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Algae.tec abid report - 07 mar12


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  • 1. Due  Diligence  and  Valuation  Report      Arrowhead  Code:     10-­01-­06        Coverage  initiated:     23  Mar  2011    This  document:     07  Mar  2012   Company:   Algae.Tec  Limited  Fair  share  value  bracket:   AU$1.15  to  AU$2.70i   Ticker:   ASX:AEB,  OTCBB:ALGXY  Share  price  on  date:     AU$0.37ii   Headquarters:   Perth,  Australia  Analyst  Team   Executive  Chairman:   Mr.  Roger  Sydney  Stroud  Vishal  Pasari                                                               Rashmi  Shah   Website:   biofuels   facility   in   China.   The   JV   will   be   an  Market  Data   equally   funded   facility   to   producing   algae  52-­Week  Range:   AU$0.29  to  AU$0.63iii   derived   transport   oil   and   biomass   of   over  Average  Daily  Volume:   268,135iv   $40MM   and   capturing   137KT   of   waste   carbon  Market  Cap.  on  date:   AU$98.04MM   dioxide.   The   Company   has   collaborations   with   Holcim  Financial  Forecast  Data  (in  AU$)   Lanka   Ltd.   to   develop   its   first   algae   biofuel               16E       production  plant  in  Sri  Lanka  and  with  Lufthansa   High  profit/   (6.7)   25.6   52.7   54.2   55.3   56.5   58.0   (loss)  MM   bioreactors   as   a   substantial   source   of   aviation   High  EPS   biofuels.     (2.52)   9.68   19.09   19.61   16.97   17.34   17.79   AU$   Low  profit/   In   Jan   2012,   Algae.Tec   raised   $5.0MM   via   (6.4)   12.9   17.6   18.9   19.5   20.1   20.9   (loss)  MM   12.5MM   shares   at   an   issue   price   of   40c/share   Low  EPS   (2.43)   4.89   6.37   6.83   5.98   6.16   6.40   through   Patersons   Securities.   In   Dec   2011,   AU$   Algae.Tec   secured     funding   support   from   San   Francisco   based   La   Jolla   Cove   Investments   with  Fiscal  Year  (FY)                                    1st  July    30th  June $6m  in  convertible  notes  to  be  drawn  down  over   a  three-­year  period.  Summary     In   Jan   2012,   S&P   commenced   Factual   Stock  Algae.Tec   Limited   is   involved   in   the   production   Report   coverage   on   Algae.Tec,   upgrading   and  of   algae   to   manufacture   sustainable   fuels   such   extending  the  reach  and  profile  of  the  Company  as  biodiesel  and  green  jet  fuel.  Management  has   in  the  USA  investor  community.  core   competencies   in   biofuel   technologies,  energy   markets,   project   commercialization   and   Algae.Tec   tapped   into   international   capital  business  management.   markets   with   a   public   offer   and   listed   on   the   Australian   Stock   Exchange   and   Frankfurt   Stock  Algae.Tec   developed   the   McConchie-­Stroud   Exchange.   On   Feb   22nd  System,   which   cultivates   and   economically   American  Depositary  Receipts  started  trading  on  harvests   high   yield   algae.   The   technology   the  highest  tier  of  the  OTC  market,  OTCQX.  provides  competitive  advantages  in  terms  of  low  capital   and   operating   costs,   minimal   The   global   market   for   algae   is   poised   for  requirement  of   land,  low  water  evaporation   and   explosive   growth   in   the   next   10   years;;   demand  better   recycling   of   water   amongst   other   is   expected   to   reach   61MM   gallons/year   of   bio-­specifics.   The   company   is   now   building   a   fuel   and   a   market   value   of   AU$1.3B   by   2020  demonstration   facility   with   Manildra   to   prove   representing   a   CAGR   of   72%,   roughly   on   par  commercial  viability  of  the  System.     with  early  development  in  the  biodiesel  industry.  The   company   intends   to   initiate   the   Arrowhead   believes   that   Algae.Tec   has  development   and   operation   of   commercial   enormous   growth   potential   with   a   medium   risk  facilities   in   Australia,   U.S.,   Brazil   and   Southern   profile.  Based  on  intrinsic  revenue  capacity  from  Europe   predominantly   by   way   of   Joint   Venture   500   modules,   Arrowhead   believes   that   the  (JV).   The   products   will   be   primarily   Biodiesel   AU$1.15  and  Grade-­A  Jet  Fuel.     to  AU$2.70  bracket.  In  Jan  2012,  the  company  entered  into  a  JV  with  Shandong   Kerui   Group   to   a   250-­module   algae    Algae.Tec  Limited    Arrowhead  BID   1 OTCBB:  ALGXY;;  ASX:  AEB  Due  Diligence  and  Valuation  Report     See  important  disclosures  on  page  25  of  this  report.  
  • 2. Table  of  Contents    Algae.Tec  Presentation  .....................................................................................................     3News  .................................................................................................................................     7Listing  Information  ...........................................................................................................     9Contacts  ............................................................................................................................     9Major  Shareholders  ...........................................................................................................     9Management  and  Governance  .........................................................................................     10Assets  and  Projects        .......................................................................................................     11Technologies  and  Markets   ..............................................................................................     . 14Project  Risk  Profile  Analysis   ............................................................................................     18Peer  Profile  .....................................................................................................................     19Value   ..............................................................................................................................     . 22Analyst  Certifications  and  Important  Disclosures............................................................     25Valuation   .........................................................................................................................     26  Algae.Tec  Limited    Arrowhead  BID   2 OTCBB:  ALGXY;;  ASX:  AEB  Due  Diligence  and  Valuation  Report     See  important  disclosures  on  page  25  of  this  report.  
