Saturday, August 11, 2001

The Kekaha Agricultural Park on Kauai is seen
in 1999 with its initial 20 ponds.

Ceatech has big
appetite for shrimp

The firm has added more ponds
and a new processing plant in
order to boost output

By Dave Segal

Its stock is the best performer of any Hawaii-based company in 2001, but don't be fooled by the 149 percent return.

Controlled Environment Aquaculture Technology Inc., commonly known as Ceatech, is still trying to get its sea legs.

The company, which grows, processes and markets shrimp in west Kauai, has accumulated millions in debt to build its business and fund expansion that it says is necessary to reach profitability.

The drawing force is Americans' appetite for shrimp, which according to the National Fisheries Institute is the nation's top fresh and frozen seafood with 850 million pounds consumed annually. Since more than 600 million pounds are imported, there exists a lucrative opportunity to tap into that market.


"Our marketing strategy has been to get these very good tasting animals into the mouths of people through seafood shows and tastings," Ceatech Senior Vice President Paul Bienfang said. "And repeatedly, after having done this, the buyers would say, 'Great, I love it,' and request more product than we could provide.

"The demand from the buyers of premium products is significant. So for us to be able to meet that demand, we need to be larger. Many times they'll request a particular form or size of shipments on a certain frequency. These are much easier to accommodate when you have larger production capability."

Hence, in February, Ceatech announced that it had received commitments for up to $3.9 million in financing from its investors. The money, which is being used as working capital, also has been used to double its number of one-acre ponds to 40 from 20 at the Kekaha Agricultural Park (the last few of which are slated for completion next month) and to construct a recently completed $1 million processing facility in nearby Hanapepe.

In addition, Ceatech is eyeing several thousand acres of state-owned land adjacent to Kekaha Park that was recently abandoned by the Amfac-owned Kekaha Sugar Co. when it shut down sugar operations in the area.

One of the shrimp produced at the Kekaha Park on Kauai.

"We are continuing to seek additional capital for expansion and we fully intend to expand beyond the 40 one-acre ponds we have now," Ceatech Chief Financial Officer Edward Foley said. "We're talking with certain financial institutions about obtaining a construction loan to expand the program."

Currently, the company sells most of its fresh and frozen shrimp, marketed under the name Kauai Shrimp, in Hawaii and on the mainland in California and Nevada.

Incorporated in Colorado in 1995, Ceatech can trace its technology to the Oceanic Institute in Makapuu, where several of the company's key personnel played roles in developing advanced production and breeding techniques under the U.S. Marine Shrimp Farming Program sponsored by the U.S. Department of Agriculture. The intent of the program, which began in 1984, was to accelerate the growth of the U.S. marine shrimp industry, which runs an annual trade deficit of more than $3 billion a year.

In late 1996, several key executives left the Oceanic Institute to start Ceatech on Kauai's west side, which the company considers an ideal location for shrimp farming because of its isolation and hot, dry, sunny weather.

Ceatech began pond construction in early 1997, started trading its stock on the Over The Counter Bulletin Board in August of that year and took out a $3 million loan from Bank of America in 1998 to help fund expansion.

Sales of the company's hatchery products began in 1998 and sales of shrimp for consumption began in February 1999 after the first of Ceatech's 20 one-acre ponds was completed.

Ceatech, which had incurred $6.3 million in debt through the first quarter of fiscal 2001 that ended April 30, has had its production hamstrung while waiting for the additional 20 ponds to come online and for the processing facility to be built.

"We've been undercapitalized since the beginning when the founder (Al Garcia) passed away," Foley said. "The expectation was that he would raise funds and capital and it didn't happen (due to his death in January 1999). Since then, we've been trying to raise capital and expand."

Growing pains

The 80-employee company has suffered its share of growing pains along the way -- financially and politically.

Ceatech's willingness to turn to the debt market to finance its growth came to a head in 1999 when then-Chairman and Chief Financial Officer Ronald Ilsley accused the company in a press release of "creating new debt as a means for expansion and funding losses, in lieu of pursuing revenue-earning opportunities."

He said in the release that the company was in serious risk of being able to service new or existing debt unless the company focused on revenue-raising opportunities, such as a bid at that time by Galletti Companies to open the Southern California market for Ceatech's shrimp product.

The board, which had been scheduled to meet that same day, voted to remove Ilsley as chief financial officer, after he declined to voluntarily resign. The board also voted to replace Ilsley as chairman and elected Gordon Mau to that post. Ilsley subsequently sued the company and its subsidiaries in U.S. District Court for the Central District of California, alleging wrongful termination and breach of employment contract and claimed damages in excess of $1 million. The two parties agreed on an out-of-court settlement of $113,000 on Jan. 31 of this year.

