Ann: Appendix 4C - AHF, page-5

Not really - more like treading water than in making any genuine headway. And that's being +ve.

The desperation stakes were simple. In order to try and pull off a +ve CF ending to the year, it seems that Michael was spooked out of paying any more of TAU’s costs whilst the Admin costs came down (or more pointedly, deferred to a later date).

What is fascinating to see here is the near on total lack of calibration between estimated and actual cash outflows. There can be many reasons for this, but the main ones are that the CDC processing function really has dropped well below a 50% operating mark with no real, or material outlook in sight.

Customer receipts for the year were $26.047M which is interesting as much for what it tells about what is currently happening. Consider this:

CASH RECEIPTS

	Column 1	Column 2	Column 3	Column 4	Column 5	Column 6	Column 7
0	Date	Based on	SepQ	DecQ	MarQ	JunQ	Total
1	Value		7.779	7.277	5.167	5.824	26.047
2	Utilisation	SepQ base	>62%	58	41	46	52
3	Utilisation	H17 midpoint (7.528)	64	60	42.5	48	53.6

In determining this utilisation, I have simply lumped together all of the customer receipts and then treated them as if CDC based. In reality, the customer receipts cover variously (*) CDC, (*) farm milk sale, and (*) beast sales. Therefore, in calculating a supposed utilisation rating above is, in effect, the very best that CDC could be achieving at this point in time. Much more likely, you can clip another 5+ points off of these figures. Broadly speaking, then, based on the JunQ cash receipts, CDC is clearly functioning on a sub-50 basis, most likely circa 45 or less.

EXPENSES YTD

	Column 1	Column 2	Column 3	Column 4	Column 5	Column 6
0	Date	SepQ	DecQ	MarQ	JunQ	Total
1	Product Costs	6.477	5.405	4.019	4.355	20.260
2	Staff	1.084	1.105	1.065	1.041	4.295
3	Farm + CDC	7.561	6.510	5.084	5.396	24.555
4	Admin	.171	.340	.103	.096	.709
5	Interest	.121	.112	121	.098	.452
6	Other	.003	.004	.011	.009	.025
7	Total	7.856	6.966	5.319	5.599	25.741

EXPENSES TO PROJECTED (SepQ)

	Column 1	Column 2
0	Date	SepQa
1	Product Costs	6.477
2	Staff	1.084
3	Farm + CDC	7.561
4	Admin	.171
5	Interest	.121
6	Other	.003
7	Total	7.856

EXPENSES TO PROJECTED (DecQ)

	Column 1	Column 2	Column 3	Column 4
0	Date	DecQe	DecQa	Var
1	Product Costs	5.681	5.405	.276
2	Staff	1.035	1.105	-.070
3	Farm + CDC	6.716	6.510	.206
4	Admin	.130	.340	-.210
5	Interest	.131	.112	.019
6	Other	.006	.004	.002
7	Total	6.983	6.966	.017

EXPENSES TO PROJECTED (MarQ)

	Column 1	Column 2	Column 3	Column 4
0	Date	MarQe	MarQ	Var
1	Product Costs	5.932	4.019	1.913
2	Staff	1.112	1.065	.047
3	Farm + CDC	7.044	5.084	1.960
4	Admin	.340	.103	.237
5	Interest	.116	121	-.005
6	Other	.007	.011	-.004
7	Total	7.507	5.319	2.188

EXPENSES TO PROJECTED (JunQ)

	Column 1	Column 2	Column 3	Column 4
0	Date	JunQe	JunQ	Var
1	Product Costs	4.713	4.355	.358
2	Staff	1.085	1.041	.044
3	Farm + CDC	5.798	5.396	.402
4	Admin	.301	.096	.205
5	Interest	.121	.098	.023
6	Other	0.011	.009	.02
7	Total	6.231	5.599	.632

EXPENSES TO PROJECTED (SepQ17)

	Column 1	Column 2
0	Date	SepQe
1	Product Costs	4.367
2	Staff	1.061
3	Farm + CDC	5.428
4	Admin	.140
5	Interest	.121
6	Other	0.013
7	Total	5.702

Based on the forward projections (which they have been getting repeatedly wrong, especially in relation to the PROMOC costs of running CDC, etc), the forward production position for SepQ17 is expected to be 10% below the JunQ estimates, but otherwise, virtually unchanged from the JunQ actuals (ie: $4.367Me vs $4.355Ma). Factor in for staffing costs and the SepQ position is estimated at $5.428M compared to June’s $5.396M actual outcome, with most of the quarterly increase being attributed to staff costs of +20.

If this is correct and they have finally gotten to a position of correcting estimating their future quarterly costs, then this points to a barely change position from that of JunQa. That is, if the JunQ receipts of $5.824M reflected a PROMOC of $4.355M and a CDC/Farms cost of $5.396M, then in circumstances where the SepQe is $4.367M for PROMOC and $5.428M for CDC /Farms, this suggests a barely changed customer receipt outcome of $5.824M (ie: JunQ repeating) through to (at best) $5.9M on a fully comparative basis.