  • 3. Company  Presentation  Algae.Tec  is  an  Australian  biofuel  company  focused  on  commercializing  technology  that  produces   algae  to  manufacture  sustainable  fuels  such  as  bio-­diesel  and  green  jet  fuel.  Founded  in  2008,  Algae.Tec  has  conducted   scores   of   laboratory,   bench-­scale   and   pilot   tests   and   product   trials,   assessed   competitive  algae   technologies,   and   applied   the   results   to   detailed   engineering   evaluations   of   commercial   plant  operations.   These   activities   have   led   to   the   development   of   unique   proprietary   technology   and   know-­how   for   high   efficiency   production   of   microalgae   through   a   novel   modular   photo-­reactor   system   and  improved   algae   harvesting   and   product   refinement   technologies.   The   current   strategy   of   continuous  improvement   and   adherence   to   quality   control   in   existing   markets,   are   expected   to   assist   in   the     ique   technology   has   demonstrated   sustained   performance,   providing   step-­change  improvements  in  productivity,  product  yield,  carbon  dioxide  sequestration,  plant  footprint  requirements  and   substantial   capital/cost   savings   versus   agricultural   crops   and   other   competitive   algae   processes   in  the   industry.   The   company   is   building   a   demonstration   facility   with   Manildra   to   prove   its   commercial  viability.    The   70,000   sq   ft   Algae   Development   &   Manufacturing   facility   in   Atlanta,   Georgia,   is   the  algae-­to-­transport   fuel   development   and   manufacturing   hub   for   the   USA,   Asia   and   Europe.   Currently,  this  facility  is  also  being  used  to  build  the  first  full  size  modules  that  will  be  established  on  the  Manildra  site  in  Nowra,  NSW.   remiums    Algae.Tec   benefits   from   a   wide   range   of   benefits   encompassing   a   sound   business   model,   advanced  technology  and  strategic  partnerships.    Advantages   of   Algae:  Algae  are  a  group  of  aquatic  estuarine  and  marine  plant  organisms,  which  may  range  from  microscopic  (microalgae)  to  many  meters  in  length.  Largely  found  in  damp  places  and  bodies  of   water,   approximately   1,000   algae   species   show   the   potential   for   production   of   biofuels.   These  organisms   contain   chlorophyll   and   with   water,   carbon   dioxide   and   sunlight,   produce   complex   carbon  chain  molecules  such  as  hydrocarbons  and  polysaccharides  and  proteins.   d   range   anywhere   between   45%-­80%,  in  the  form  of  lipids/oils,  carbohydrates,  proteins  and  hydrocarbons.  The  advantages  of  algae,  as  a  source  of  renewable  fuel  are  noteworthy:   Efficient   and   fast   production   cycle;;   converts   solar   energy   and   carbon   dioxide   into   renewable   and   sustainable  fuels.   Effectively  sequesters  atmospheric  carbon  dioxide,  balances  greenhouse  gas  production  and  reduces   impact  of  global  warming.   Provides   environmental   solutions   for   recovery   of   toxic   stack   gas   pollutants   and   remediation   of   polluted  water  streams.   Hydrocarbons   derived   from   algae   production   can   be   used   to   produce   renewable   biofuels   for   direct   substitution  of  fossil  fuels.   Algae-­derived  biofuels  provide  a  significant  reduction  in  vehicular  exhaust  emissions  versus  standard   fossil  fuels.   Algae.Tec  requires  relatively  lesser  land  to  produce  the  same  amount  of  oil  than  the  land  required  for   oil  production  from  palm,  jatropha,  canola,  soy,  cotton,  corn  etc.   Algae.Tec  provides  a  long-­term  sustainable  fuel  source  not  derived  from  food  source  vegetable  oils.   Algae.Tec,   due   to   the   nature   of   its   operation,   is   not   subject   to   significant   environment   regulations   under  both  the  Commonwealth  and  state  legislation.  Technology:   Photosynthesis   is   a   biochemical   process,   during   which   algae   absorbs   light   energy   from  sunlight  and  carbon  dioxide;;  utilizes  water  and  critical  nutrients    and  undergoes  multiple  step  light  and  Algae.Tec  Limited    Arrowhead  BID   3 OTCBB:  ALGXY;;  ASX:  AEB  Due  Diligence  and  Valuation  Report     See  important  disclosures  on  page  25  of  this  report.  
  • 4. dark   phase   reactions   to   biologically   produce   primarily   lipids,   carbohydrates   and   proteins     subsequently  generating   oxygen.   The   Algae.Tec   system   combines   closed   control   of   algae   production   within   an  engineered   modular   environment   and   efficient   downstream   bio-­fuel   processing.   The   Algae.Tec  production  process  is  described  below.    McConchie-­Stroud   System:   Algae.Tec   produces   high-­yield   algae   growth   and   harvesting   technology  through   the   McConchie-­Stroud   System.   The   McConchie-­Stroud   System   is   designed   to   facilitate   algae  cultivation   anywhere,   including   marginal   land   or   industrialized   areas.   The   system   also   incorporates  scalability,   minimal   land   footprint   and   water   usage.   McConchie-­Stroud   System   consists   of   a   modular  reactor   in   which   minute   plants,   called   microalgae   are   grown   and   related   infrastructure   used   for  harvesting  and  refining  into  algae  products.  The  company  has   developed  and  utilized  process  simulation  models  for  evaluation  of  the  algae  process  and   its   downstream   biofuels,   including   detailed   material   and   energy   balances,   process   flow   diagrams,  unit   and   equipment   design   and   specifications,   plant   lay-­out   and   turnkey   capital   estimates.   The  production   comprises   a   series   of   critical   processing   steps,   including   gas   treatment,   supply   systems   for  carbon  dioxide,  light  energy  and  nutrients;;  harvesting  of  biomass  and  refinement  of  algae  products.  The  advantages  of  the  McConchie-­Stroud  module  include:   Reduction  of  capital  and  operating  costs,  due  to  the  possibility  of  sharing  infrastructure  as  modules   in  close  proximity  can  be  grouped,  relocated  and  re-­used.   Minimal  requirement  of  land,  vis-­à-­vis  peers,  thereby  reducing  land  leasing  and  purchase  costs.   Reduced   water   evaporation   and   better   recycling   of   water,   nutrients   and   heat,   and   reduced   risk   of   contamination  of  algae  from  external  sources.  Strategic  Partnerships   On  1st  Dec  2011,  the  company  announced  that  it  signed  a  collaboration  contract  with  Holcim  Lanka   Ltd.  to  build  its  first  bio-­fuels  production  facility  in  Asia.  This  is  an  initiative  by  Holcim  Lanka  Ltd.  to   reduce   its   carbon   footprint   by   channeling   waste   carbon   dioxide   into   algae   growth   system   and   generating   valuable   biofuel   at   below   market   cost.   The   biofuel   production   facility   to   be   built   by   Algae.Tec  is  expected  to  initially  comprise  a  production  plant  of  five  photo-­bioreactor  modules.  This   plant   is   expected   to   allow   Holcim   to   evaluate   the   benefits   of   capturing   more   of   the   waste   carbon   dioxide  in  a  much  larger  facility.  The  success  of  this  installation  will  allow  Holcim  Lanka  to  access  the   viability  of  a  bigger  facility.   On  21st  Dec  2011,  the  company  announced  that  it  has  signed  a  memorandum  of  understanding  with   the  Lufthansa   Airlines,  a  European  airline   bioreactors  to  be  developed  into  a  substantial  source  of  aviation  biofuels.   On  18th  Jan  2012,  the  company  entered  into  a  Joint  Venture  with  Shandong  Kerui  Group  to  a  250-­ module   algae   biofuels   facility   in   China.   It   will   be   an   equally   funded   facility   for   producing  Algae.Tec  Limited    Arrowhead  BID   4 OTCBB:  ALGXY;;  ASX:  AEB  Due  Diligence  and  Valuation  Report     See  important  disclosures  on  page  25  of  this  report.  
