Aqua Fish Canada Inc. (AFC)

To: Guy Mills, President & CEO
From: Adam Rice, Controller
Date: May 16th, 2014
Re:Report on business strategies to follow to meet strategic goals set by Board of Directors.

Executive Summary:

Aqua Fish Canada (AFC) is a Canadian owned company involved in aquaculture in the Maritimes, whose mission is to provide sustainable source of fresh, diesase-free fish to domestic and export markets through aquaculture farming. AFC's goal is to be able to diversify into other markets, mainly the shellfish farming market, while also increasing profitability in the salmon operations. All potential investments must also yield at 10% rate of return in order for AFC to approve the project.
Three alternatives were evaluated to hep AFC achieve its goals. The first alternative is to build a blue mussel farm in PEI. The second alternative is to build an American oyster farm in New Brunswick and the last alternative is to sponsor project Blue Wave to genetically modify salmon. It's recommended that AFC accept all three alternatives, as all three meet the 10% required rate of return.
Minor issues, include a potential lawsuit against AFC for fish which escaped from Site 3, unethical behaviour by Mrs. Maise in advising employees to write down inventory shipment value to please customers, legislation which requires AFC to cover costs of dismantling any owned aquaculture sites, bonus calculation for employees to be revised based on the AFC's performance over the past few years and lastly the not sufficiently trained and experienced staff at sites 3 & 4 which caused considerable loss in inventory, revenue and damage to the net-opens.
By implementing the recommendations stated above AFC will be able to achieve its current strategic goals, while conforming to it's mission and vision statements.

Introduction:
This report provides detail analyses of the business strategies available to AFC and will provide advice to help AFC in deciding which direction to pursue while addressing the goals set by the board of directors.
AFC's current financial situation will be analysed, along with the identification and analysis of AFC's strategic/operational issues and alternatives. Recommendations will be provided to management on the best course of action, along with an implementation plan. Also the 2011 financial statements will be adjusted and finalized.
Situational Analysis:
Vision:
AFC feeds the global community.
Mission:
AFC provides a sustainable source of fresh, diesase-free fish to domestic and export markets through aquaculture farming. AFC strives to exceed environmental and quality standards and regulations, provide a safe environment for out employees, and generate reasonable financial returns to our shareholders.
Strategic Goals:
1. Move into other markets & diversify into shellfish farming.
2. Increasing profitability of current salmon operations.
Constraints:
• Any proposed investment should generate a minimum after-tax return of 10% within five years. • Eastern Bank of Canada will only provide loan of $3 million if AFC maintains a gross profit margin of at least 20%.
Stakeholder Preferences:
Guy Mills, President & CEO: • Increase overseas sales • Decrease operating costs • Increase profitability in salmon operations
Environmental Scan:
An updated SWOT (Appendix 1) analysis indicates the AFC faces major issues with it's employees at Sites 3 & 4. Their lack of training and experience has caused AFC to lose valuable inventory and revenue. Unethical behaviour has been discovered at the vice president level. Opportunities exist in the overseas markets and demand has grown for oyster in North America. However the strong Canadian Dollar to the U.S. Dollar continues to pose a threat, along with the increased competition for Chile and world fuel prices continuing to increase.
Key Success Factors: • Strong reputation • Product quality • Effective delivery of products
Key Risk Factors: • Product safety
Current Financial Analysis: (Appendix 2 Ratio Analysis) • Current Gross profit margin is 18.62% which is less than the 20% minimum that Eastern Bank requires in order to loan AFC of $ 3 million dollars. • Gross profit margin has steadily declined from 2009 to present (27.57% to 18.62%). • Net profit margin has steadily declined from 2009 to present, which indicates that costs have continued to rise more so than revenues (6.51% to 0.07%). • Inventory turnover of has decreased drastically from 2010, and is due to Site 3 mishap (2.58 to 1.88). • Current ratio has increased from 2009, which indicates AFC is liquid (1.64 to 1.74). • Net Working Capital has increased from 2009, indicating AFC has excess capital that can be used in future projects ($2.8 Million to $3.6 Million). • Debt to equity has continued to decrease indicating AFC is leveraged with less debt (2.12 to 1.80) • Debt to Asset ratio has decreased indicating that AFC is financing assets more through equity than debt (0.68 to 0.64).
Identification of Major & Minor Issues and Alternatives:
Major Issue: Move into other markets & diversify into shellfish farming.
Alternatives:
1. Blue Mussel Farm in PEI
2. American Oyster Farm in New Brunswick
Major Issue: Increasing the profitability of current salmon operations.
Alternative:
1. Project Blue Wave
Minor Issues:
1. Potential Lawsuit against AFC for Site 3 escaped fish.
2. Ethical issues of Maise in valuing the shipment for a lower value.
3. Legal obligation for dismantling of aquaculture sites.
4. Current bonus calculation for employees.
5. Site 3 & 4 untrained staff.
Analysis of Alternatives for addressing issues:
1. Blue Mussel Farm
Pros:
• Positive NPV of $1.1 Million (Appendix 3: Blue Mussel Farm) • Meets the 10% required rate of return over the 5 years. • Allows for diversification of shellfish farming. • Positive cash flows beginning in year 3 when mussels are ready for harvest. • Increases profitability for AFC in Years 3 - 5. • Larger farm than Oysters. • Requires only 2 to 3 years to reach marketable size, 1 to 2 years quicker than oysters.
Cons:
• Many farms become infested with invasive parasite. • Costs due to parasite are increased (20% more variable production, 10% more fixed production, and 14% more variable distribution costs). • Employees dislike handling mussels infested with parasite. • Initial investment is $600,000, $200K more than the oysters farm. • Additional investment of $200K is needed every 5 years, $50K more than for oysters.
2. American Oyster Farm:
Pros:
• Positive NPV of $ 716K (Appendix 4: American Oysters). • Meets the 10% required rate of return over the 5 years . • Allows for diversification of shellfish farming. • Initial Investment is $400,000, $200k less than Mussel farm. • Increases AFC's profitability. • Additional investment every 5 years is $50K less than Mussel farm. • Takes advantage of high demand for oysters in North American market
Cons:
• Farm is smaller than Mussel Farm, leading to less quantity being produced. • Requires 3 to 4 years to reach marketable size. • Positive cash flow doesn't begin till year 4
3. Project Blue Wave:
Pros:
• Increased efficiency in converting feed into protein. • Faster growth rate. • Increased harvestable salmon from 3.8 million kilos to 5.1 million kilos. • Inability to breed with wild salmon, reduce genetic modifications. • Greatly increased disease resistance, lowers medical and veterinary costs. • Positive NPV of $500,000 (Appendix 5: Project Blue Wave) • Meets the 10% required rate of return • Increases profitability in salmon operations
Cons:
• Lily Stern will resign if project not sponsored • Initial investment is $1.2 Million, more than both Mussel & Oyster farm projects • Approvals are needed from both Canadian and USA governments
Recommendations:
It's recommended that AFC accept the following alternatives:
Investing in the Blue Mussel farm, as this is inline with the mission and vision statement of AFC while also meeting the desired diversification into the shellfish farming. This farm will produce positive cash flows by year 3 and will generate a return greater than 10% required. This project can also be funded with the excess cash AFC has on hand. The other project of American Oyster farm should also be invested upon. This project is also inline with the mission and vision statement and will also capitalize on the growing demand for oysters in North America. This project yields a positive return which is greater than the required 10% and can be funded with the $8 million in property, plant & equipment (PPE) financing loan available from the bank. Lastly the project Blue Wave should also be invested upon, as not only will Lily resign should AFC not sponsor the project, but this project returns a greater than 10% required return. This project can also help increasing the profitability in AFC's current salmon operations. However this project is the most expensive of the three, costing an initial investment of $1.2 million, while this can be funded with the remaining PPE loan, this project also requires government approval from both the Canadian and U.S. government. In all the three projects will help AFC achieve their strategic goals.