Settled out of court

Ilsley is now chief financial officer for Valencia, Calif.-based DCH Technology Inc., a manufacturer of hydrogen fuel cells and sensors and a provider of hydrogen safety services.

"I really don't want to comment on it," said Ilsley, who remains Ceatech's sixth-largest shareholder with 2.46 percent, or 150,000 shares, of the company. "The press release speaks for itself."

Foley, who replaced Ilsley as chief financial officer in March 2000, said the company didn't have the processing capability at the time to achieve what Ilsley wanted.

"At that point (of the Galletti offer) the company had 10 ponds and was headed toward 20 ponds," Foley said. "The level of production couldn't warrant his proposed revenue-enhancing scheme to sell everything fresh, head on (the full shrimp), in California. We met shortly afterward with Mr. Galletti and, after meeting with (the company), they fully understood why no relationship could go forward because we didn't have the level of production that they would need."

Ceatech, meanwhile, has seen its shares suffer while waiting for its expansion to take hold. The stock, which hit its all-time high of $5.25 on Aug. 8, 1997, closed yesterday at $1.01.

Sales also have slumped, with shrimp revenues in the 2001 first quarter falling 28.6 percent to $455,000 from $637,000 in the year-ago quarter as its net loss widened to $490,000 from $358,000. The company sold 74,000 pounds of shrimp in the quarter, a drop of 32.1 percent from 109,000 in a year earlier. The company's revenue from the sale of hatchery products, which it produces for its own farm and for other commercial growers worldwide, was $18,100 for the quarter compared with $100,000 for the first quarter. The company has yet to report earnings on its second quarter, which ended July 31.

In fiscal 2000, Ceatech's first full year with all 20 of its initial one-acre ponds in operation for the entire 12 months, the company had sales of $2.2 million, a slight gain over $2.1 million the previous year. The company's net loss for the year widened to $2 million from $1.6 million. The company sold approximately 383,000 pounds of farm shrimp compared with 293,000 pounds of farm shrimp in the prior year, resulting in a $500,000 increase in sales. However, revenue from the sale of hatchery products declined to $254,000 from $546,000.

Ceatech's new processing facility, which can accommodate up to 104 ponds, will enable the company to increase the amount of shrimp it is able to sort, freeze and package.

Randy Havre, chief executive officer of Hawaii Venture Group and a local business analyst, said Ceatech's technology gives the company an advantage over other shrimp producers but the company still has to overcome the disadvantage of operating out of Kauai.

Logistical challenge

"It's tough to raise shrimp on Kauai logistically, just like any agricultural product," Havre said. "They've got the onus of being in a high-cost environment and competing against a low-cost environment (other less expensive global shrimp operations).

"I think they have to position themselves as they have been, as a high-quality product. Whether they'll be able to pull it off or not, I couldn't tell you."

With its modern production system, Ceatech says it is able to produce more shrimp per acre than its global counterparts while marketing its shrimp as being better tasting and free of disease. Ceatech's system enables it to produce roughly 40,000 pounds per acre per year, Bienfang said, compared with 1,000 to 4,000 pounds per acre per year with a traditional system.

"The technology allows us to control the environmental conditions in which the shrimp are produced so they are optimum for growth and survival," Bienfang said. "It also means it avoids the stress that shrimp may experience in more traditional farming practices. Part of this control is a lined system so the animal never comes in contact with mud and is not under stress. So in addition to having a very high quantity of yield, the shrimp come with a very sweet, clean taste and are very firm. All are very desirable characteristics of a fresh product.

Rapid harvest

"The other aspect of this modern technology is the design of the pond unit allows these animals to be harvested very rapidly. So within an hour or so, the entire contents of a pond, which may be 14,000 to 15,000 pounds, is transferred from the production unit onto ice. One moment they're swimming in the water and the next moment they're asleep on the ice. This is different from the traditional practice of very large earthen ponds where the water level is dropped dramatically and the animals are flopping in the mud and exposed to the sun. This allows us to preserve the quality of product through the harvesting process."

Bienfang, who said the company needs 40 to 50 ponds to break even, expects Ceatech to harvest 1.1 million pounds this year, based on the use of the original 20 ponds and partial use of the other 20 ponds. He said he expects Ceatech's production to rise to 1.7 million pounds of harvested weight next year when it has the full use of all 40 ponds.

"Of course, what the farm is producing (in weight) and what it sells is different because right now a significant number of orders, about 85 to 90 percent, are for tail only (as opposed to the entire shrimp)," Bienfang said.

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