  • 5. approximately   33MM   liters   of   algae   derived   transport   oil   and   33KT   of   biomass   annually   at   a   combined  value  of  over  US$40MM,  and  capture  137KT  of  waste  carbon  dioxide.  The  joint  venture  will   allow  Algae.Tec  to  expand  its  biofuels  facilities  throughout  China.    Intellectual  Property:  Algae.Tec,  so  far,  has  not  obtained  a  patent  in  relation  to  the  McConchie-­Stroud  System,   and   there   is   no   certainty   that   the   current   patent   application   in   Australia   for   the   McConchie-­Stroud  will  be  granted.  Strategic   Partnership:   The  Company  intends  to  initiate  the  development  and  operation  of  commercial  facilities   in   several   countries,   predominantly   by   way   of   joint   venture   with   focus   on   Australia,   U.S.A.,  China,   Brazil   and   Southern   Europe.   The   products   will   primarily   be   Biodiesel   and   Grade-­A   Jet   Fuel.  Different  countries  have  different  environmental  regulations  and  the  company  has  to  find  right  strategic  partner  for  success  in  these  countries.  Financing   Requirement:operation   and   require   scaling   back   expansion   and   development   programs.   The   company   is   building   a  demonstration  facility  and  it  is  possible  that  available  funds  may  not  be  sufficient  to  fulfill  the  business  objective.  However,  in  Dec  2011,  Algae.Tec  secured  funding  support  from  San  Francisco  based  La  Jolla  Cove  Investments  with  $6MM  in  convertible  notes  to  be  drawn  down  over  a  three-­year  period.  This  will  enable   the   Company   to   fast-­track   the   Holcim   Lanka   biofuel   project   and   carbon   capture   facility   and  projects   in   Europe.   Also   in   Jan   2012,   the   company   comfortably   raised   AU$5MM   through   Patersons  Securities   by   issuing   12.5MM   shares   at   an   issue   price   of   40c/share   to   sophisticated   and   professional  investors.  Success   of   McConchie-­Stroud   system:  The    success  largely  depends  on  the  success  of  its  technology.   Though   the   company   has   shown   excellent   results   during   its   research   and   development  phase,  it  still  faces  the  risk  of  commercialization  of  algae  products  from  the  McConchie-­Stroud  system.  Apart  from  the  above  risks,  the  company  faces  the  risk  of  attrition  of  its  key  personnel,  operational  risks,  adverse  weather  conditions,  industrial  and  environmental  accidents,  and  industrial  disputes.  For  a  detailed  risk  assessment,  please  refer  to  the  Risk  profile  analysis  section.    The   company   intends   to   initiate   the   development   and   operation   of   commercial   facilities   in   several  countries,   predominantly   by   way   of   joint   venture.   The   primary   focus   will   be   on   Australia,   U.S.,   China,  Brazil  and  Southern  Europe.  The  products  will   primarily  be  Biodiesel  and  Grade-­A  Jet  Fuel.  Algae.Tec  is  establishing   strategic   partnerships   and   alliances   with   investors,   venture   partners,   customers   and  objectives.  Algae.Tec  currently  has  MOUs  with:   The  Manildra  Group  for  the  first  Australian  plant   Leighton  Contractors  for  engineering  and  project  management  expertise   Lufthansa  Airlines  to  jointly  evaluate  for  algae  oil  from    bioreactors  to  be  developed  into  a   substantial  source  of  aviation  biofuels.   Joint  Venture  (JV)  with  Shandong  Kerui  Group  to  a  250-­module  algae  biofuels  facility  in  China.  After   completion   of   the   250   module   plant,   the   JV   will   look   to   secure   funding   to   develop   new   projects   exceeding  1,000  modules.  They  also  target  to  engage  with  CO2  emitters  in  the  Greater  China  region.    development   phase   results   to   detailed   engineering   evaluations   of   commercial   plant   operations.   The  development  of  unique  algae  technology  has  led  to  improvements  in  productivity,  product  yield,  carbon  dioxide   sequestration   and   substantial   capital/cost   savings   versus   agricultural   crops   and   other  competitive  algae  processes  in  the  industry.    Algae.Tec  Limited    Arrowhead  BID   5 OTCBB:  ALGXY;;  ASX:  AEB  Due  Diligence  and  Valuation  Report     See  important  disclosures  on  page  25  of  this  report.  
  • 6. The   company   is   currently   in   the   process   of   scaling   up   the   technology   to   the   next   phase   of  commercialization   with   construction   and   operation   of   a   demonstration   Plant Shoalhaven   One for  performance   evaluations,   product   trials   and   technology   marketing.   Total   developmental   capital   and  operating  costs  for  Shoalhaven  Plant  are  budgeted  at  AU$4MM  with  a  scheduled  start  date  in   Q1-­2012,  and  the  first  commercial  plant   is  projected  to  launch  by  the  end  of  2013.  The  photo  bioreactors  will  be   demonstration   plant.   The   plant   is   located   at   the  Manildra  facility   situated   at   Nowra,  south   of   Sydney.   The  Manildra   Group   is  the   largest  ethanol   producer   in  Australia.  The  key  milestones  in  the  Demonstration  Plant  are  as  follows:   Period   Milestone   Mar  2011   Manufacturing  plant  operational  in  Atlanta   Apr-­Aug  2011   Module  fabrication  in  Atlanta   Aug  2011   Construction  of  Nowra  commences   October  2011   Shipment  of  Modules  from  Atlanta   2012  Q1   Start-­up  of  Demonstration  facility  The   initial   two   commercial   facilities   will   be   deployed   in   China   and  Australia.   Considering   the   rising   demand   for   biomass   in   India,   the   company   is   equally   inclined   towards  venturing   in   India.   There   are   also   worldwide   efforts   to   lower   carbon   emissions   to   which   algae   oil   and  biomass  act  as  a  healthy  substitute.  Algae.Tec  Limited    Arrowhead  BID   6 OTCBB:  ALGXY;;  ASX:  AEB  Due  Diligence  and  Valuation  Report     See  important  disclosures  on  page  25  of  this  report.  
  • 7. News   Algae.Tec   Joins   OTCQX:   On   February   22,   2011,   the   company   announced   that   its   American   Depositary  Receipts  (ADRs)  will  be  traded  on  the  highest  tier  of  the  OTC  market,  OTCQX.  Algae.Tec   began  trading  today  on  the  OTC  markets  prestigious  tier,  OTCQX  International.  Investors  can  find   current   financial   disclosure   and   Real-­Time   Level   2   quotes   for   the   Company   on   INTL   Trading,   Inc.   will   serve   as   Algae.Tecs   Principal   American   Liaison   ("PAL")  on  OTCQX,  responsible  for  providing  guidance  on  OTCQX  requirements   Algae.Tec   Announces   Standard   and   Poor s   (S&P)   Research   Upgrade:   On  January  30,  2011,   the  company  announced  that  Standard  and  Poors,  in  conjunction  with  the  Company,  upgraded  the   status  of  Algae.Tecs  American  Depository  Receipt  program  (ADR),  the  USA  share  trading  platform.   S&P   has   commenced   Factual   Stock   Report   coverage   on   Algae.Tec   providing   financial   data   and   analysis   to   key   USA   brokers,   dramatically   upgrading   and   extending   the   reach   and   profile   of   the   Company  in  the  USA  investor  community.   Algae.Tec   Completes   AU$5MM   of   Capital   Raising:   On   January   22,   2011,   the   company   announced   that   the   AU$5MM   Placement   through   Patersons   Securities   has   been   successfully   completed.  The  capital  raising  will  be  used  to  fast-­track  commercial  projects  the  Company  recently   announced  in  China,  Sri  Lanka  and  Europe.   Algae.Tec   forms   joint   venture   with   Shandong   Kerui   Group:   On   January   18,   2011,   the   company  signed  a  binding  memorandum  of  understanding  for  a  50:50  joint  venture  with  Shandong   Kerui   Group   Holding   Limited.   Shandong   Kerui   is   a   China-­based   company   engaged   in   the   manufacturing  of  oilfield  and  petroleum  industry  equipment.   The   joint   venture   will   build   250-­module   algae   biofuels   facility   in   China,   in   which   both   the  partners   will   pay   half   to   cover   costs.   The   equally   funded   facility   will   be   built   in   Dongying,   in   Shandong   Province,   and   produce   approximately   33MM   liters   of   algae   derived   transport   oil   and  approximately   33KT   of   biomass   annually   at   a   combined   value   of   over   US$40MM,   and   capture   137KT   of   waste   carbon   dioxide.   The   joint   venture   will   allow   Algae.Tec   to   expand   its   biofuels   facilities   throughout   China.   Algae.Tec  Announces  AU$5MM  Capital  Raising:  On  January  18,  2011,  the  company  announced   that  it  mandated  Patersons  Securities  to  raise  AU$5MM  via  the  issue  of  12.5MM  shares  at  an  issue   price   of   40c/share   to   sophisticated   and   professional   investors.   In   conjunction   with   the   shares,   the   company  will  also  issue  attaching  options  on  the  basis  of  one  option  for  every  two  placement  shares   subscribed.  The  options  will  be  American  options  with  an  exercise  price  of  75c  and  a  maturity  date   at   31   January   2014.   This   capital   raising   via   a   placement   will   marginally   increase   the   companys   shareholder  base  by  4.7%  and  will  be  utilized  to  fund  the  fast  tracking  of  the  commercial  projects   recently  announced.   Algae  Tec  Ltd  Announces  Conversion  of  La  Jolla  Convertible  Note:  On  January  11,  2011,  the   company   announced   the   issuance   of   271,223   fully   paid   ordinary   shares   at   AU$0.3687   each.   The   shares  were  issued  to  La  Jolla  Cove  Subscribers  Inc  in  relation  to  conversion  of  AU$100K  of  the  La   Jolla  Convertible  Note.   Algae.Tec   Expands   USA   Commercial   Production   Facility   for   Asia   and   EU   projects:   On   January   10,   2011,   the   company   announced   the   expansion   of   its   algae   development   &   manufacturing   centre   in   Atlanta,   Georgia   to   accommodate   commercial   production   programs.   The   Atlanta  facility  increased  fourfold  from  18,000  sq  ft  to  70,000  sq  ft  to  scale  up  production  capability   -­to-­   transport   fuel  development  and  manufacturing  hub  for  the  USA,  Asia  and  Europe.   Change   of   Registered   Office:   On   January   10,   2011,   the  company   announced   that   it   changed  it    Algae.Tec  Limited    Arrowhead  BID   7 OTCBB:  ALGXY;;  ASX:  AEB  Due  Diligence  and  Valuation  Report     See  important  disclosures  on  page  25  of  this  report.  