Implementation Plan:
Operating Issues: • Potential Lawsuit against AFC for Site 3 escaped fish. This lawsuit should be recorded as contingent liability by Jacques Dubois, as the potential exists that AFC will be required to pay $10 million in the lawsuit. • Ethical issues of Maise in valuing the shipment for a lower value. This issue of Mrs. Maise being unethical, needs to be reported to Guy Mills. While trying to please the customer is great customer service, no rules should ever be broken or circumvented to do so. Mr. Mills should require Mrs. Maise to attend an ethical behavior course to ensure this problem never arises again. • Legal obligation for dismantling of aquaculture sites. This obligation needs to be recorded as an Asset retirement obligation on AFC's financial statements. Mr. Dubois needs to revise and disclose this information on the 2011 statements. • Site 3 & 4 Staff to be better trained to avoid costly inventory destruction and property damaged. Have staff members from Sites 1 & 2 to work and train the other members to ensure incidents do not happen again.
Action Plan
0 to 12 months: • Mr. Palango to obtain funding for all three projects from Eastern Bank. • Gale Harper to have staff from Sites 1 & 2 to train and work with Sites 3 to 4 to ensure all staff are properly trained. • Staff are hired both for Mussel & Oyster farms
13 to 24 months: • Mussel farm and Oyster farm to be built and harvesting to begin. • Project blue wave to create genetically modified salmon
24 months to 60 months: • Marketable size mussels and oysters ready to be sold • Harvesting of genetically modified fish in 2014 for Project Blue Wave • Canadian government approval in 2014 for Project Blue Wave • US government approval in 2015 for Project Blue Wave
Conclusion:
This report evaluated AFC's current business situation, looked at strategic and operational issues and analyzed three alternatives, building a Blue Mussel farm, building an American Oyster farm and sponsoring Project Blue Wave. It is recommended that AFC take part in all three projects as this will not only help meet the current strategic goals of AFC, but is also inline with AFC's mission and vision statement.

Appendix 1: Updated SWOT Analysis
Strengths:
• Sites 1 & 2 employees are well trained and experienced.
Weakness:
• Lost S&F Seafood to new firm due to sophisticated computerized system. • Site 4 employees not following established procedures. • Revenue lost due to Site 3 employees not securing net-pens. • Site 3 net-pens are damaged and need to be fixed. • Employees at Sites 3 & 4 over feeding the fish, not well trained nor experienced. • Maise unethical behaviour to incorrectly value fish shipment.
Opportunities:
• Demand for salmon expected to grow at record pace in overseas markets. • New packaging methods allow for exporting mussels to markets at greater distances. • Demand of oysters increasing in North America.
Threats:
• Increased competition from aquaculturists in Chile. • Strengthening of Canadian Dollar to the U.S. Dollar. • Costs of maintaining fish have increased. • World fuel prices are increase and risk of spoilage of fresh seafood shipped overseas will double.