In SepQ16, customer receipts were $7.779M so, all things being equal, this is presently inferring a YoY drop of 25% on customer receipts coming up in the SepQ. Certainly however it cannot be pointing to an improved customer receipt profile through to end SepQ.

Considering then the comments of STP ASX 11/7 which suggested that there had been a material improvement in the sales pipeline going forward, this actually now suggests that either that material improvement has failed to materialise, is delayed /deferred, or has been lost altogether.

It also suggests that present CDC utilisation is now seriously below the 50% mark and given some extrapolation of the argument, down to perhaps as low as 40 – 45%. In other words, back to the Dec14 levels of performance.

On this basis, it would seem that CDC is now loss making, to say the least, with either farm milk or beast sales now holding up the sales /receipts performance.

So, what has seriously, so very seriously, gone wrong, here?

It is also intriguing to note that back the CBA facility rates (variable) have been:

• DecQ15 - ???
• MarQ16 - ???
• JunQ16 - ???
• SepQ16 - 13%
• DecQ16 - 13%
• MarQ17 - 13%
• JunQ17 - 13%

The rates in mind here are significant because under the Convertible Notes conversion last year, the interest charge rate was CBA rates + 2%. So, it would seem that for all of F17 (through to conversion), the maximum permissible rate chargeable by TAU should have been 6.13%, not the 7.7%+ rate that it was charging.

Similarly, the earlier on charged rates, particularly in reference to F16 should have also been closer to the 6% mark than to the actually charged rate of >7.3% ($178,000) that was actually charged. So, in this quarter as well, TAU was overcharging AHF on interest on the convertible notes.

As for the argument that AHF is now CF +ve, what should be remembered is that they were originally projecting ADMIN/INT/OTH expenses of $433,000 for the quarter. In actual terms however, these expenses came in at $193,000. Add back then the $240,000 extra that had been originally been estimated for the quarter and the truer outcome would have been CF –ve by $15,000+.

In order to therefore achieve a superficially looking, CF +ve outcome for JunQ of $225,000, they pushed back on the ADMIN expenses, dropping these down to $98,000 from an originally estimated June outcome of $301,000. That’s a variation of $203,000. The other variation though was in interest charges for the quarter, coming in at $98,000 as opposed to an originally estimated June position of $121,000. That’s a further $23,000 in variation, but deferred support. In actual fact, what occurred here seems to have been that not all of the interest for the quarter was included in the final calculation as generally interest has been ~$121,000 per quarter. It is again being estimated at $121,000 for the SepQ.

As for the ADMIN estimate however this has also reverted to a minimum of $140,000 for the SepQ.

Undoubtedly, TAU had difficulties in getting the money out of AHF as it would have liked, quite possibly because the ASX was looking at them. But so too possibly because others are also watching.

So, no matter which way you look at it, the JunQ +ve CF outcome was a contrivance on the basis of:

• Missing interest = $23,000
• Missing ADMIN of $203,000 (referring to the JunQe) through to $42,000+ (assuming the correctness now of the SepQe of $140,000).

Of particular interest though is that payment to directors for the quarter came in at $122,000. This then took the full year total payment to directors to $413,000 which is $63,000 higher than the shareholder approved $350,000 payment limit which is supposed to serve /represent a Board of 5, not a Board of 2.

As for the individually made made, consider this:

• SepQ = $27,000
• DecQ = $149,000
• MarQ = $115,000
• JunQ = $122,000

With nil payments having been made for the quarter in relation to TAU’s ADMIN costs (1/2 + share o/s, or so TAU says), it really does seem to be that Michael is packing things up, knowing that very soon he is going to be shunted off through the door. But in doing so, he appears to have adopted the same scorched earth approach as was being suggested back in WWII in the event of a mainland invasion having ever occurred.

Today’s results are therefore artificial and contrived in nature, with various deferrals, etc in place through to another day. CDC’s productive performance remains subdued and sub-50 in nature whilst those heralded upon sales have been even slower to materialise, even going into the current SepQ (judging, for example, by what they are now expecting by way of PROMOC costs for the SepQ, etc).

Altogether though this does not point to a profitable end of year.

The H17 mark already showed a P&L loss of $1.035M which cannot now be reversed.

With CDC operating on a sub-par basis, it is very likely that a material impairment charge will be made here.

As for the farm valuations, to date, these have been revalued down by >$2.5M. It is doubtful therefore that they can be revalued up by this much or more (at least without then being reckless about it) a to do so would then shine scrutiny on the original devaluations, to begin with.

Equally, with livestock sales, the 2H17 position is likely to have mirrored that of H17 where the revenue from sales was $610,000, but the deemed cost of sold livestock was $810,000 whilst the fair value biological adjustment was +$763,000. In other words, a selling loss of $200,000 coupled with a valuation rise of $763,000, leading to an overall stock improvement value of $563,000. Yet, even this didn’t save AHF from having a >$1M loss in H17.

A full year financial loss therefore beckons absent there being some financial chicanery applied in order to artificially restate the baseline positions. Trouble is, having already been undone by CDC (with impairment charges beckoning), does Michael really want to tempt fate again? Time will tell.

But, no, at best, this can only be described as a treading water result.