  • 8. Notice   of   General   Meeting/Proxy   Form:   On  December  22,  2011,  the  company  announced  that   General  meeting  of  shareholders  will  be  held  at  10:00am  on  30th  January  2012  at  ground  floor,  516   Hay  Subiaco,  WA  6008.   Algae.Tec  and  Lufthansa  Sign  MOU:  On  December  21,  2011,  the  company  announced  it  signed  a   Memorandum   of   Understanding   with   Lufthansa   Airlines   to   jointly   evaluate   for   algae   oil   from    bioreactors  to  be  developed  into  a  substantial  source  of  aviation  biofuels.   Issue   of   2,146,223   fully   paid   ordinary   shares:   On   December   15,   2011,   the   company   announced  that  it  will  issue  fully  paid  ordinary  shares  to:     o 1,324,086  shares  at  39.65c:  issued  to  Empire  equity  limited  in  relation  to  services  in  arranging     o 535,845   shares   at   36.95c:   issued   to   Empire   equity   limited   for   services   in   arranging   the   $   3,000,000  convertible  note  dated  12/12/2011  between  company  and  La  Jolla  Cove  Subscribers   Inc   o 286,292   shares   at   29.69:   issued   to   La   Jolla   Cove   Subscribers   Inc   in   relation   to   conversion   of   $85,000  of  the  La  Jolla  Convertible  Note.   $3,000,000   shares   issued   to   La   Jolla   Cove   Subscribers   Inc:   On   December   13,   2011,   the   company  announced  that  it  will  issue  fully  paid  ordinary  shares  on  conversion  of  a  convertible  note   in  the  capital  of  the  company  valuing  up  to  $3,000,000  and  issued  to  La  Jolla  Cove  Subscribers  Inc   under  private  placement  to  be  on-­sold  to  retail  investors   Algae.Tec  to  receive  $6m  in  funding  from  La  Jolla  Cove:  On  December  08,  2011,  the  company   announced   that   it   received   funding   support   from   San   Francisco   based   La   Jolla   Cove   Investments   with   $6m   in   convertible   notes   to   be   drawn   down   over   a   three-­year   period.   The   funding   will   allow   Algae.Tec  to  fast-­track  a  number  of  strategic  projects  in  Asia  such  as  the  Holcim  Lanka  biofuels  and   carbon  capture  facility;;  projects  in  Europe;;  and  one  global  deal  in  particular.   Algae   production   plant   in   Shoalhaven   on   track:   On   December   07,   2011,   the   company   announced  that  the  work  is  on  schedule  for  the  Mar  2012  opening  of  the  algae  production  plant  in   the   Shoalhaven.   The   algae   bio-­fuel   plant   will   capture   the   carbon   dioxide   emissions   from   the   Manildra  plant  in  Nowra  and  use  it  to  grow  algae.  The  algae  can  then  be  used  a  number  of  different   ways  as  a  biofuel.   Holcim  Lanka   and   Algae.Tec   launch  first   biofuels   production  facility  in  Asia:   On  December   01,  2011,  the  company  announced  that  it  signed  a  collaboration  contract  with  Holcim  Lanka  to  build   its   first   algae   biofuels   production   facility   in   Asia.   Algae.Tec   offers   a   compelling   carbon   capture   solution   for   carbon   emitting   companies   and   industries   seeking   carbon   dioxide   reduction   technologies.  Holcim  Lanka  was  attracted  to  the  Algae.Tec  solution  as  a  way  of  reducing  its  carbon   footprint  by  channeling  waste  carbon  dioxide  into  the  algae  growth  system,  and  generating  valuable   biofuel   at   below   market   cost.   The   biofuels   production   facility   will   initially   comprise   a   production   plant   of   five   photo-­bioreactor   modules   for   evaluation   purposes   before   potentially   upgrading   to   a   much   larger   facility.   This   plant   will   allow   Holcim   to   evaluate   the   benefits   of   capturing   more   of   the   waste  carbon  dioxide  in  a  much  larger  facility.  It  is  expected  that  the  Algae.Tec  technology  could  be   rolled  out  at  other  sites.   First   Algae.Tec   module   shipped   from   USA   to   Australian   production   facility:   On  November   24,   2011,   the   company   announced   that   the   first   photo-­bioreactor   module   has   been   shipped   from   the  Algae   Development   &   Manufacturing  Centre   in   Atlanta,   Georgia,   for   Australia.   The   shipment   is   one   of   five   that   will   be   delivered   over   the   next   few   weeks   for   the   Shoalhaven   One   Australian   showcase  facility  at  Nowra,  South  of  Sydney,  which  has  recently  been  granted  permitting  approval.   The  Algae.Tec  enclosed  modular  technology  captures  carbon  dioxide  waste  from  power  stations  and   manufacturing  facilities,  which  feeds  into  the  algae  growth  system.  The  enclosed  modular  system  is   designed  to  deliver  the  highest  yield  of  algae  per  hectare,  and  solves  the  problem  of  food-­producing   land   being   turned   over   for   biofuel   production.   The   company   aims   for   biofuel   production   at   Shoalhaven  One  in  early  2012.  Algae.Tec  Limited    Arrowhead  BID   8 OTCBB:  ALGXY;;  ASX:  AEB  Due  Diligence  and  Valuation  Report     See  important  disclosures  on  page  25  of  this  report.  
