,000) was payable to these directors (March 31, 2014 $71,000, RMB400,000) and was included in accounts payable and accrued liabilities. These advances are unsecured, non-interest bearing, and repayable on demand. Compensation of Key Management Personnel Key management personnel include the Chief Executive Officer, the Chief Financial Officer, and the directors of the Company: Three months ended December 31, Nine months ended December 31, $ $ $ $ Salaries for key management personnel Directors' fees Consulting Fees Consulting fees paid and accrued to a former director and officer of the Company during the three and nine months ended December 31, 2014 were $nil ( $nil and $50,000). OUTSTANDING SECURITIES As of the date of issuance of this MD&A, the following common shares, share purchase options, warrants and convertible securities of the Company were outstanding: (In thousands) Total common shares outstanding 109,708 Total common share purchase options 88 Fully diluted shares outstanding 109,796 Detailed information regarding these instruments at as December 31, 2014 is set out in note 15 of the Company s December 2014 Interim Consolidated Financial Statements. Common Shares On May 27, 2013 the Company consolidated its common shares on the basis of one new common share for fifteen old common shares as approved by a majority of shareholders at the Company s Annual General and Special meeting held on April 26, Refer to Discussion of Operations and Significant Events section of this MD&A for detailed information on the share consolidation. 16

18 Stock Options AgriMarine Holdings Inc. The following table summarizes information about fixed stock options outstanding at December 31, 2014: Expiry Date Number of Options Outstanding (in thousands) Number of Options Exercisable (in thousands) Exercise Price ($) Apr Sep Oct Feb Sep Jun SIGNIFICANT ACCOUNTING POLICIES, ESTIMATES AND JUDGMENTS For a full description of the Company s accounting policies and estimates, refer to notes 2 and 3, respectively, in the Company s Audited Consolidated Financial Statements. The December 2014 Interim Consolidated Statements follow the same accounting principles and methods of application as those disclosed in note 2 to the Audited Consolidated Financial Statements, except for the change in accounting estimate detailed in note 2(c) and the new standards detailed in note 2(d) to the December 2014 Interim Consolidated Statements. Future IFRS standards and interpretations issued but not yet adopted are referenced in note 3 to the December 2014 Interim Consolidated Financial Statements. The preparation of interim financial statements in accordance with IFRS requires management to make certain accounting judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, income and expenses. The estimates and underlying assumptions are based on past experience and other factors perceived to be relevant and probable when the estimates were made. Estimates are reviewed on an ongoing basis and the changes to the accounting estimates are accounted for prospectively. Significant areas involving critical judgments in applying accounting policies, key assumptions and sources of estimation uncertainty that have the most significant effect on the amounts recognized in the financial statements include biological assets, inventory, property and equipment, and the purchase price allocation of WCFC. Key estimates and assumptions made by management with respect to these areas have been disclosed in the notes to the consolidated financial statements as appropriate. There have been no significant changes in accounting judgements, estimates and assumptions made by the Company in the preparation of the December 2014 Interim Consolidated Financial Statements from those judgements, estimates and assumptions disclosed in note 3 to the 2014 Audited Consolidated Financial Statements. The fair value estimate of the biological assets relies on assumptions relating to feed conversion rates, mortality rates, and the projected selling price. A change in estimate of biological assets may impact the carrying value of property and equipment, as significant write-downs of biological assets may indicate the impairment of property and equipment. The Company used the projected cash flows, derived from net sales revenue of biological assets, to assess the impairment of property and equipment. In addition, the value of frozen fish and fertilizer inventory is based on assumptions related to the future selling price. 17

19 RISKS AND UNCERTAINTIES AgriMarine Holdings Inc. Due to the nature of the Company s business and present stage of development, the Company is subject to significant risks. Risk factors relating to the Company include, but are not limited to the following: Liquidity Concerns and Future Financing Requirements The Company requires additional financing in order to fund its plan of operations. The Company s ability to arrange such financing in the future will depend in part upon prevailing capital market conditions, as well as the Company s resulting business success. There can be no assurance that the Company will be successful in its efforts to arrange additional financing on terms satisfactory to the same. If additional financing is raised by the issuance of common shares from treasury, control of the Company may change and existing shareholders may suffer dilution. If adequate funds are not available, or are not available on acceptable terms, the Company may not be able to take advantage of other opportunities, be forced to curtail business operations or cancel planned projects, or otherwise remain in business. Events in the equity markets may impact the Company s ability to raise additional capital in the future. Technology Failures AgriMarine s farms rely on several low and high technology systems that govern the operations of the facility. A failure of one or more of these systems over a short period of time could adversely affect the fish crop under production. The failures could range from computer software problems to a complete power outage, which could potentially happen at any time. The Company has built redundancy and fail-safe protocols into all of its key operational systems. These protocols are monitored, alarmed and manned on location on a 24/7 basis. The Company has experienced no life support system failures at its production facilities in China or Canada. Crop Failure All fish farming operations are vulnerable to crop failure. Most salmon crop failures are a direct result of escapes, disease, plankton infestation and/or contamination of the fish population from outside sources. Fish health in closed containment systems may also be adversely affected by a failure to properly oxygenate their rearing habitat while net cage systems suffer risk of low oxygen level related fish health events during uncontrollable high surface water temperatures during summer months or other environmental factors limiting available oxygen in the water flowing through the nets. The Company has taken exhaustive steps, through the design of its facilities and through the monitoring and management of fish stocks, to ensure that none of these conditions could cause the wholesale loss of an entire crop. Each of the life support systems is backed up with alternate supply facilities and the separation of groups of fish in the rearing containers should minimize the impact of any adverse event that may affect the fish populations. Feed conversions and feed quality may affect the production of biomass which could lower the yield of and size of cultured salmon, resulting in lower than anticipated harvest size and lower revenue. Poor Market Demand The Company may be susceptible to market forces including demand and pricing that are outside of its control. Should the demand for farmed salmon and/or steelhead trout experience a significant drop due to world conditions or market perception, the Company s ability to market its products could be affected. 18