  • 9. Algae.Tec   bioreactors   receive   approval   for   Australian   facility:   On   October   18,   2011,   the   company  announced  that  its  demonstration  plant,  Shoalhaven  One,  received  development  approval   under   the   Shoalhaven   City   Council   Environment   Planning   and   Assessment   Act.   The   plant   will   be   used  to  capture  carbon  dioxide  waste  from  power  stations  and  manufacturing  facilities,  feeding  the   pollution  into  the  algae  growth  system.  The  permit  is  effective  immediately,  and  after  three  years,   Algae.Tec   will   have   the   option   of   expansion.   Shoalhaven   One   will   be   sited   next   to   the   Manildra     meetings   in   China   and   Germany:   On   July   18,   2011,   the   company  announced  that  its  management  returned  from  customer  and  site  meetings   in  China  and   sustainable  fuels  such  as  biodiesel  and  green  jet  fuel.     Algae.Tec   technology   uptake   due   to   Australian   price   on   carbon:   On   July   14,   2011,   the   company   indicated   that   the   introduction   of   a   price   on   carbon   by   the   Australian   Government   in   its   Clean  Energy  Future  (CEF)  package  would  accelerate  uptake  of  the  Algae.Tec  technology  by  carbon   dioxide   emitting   industries.   The   Algae.Tec   enclosed   modular   technology   captures   carbon   dioxide   pollution   from   power   stations   and   manufacturing   facilities,   which   feeds   into   the   algae   growth   system.   On  July  08,  2011,   the   company   announced   that   it   producer,  the  Manildra  Group,  to  construct  a  demonstration-­scale  algae  production  facility  in  Nowra,   NSW   and   the   project   could   be   operational   by   the   first   quarter   of   2012.   The   company   announced   that   Manildra   is   making   several   contributions   to   the   project,   including   access   to   land   and   utilities.   regulations   are   met.   The   company   intends   to   convert   a   percentage   of   the   algae   produced   at   the   algae  feedstock  will  be  converted  into  jet  fuel  and  used  for  testing  purposes  in  aircraft  engines.  Listing  Information  Algae.Tec   was   listed   on   the   Australian   Stock   Exchange   on   13-­Jan-­2011   and   was   listed   on   Frankfurt  Stock   Exchange   on   21-­Feb-­on  the  USA  OTC  market  on  28-­Apr-­2011.  Contacts  Registered  office   Ground  floor,  516  Hay,  Subiaco,  WA  6008  Postal  address   PO  box  2146,  Subiaco,  WA  6904  Telephone   +61  (08)  9380  6790  Facsimilie   +61  (08)  9381  9161  E-­mail  Major  Shareholdersv   Equity  Holder   No.  of  Shares  Held  (MM)   Percentage  Holding  Teco.  Bio   200.00   75.48%  Mr.  Peter  Ernest  Hatfull   9.66   3.64%  FMR  Investments  Pty  Ltd   5.00   1.89%  Mcconchie  Jeanette   2.40   0.91%  Morrison  Timothy   2.00   0.75%  Tinkler  Investments   1.61   0.61%  Lawsons  Company  Pty  Ltd   1.30   0.49%  Chung  Joseph   1.25   0.47%  Hover  Holdings  Pty  Ltd   1.25   0.47%  Algae.Tec  Limited    Arrowhead  BID   9 OTCBB:  ALGXY;;  ASX:  AEB  Due  Diligence  and  Valuation  Report     See  important  disclosures  on  page  25  of  this  report.  
  • 10. Management  and  Governance  The  management  team  at  Algae.Tec  comprises  experienced  professional  with  a  proven  track  record.  Mr.  Roger  Sydney  Stroud   Executive  Chairman  Mr.  Roger  S.  Stroud  has  over  35  years  experience  in  a  variety  of  industries.  He  spent  over  10  years  in  finance   in   a   number   of   areas   including   credit,   money   market   and   investment   banking   for   CitiNational  (Citibank/National  Mutual)  merchant  bank,  predominantly  in  Sydney.  Following  the  above,  he  floated  a  mining  company,  while  undertaking  the  role  of   Managing  Director  for  eight   years.   In   the   late   1990s,   Roger   began   the   process   of   building   businesses   in   the   renewable   fuel  sector,   primarily   biodiesel.   This   included   floating   two   separate   biodiesel   companies.   One   of   these  companies,   Natural   Fuel   Ltd   went   into   voluntary   administration   in   Apr   2009.   Roger   was   a   director   of  Natural  Fuel  Ltd.  until  October  2007.  He  is  a  founding  director  and  50%  shareholder  of  Teco.Bio  LLC,  and  is  based  in  Perth,  WA.  Mr.  Garnet  Earl  McConchie   Executive  Director  Mr.   Garnet   Earl   has   over   35   years   experience   over   a   broad   field   of   chemistry   and   associated  technologies,   including   global   markets,   bulk   chemicals   and   plastics,   differentiated   commodities   and  intermediates,  specialty  chemicals,  polymers  and  interaction  with  environmental  sectors.  engineering  in  the  United  States,  Europe  (especially  Germany,  Holland,  Switzerland,  UK  and   CIS),  Latin  America   (Brazil,   Argentina   and   Mexico)   and   Asia   (Korea,   China   and   Australia).   He   served   as   Global  Director  for  chemicals  and  plastics  in  the  latter  part  of  his  employment  with  Dow  Chemical  Company.  Earl   has   over   10   years   of   specific   technical   and   business   experience   in   the   biodiesel   and   glycerine  industry  sectors.   He   is  a  founding  director   and  controlling  shareholder  of  Teco.Bio  LLC,  and  is   based  in  Atlanta,  Georgia  where  he  has  coordinated  the  microalgae  development.  Mr.  Peter  Ernest  Hatfull   Managing  Director  &  Company  Secretary  Mr.   Peter   Ernest   has   over   30   years   experience   in   a   range   of   senior   executive   positions   with   Australian  and  International  companies.  He  has  an  extensive  skill-­set  in  the  areas  of  business  optimization,  capital  raising  and  company  restructuring.  He   was   recently   Managing   Director   of   a   leading   integrated   metal   recycling   and   contracting   company,  CMA   Corporation   Ltd,   based   in   Sydney,   where   he   managed   a   period   of   dramatic   growth   and   increased  profitability.   Prior   to   this   appointment,   he   held   senior   financial   and   Board   positions   in   Australia,   Africa  and   the   UK.   He   has   experience   in   turnaround   and   slow   growth   situations,   where   companies   have  struggled   to   expand   their   business.   This   has   required   revitalizing   the  business   plan,   attracting   investor  funding,   and   implementing   profitable   strategies.   Peter   is   currently   a   director   of   Teco   Pty   Ltd,   Kresta  Holdings  Ltd,  Barminco  Pty  Ltd  and  is  based  in  Perth,  WA.  Mr.  Timothy  Morrison   Non-­Executive  Director  Mr.  Timothy  is  the  current  Director  of  Research  and  Development  at  Murdoch  University.  Tim  represents  the  University  on  the  Board  of  a  number  of  companies  engaged  in  the  commercialization  of  University  IP.  Mr.  Morrison  plays  a  role  with  a  number  of  early  stage  clean  tech  companies  supporting  these  groups  to  raise  early  stage  capital  and  structure  merger  and  acquisition  transactions.  Through  his  engagement  on  an  Australia-­based  private  equity  investment  fund,  Mr.  Morrison  plays  a  role  in  reviewing  and  investing  in  businesses  seeking  early  stage  venture  finance.  Prior   to   his   current   position,   he   was   General   Manager   of   MurdochLink   Pty   Ltd,   the   commercial   arm   of  Murdoch   University,   which   is   the   dedicated   provider   of   quality   research   consultancy   services   to   the  professions,  industry  and  government.  Algae.Tec  Limited    Arrowhead  BID   10 OTCBB:  ALGXY;;  ASX:  AEB  Due  Diligence  and  Valuation  Report     See  important  disclosures  on  page  25  of  this  report.  
  • 11.   McConchie-­Stroud   System.   System   is   designed  Assets  and  Projectsvi  vii  viii  ix   to   cultivate   algae   virtually   anywhere,   including   marginal   land   or   industrialized   areas.   The  Overview   system   is   designed   for   scalability   and   minimal  Algae.Tec   is   focused   on   commercializing   land   footprint   and   water   usage.  technology   that   produces   algae   at   a   very   fast   primary   focus   has   been   directed   towards  rate,   to   manufacture   sustainable   algae   oil   microalgae   as   the   most   efficient   photosynthesis  (which   is   further   used   to   produce   vegetable   oil,   species  for  bio-­fuels  production.  biodiesel   and   refined   glycerine),   biomass   (used   Algae  Products   End-­Use  Markets  to  produce  animal  protein  feed,  bio-­ethanol  and   Lipids/Oils   Algae   oil   substitution   of   vegetable  renewable   distillates)   and   other   nutrients   such   oil   feedstocks   (e.g.   soybean   oil,  as   fatty   acids.   The   company   intends   to   initiate   palm  oil)  for  biodiesel  industry  the   development   and   operation   of   commercial   Refined   glycerine   produced   via  facilities   in   several   countries,   predominantly   by   algae-­biodiesel  production  way   of   Joint   Ventures   with   focus   on   Biodiesel   Specialty  oils  and  fatty  acids.  and  Grade-­A  Jet  Fuel.  The  company  is  building  a   Carbohydrates   Substitution   of   agricultural   sourced  demonstration  facility  with  Manildra  to  prove  its   feedstocks   for   conversion   of  commercial  viability.     carbohydrates   (sugars)   to   bio-­ ethanol    The  Algae  Development  &  Manufacturing  Centre   Production   of   bio-­based   polyolefin  in   Atlanta   has   expanded   from   18,200   sq   ft   to   plastics.  70,000   sq   ft   in   order   to   accommodate  commercial   production   programs.   The   facility   Proteins   High  protein  content  algae  biomass   for  the  animal  food  market  will   be   -­to-­transport   fuel  development   and   manufacturing   hub   for   the   Hydrocarbons   Production   of   renewable   distillates  USA,  Asia  and  Europe.     via   gasification   for   substitution   of   diesel  fuels.  In   Nov   2011,   the   company   shipped   the   first   Biomass   Feedstock  source  for  biomass  module   from   the   Algae   Development   and   power  generation  with  Substitution  Manufacturing   Centre   in   Atlanta,   Georgia   in   the   of  fossil  fuels  United   States   and   is   headed   for   Australian   Conversion  of  residual  biomass  shores   development   facility.   The   shipment   is   following  oil  extraction  to  one   of   five   that   will   be   delivered   over   the   next   renewable  distillates.  few   weeks   for   the   Shoalhaven   One   Australian   Biomass  nutrients  suitable  for  use   in  agricultural  fertilizers  showcase   facility   at   Nowra,   South   of   Sydney,  which   has   recently   been   granted   permitting   Vegetable  Oil  approval.  The  company  also  announced  that  the  work   for   the   algae   production   plant   in   Microalgae   such   as   higher   plants   produce  Shoalhaven   is   on   schedule   and   the   company   storage   lipids   in   the   form   of   triacyglycerols.  aims   for   biofuel   production   at   Shoalhaven   One   Comparatively,  algae  produce  more  oil  than  any  in  early  2012.     other   oilseeds   which   are   currently   in   use.   Many   Algae  Oil Vegetable  Oil  Market microalgae   species   can   be   induced   to   Biodiesel Biodiesel  Market accumulate  substantial  quantities  of  lipids,  often   Algae  Oil greater  than  60%  of  their  biomass.     Refined   Glycerine Market Glycerine The   table   below   presents   indicative   oil   yields   from  various  oilseeds  and  algae.   CO2 Animal   Animal  Feed  Market Nutrients Protein  Feed Yields  (Gallons  of  oil  per  acre  per  year)   Algae   Ethanol   Market Biomass Water Production Bio-­Ethanol Corn   18   Renewable   Chemicals Distillates Diesel  Fuel  Market Soybeans   48   Safflower   83   Sunflower   102   Fatty  Acids Fatty  Acid  Market Rapeseed   127   Jatropha   254  The   company   produces   high-­yield   algae   growth   Oil  Palm   635  and   harvesting   technology   through   the   Micro  Algae   5,000-­15,000  Algae.Tec  Limited    Arrowhead  BID   11 OTCBB:  ALGXY;;  ASX:  AEB  Due  Diligence  and  Valuation  Report     See  important  disclosures  on  page  25  of  this  report.  
  • 12. Depending   on   the   geographic   region,   the   fatty   acids   is   related  to   the   growth   in   vegetable  125Mtpa   vegetable   oil   market   (primarily,   palm,   oils  and  economy  of  the  region.    soybean   and   rapeseed   oils),   representing   The  current  fatty  acid  prices  range  from  60%  to  AU$110B  is  growing  between  3%  and  5%.   80%  of  the  vegetable  oil  prices,  which  is  greater   than  AU$800/T  on  an  average.  Approximately  80%  of  the  vegetable  oil  demand  is   for   the   food   market,   and   consumer   products   Biodiesel  and   feedstock   for   biodiesel   production   account   Most   research   into   efficient   algal-­oil   production  for  approximately  25Mtpa  of  the  total  demand.     predicts   that   biodiesel   may   be   the   only   viable  Vegetable   oil   prices   have   historically   followed   method   to   produce   enough   automotive   fuel   to  agricultural  supply/demand  balances,  population   replace   current   world   diesel   usage.   Continuous  growth   and   standard   of   living;;   however,   crude   biodiesel  production  would  get  less  expensive,  oil   pricing   has   also   significantly   influenced   more   competitive   and   become   more  vegetable  oil  prices.  Soybean  and  palm  oil  prices   consumers   friendly.   Current   biodiesel  (see  chart   below)   have   escalated   approximately   consumption   represents   approximately   1%   of  14%   per   year   over   the   past   five   years   and   the   the  total  vehicular  diesel  fuel  demand  globally  at  trend  continues.  x  xi     12.5B   liters   per   year.   Europe   is   by   far   the   Palm  and  Soyabean  Oil  Prices  (US$/MT)   largest   biodiesel   market   (approximately   80%   of   the   global   market),   followed   by   the   U.S.A.   Palm  and  Soyabean  Oil  Prices  (US$/MT) (approximately  15%  of  the  global  market).     1600 1400 Biodiesel   is   registered   and   used   as   a   direct   1200 diesel   fuel   substitute   and   fuel   additive,   which   is   1000 most   often   marketed   in   blends   of   5%-­20%.   800 Biodiesel   provides   important   environmental   600 advantages,   e.g.,   carbon   dioxide   sequestration,   400 significantly   reduced   toxic   exhaust   emissions,   200 0 transportation   fuel.   There   are   more   than   500   2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 biodiesel  manufacturing  plants  worldwide  with   a   Soybean  Oil Palm  oil   total   in-­place   production   capacity   of   37B   liters   Source:   per  year.  Fatty  Acid   The   price   of   biodiesel   is   primarily   driven   by   the   following  factors:    Another   very   useful   form   of   algae   is   fatty   acid.  Fatty   acid   is   a   viscous,   gum-­like   substance,   The  crude  oil-­derived  diesel  market  derived   from   algae.   It   is   also   a   very   important   The  level  of  government  subsidy  and,  ingredient   in   the   manufacturing   of   papers   and   The  price  of  biodiesel  feedstock.  textiles.   As   it   possesses   most   of   the   properties    of  gum,  it  is  also  used  in  the  water-­proofing  and  fire-­proofing  industry.     Gasoline  &  Diesel  Price  Movements  It  is  especially  helpful  in  making  fabrics  that  are   Gasoline  &  Diesel  Price  Movementsfire   and   water   resistant.   In   the   pharmaceutical   5 4.5industry,   it   is   used   in   the   manufacture   of   4Gaviscon,   Asilone,   Bisodol   etc.   It   is   used   as   a   3.5mould-­making   material   in   life   casting,   3prosthetics  and  dentistry.  Like  most  of  the  forms   2.5 2or   products   of   algae,   alginic   acid   is   used   1.5extensively  in  the  food  processing  industry  as  an   1ingredient  of  soups  and  jellies.   0.5 0The   world   production   of   fatty   acids   from   the   2007 2008 2009 2010 2011 2012 Diesel Gasolinehydrolysis  of   natural  fats  and  oils  aggregates  to     Source:  Energy  Information  Administration  approximately   5Mtpa,   which   represents   an  AU$3B   per   year   market.   The   consumption   of  Algae.Tec  Limited    Arrowhead  BID   12 OTCBB:  ALGXY;;  ASX:  AEB  Due  Diligence  and  Valuation  Report     See  important  disclosures  on  page  25  of  this  report.  
  • 13. Crude  Oil  Prices   is   approximately   AU$900MM   per   year   at   AU$750/T.   Biomass   Algae   biomass   may   be   used   directly   or   after   oil   extraction   for   a   number   of   major   applications   such   as   animal   protein   feedstock,   agricultural   fertilizer,  biomass  power  generation,  and  further   biomass   conversion   to   ethanol   via   fermentation   or   to   middle   distillates   via   gasification   and   Fischer-­Tropsch   synthesis.   Biomass   after   extracting   oil   contains   about   40%   to   60%   carbon   content   dependent   on   the   algae   species   and   operating   conditions   in   the   form   of   Source:  Energy  Information  Administration     carbohydrates,  proteins  and  hydrocarbons.  Jet  Fuel   The   animal   feed   market   is   an   180Mtpa   market  The   company   intends   to   initiate   the   (AU$80B   per   year).   The   primary   source   for  development   and   operation   of   commercial   animal   protein   feed   in   the   U.S.   is   high   protein  facilities   with   primarily   focus   on   Biodiesel   and   soybean  meal,  currently  priced  at  approximately  Grade-­A   Jet   Fuel.   By   2015,   we   expect   AU$347/T.  The  residual  algae  biomass  with  high  production   capacity   of   bio-­diesel   based   Jet-­Fuel   carbohydrate   and   protein   contents   offers   a  to  reach  900  MGY.     direct   substitute   for   agricultural-­based   protein   sources.    Airlines,   which   burn   some   25   BGY   of   fuel,   have  won   regulatory   approval   for   bio-­fuel   that   meets   Ethanol  standards  set  by  the  benchmarking  group  ASTM   Ethanol   from   algae   is   produced   by   converting  International.   On   July   2011,   Lufthansa   became   starch   (the   storage   component)   and   cellulose  the  first  airline  in  the  world  to  use  a  bio-­fuel  mix   (the   cell   wall   component).   Lipids   in   algae   are  on  scheduled  services.  The  carrier  used  a  50:50   converted   into   biodiesel,   while   the  mix   between   jet   fuel   and   biosynthetic   fuel   carbohydrates   are   converted   to   ethanol.   Algae  sources   from   jatropha,   camelina   plants   and   are   the   optimal   source   for   second   generation  animal   fats   made   by   Neste   Oil   and   was   used   bio-­ethanol  due  to  the  fact  that  they  are  high  in  without   any   modifications   to   aircraft   or   its   carbohydrates/polysaccharides  and  thin  cellulose  engines.     walls.  In   2010,   companies   like   Choren,   Rentech,   and   The   total   global   bio-­ethanol   consumption   is  Solena   Group   had   announced   commercial   approximately   70B   liters   (55Mtpa)   and  projects  that  could  result  in  hundreds  of  millions   represents   an   AU$35B   biofuel   market   per   year.  of   gallons   per   year   of   production   capacity   Bio-­ethanol   demand   is   set   to   double   over   the  coming   online   by   2014.   There   are   a   number   of   next   20   years.   Ethanol   prices   correlate   highly  commercial   hydroprocesing   plants   being   built,   with   ex-­rack   gasoline   with   current   prices   at  most  notably  by  Neste  Oil  and  ConocoPhilips.     AU$650/T.  Glycerinexii  Glycerine   is   a   by-­product   in   the   process   of  producing   biodiesel   for   pharmaceutical   and  consumer   products   industries.   From   every   1   MT  of   biodiesel   0.1   MT   of   glycerine   is   produced.  Crude   glycerine   (80%   content)   is   typically  upgraded   to   refined   glycerine   (99.5   %+)   for  food,   pharmaceutical   and   consumer   product  applications.   The   worldwide   demand   for  glycerine   is   over   1   Mtpa   and   continues   to   grow    at  5%  per  annum.  The  current  glycerine  market    Algae.Tec  Limited    Arrowhead  BID   13 OTCBB:  ALGXY;;  ASX:  AEB  Due  Diligence  and  Valuation  Report     See  important  disclosures  on  page  25  of  this  report.  
  • 14.   Blue-­Green   Algae     They   are   found   in  Technologies  and  Markets   xiii freshwater  and  marine  environment  habitats   and  play  an  important  role  in  fixing  nitrogen   from  the  atmosphere.    Algae   Golden  Algae    Golden  algae  primarily  exists  Chemistry  and  Properties   in  freshwater  systems.  They  are  very  similar  Algae   are   a   group   of   aquatic   estuarine   and   to   diatoms   but   have   more   complex   pigment  marine   plant   organisms,   which   may   range   from   systems.  microscopic   (microalgae)   to   many   meters   in  length.   They   range   from   small   single   celled   Algae  as  Energy  Sources  organisms  to  multi-­cellular  organism,  some  with   Shooting   prices   of   oil,   increase   in   consumption  fairly  complex  and  differentiated  form.  Algae  are   of   fossil   fuel,   advances   in   technology   and  usually   found   in   damp   places   and   bodies   of   g   have  water  and  thus  are  common  in  terrestrial  as  well   attracted   demand  for   algae   as   a   potentially   rich  as   aquatic   environment.   There   are   more   than   source   of   sustainable   biofuels.   Algae   are   very  30,000   fresh   water   and   salt   water   species   of   beneficial   as   a   renewable   fuel   resource   because  algae.   Approximately   1,000   algae   species   show   of  the  following  advantages:  the  potential  for  production  of  biofuels.   It   has   one   of   the   most   efficient   and   fastest  Microalgae   production   cycles,   which   converts   solar   energy   and   carbon   dioxide   into   renewable  Studies   shows   that   algae   species   which   are   and  sustainable  fuels.  primarily  unicellular  or   diatom  microalgae  has  a  potential   of   biofuels,   meeting   the   general   It   is   an   environment   friendly   source   of  requirement  for  algae  production.  These  species   producing   energy.   It   efficiently   sequesters  are  useful  in  producing:   atmospheric   carbon   dioxide,   favorably   balances   greenhouse   gas   production   and   Carbohydrate   (sugar)   compositions   most   reduces   the   long-­term   impact   of   global   suitable  for  ethanol  production,  or     warming.   Also,   it   provides   environmental   Lipid   (fats/oils)   compositions   which   are   solutions   for   recovery   of   toxic   stackgas   suitable  for  production  of  biodiesel,  or     pollutants  and  remediation  of  polluted  water   Hydrocarbon   compositions   suitable   for   streams.   production  of  renewable  distillates.   The   production   of   oil   per   land   mass   is  These   are   the   most   primitive   form   of   plants;;   greater  than  any  terrestrial  crop  and  can  be  however   the   mechanism   of   photosynthesis   is   cultivated  virtually  anywhere.  similar   to   that   of   higher   plants.   Due   to   simple   Also,   the   hydrocarbons   derived   from   algae  cellular   structure   and   growth   in   aqueous   production   can   be   used   to   produce  environment  with  more  efficient  access  to  water,   renewable   biofuels   for   direct   substitution   of  carbon  dioxide  and  nutrients,  microalgae  are  far   fossil  fuels.  more   efficient   converters   of   solar   energy.  Biologists   have   categorized   algae   into   a   variety   Global  Algae  Market  Opportunities  of  classes  on  the  basis  of  pigmentation,  life  cycle   The   global   market   for   Algae   is   poised   for  and  basic   cellular   structure.   The   most   abundant   explosive   growth   in   the   next   10   years   reaching  types/families  of  microalgae  include:   61MM   gallons   per   year   and   a   market   value   of   Green   Algae     They   generally   exhibit   high   AU$1.3B  by  2020,  representing  a  CAGR  of  72%,   growth   rates   and   are   considered   as   the   roughly   on   par   with   early   development   in   the   evolutionary   progenitors   of   modern   plants.   biodiesel   industry.   Algal   bio-­fuels   have   matured   Carbohydrates   and   natural   oils   (lipids)   are   significantly   in   the   last   few   years,   moving   from   the   main   storage   compounds   for   green   small   research   labs,   to   pilot   projects,   to   small   algae.   scale   demonstration   projects,   and   now   to   first-­ stage  pre-­commercial  trials  for  CO2  capture  in  a   Diatom   Algae     Found   in   oceans,   they   are   handful  of  projects.     rich   in   silica   in   the   cell   walls   and   store   carbon   primarily   in   the   form   of   natural   oils   Globally,  the  United  States  is  poised  to  ramp  up   or  carbohydrates.   production   the   earliest   amongst   world   markets,  Algae.Tec  Limited    Arrowhead  BID   14 OTCBB:  ALGXY;;  ASX:  AEB  Due  Diligence  and  Valuation  Report     See  important  disclosures  on  page  25  of  this  report.  
  • 15. with   50%   of   all   algae   activity.   The   European   goes  into  fuel,  but  40%  of  the  profits  come  from  Union  (EU)  market,  accounting  for  about  30%  of   petrochemicals.   The   world   bio-­fuels   market   is  algae   activity,   will   be   limited   initially   by   the   expected   to   grow   at   a   CAGR   of   12%+   until   2017.   Despite   an   economic   downturn,  by   insufficient   access   to   water,   land,   and   environmental   concerns   and   volatile   crude   oil  nutrient   sources.   It   is   believed   that   United   prices   continue   to   drive   the   algae   bio-­fuel  States   and   Europe   cannot   grow   enough   corn,   industry.   The   expected   commercial   timeline   of  soy,  or  rapeseed  to  meet  there  bio-­fuel  targets.   Algal  Bio-­fuels  is  shown  in  the  chart:  Latin  America  and  Asia  Pacific,  which  have  fewer    projects   in   operation   today,   are   set   to   gain  significant  market  share  in  the  long  run.    Ultimately,  algae  potential   is  greatest  in  regions  where  there  is  an  abundance  of  land,  water,  and  sunlight.   Secondary   considerations   include  favorable  regulations   around  biofuels  mandates,  greenhouse   gas   (GHG)   emissions,   wastewater  treatment,   and   livestock   operation,   as   well   as  potential   co-­location   opportunities   (wastewater  remediation   and   carbon   recycling).   Algae   is  becoming  one   of   the   most   promising   sources   of  biodiesel   as   it   is   biodegradable   and   can   be    produced   using   ocean   and   waste   water   without   Source:   Algae   2020,   Emerging   Markets   Online   Consulting   Services,   Biofuel  Digest  depleting  fresh  water  resources.      The   industry   believes   that   the   algae-­based  biofuels  market  will  be  characterized  by  regional   Technology  collaborations   and   partnerships   that   are   able   to  capitalize   on   efficiencies   through   expertise   The  company  uses  McConchie-­Stroud  technology  related   to   unique   environmental   conditions,   co-­ system   to   produce   algae-­based   biofuel.  location   opportunities,   and   access   to   end   Currently,   the   company   is   pursuing   the  markets.   This   horizontal   organization   will   result   commercialization   of   this   technology   for   algae  in   significant   consolidation   within   the   market   production  and  processing  system.    over  the  next  decade.   McConchie-­Stroud   System   has   achieved  Algae   are   attracting   increased   investments   and   exceptional  algae  productivity  and  yields  of  algal  interests   from   bio-­fuel,   petroleum   and   products   during   the   research   and   development  agribusiness   industries.   Driven   by   escalating   phase  due  to  the  following:  global   climate   change   concerns   and   the   rising   Innovative   Light   System:   Contains   a   novel  cost  of  petroleum-­based  energy,  companies  and   lighting  system   for   optimal   provision   of   light   for  government   entities   are   developing   the   use   of   growth  of  algae.  bio-­fuels   derived   from   algae   to   reduce   carbon   Modular   Reactor:   Enables   growth   of   algae   to   be  emissions   from   power   plants   and   generate   easily  controlled  and  optimized.  renewable  transportation  fuels.     Controlled   Environment:   Enables   a   nutrient   rich  Using   an   intricate   process   of   photosynthetic,   atmosphere  for  better  algae  growth.  companies  have  developed  biodiesel  and  ethanol   Algae   are   micro   organisms   that   contain  from   algae   that,   given   optimal   conditions,   can   chlorophyll,   and   with   water,   carbon   dioxide   and  double   its   volume   overnight.   Up   to   50%   of   an   sunlight,   they   produce   complex   carbon   chain  algas   body   weight   is   comprised   of   oil,   whereas   molecules   such   as   hydrocarbons   and  oil-­palm  trees  -­  currently  the  largest  producer  of   polysaccharides   and   proteins.   The   composition  oil   to   make   bio-­fuels   -­   yield   just   about   20%   of   of   algae   product   is   dependent   on   the   specific  their  weight  in  oil.     species   utilized   and   the   photo-­synthesis  Algae   command   dominating   position   in   operating   conditions   employed.   Algae   products  renewable   chemicals   as   algae   is   the   only   contain  45%-­80%  of  carbon  content  in  the  form  renewable  feedstock  which  can  scale  realistically   of   lipids/oils,   carbohydrates,   proteins   and  to   compete   with   petroleum.   90%   of   crude   oil   hydrocarbons.  Algae.Tec  Limited    Arrowhead  BID   15 OTCBB:  ALGXY;;  ASX:  AEB  Due  Diligence  and  Valuation  Report     See  important  disclosures  on  page  25  of  this  report.  
  • 16. Algae  Production   process   and   its   downstream   bio-­fuels,   including   detailed   material   and   energy   balances,   process  Algae   production   comprises   a   series   of   critical   flow   diagrams,   unit   and   equipment   design   and  processing   steps,   including   supply   systems   for   specifications,   plant   lay-­out   and   turnkey   capital  carbon   dioxide,   light   energy   and   nutrients,   estimates.   Based   on   the   development   phase  harvesting   of   biomass   and   refinement   of   algae   results,   engineering   design   and   process  products.   simulation   modeling,   material   and   energy  The   company   developed   and   utilized   process   balance   data   are   presented   in   the   process   flow  simulation   models   for   evaluation   of   the   algae   diagram  for  a  typical  algae  plant.       Make-up Seed Algae Water Supply Algae Unit CO2 Nutrients & Water Recycle Water Nutrients Nutrient System Off-Gas Chemicals Alkalinity System Vents Algae Oil Modular Photo- Chemicals Light Energy Product Refinement Fatty Acids Reactors Algae-Water Dilute Algae-Water Biomass Stackgas Gas Treatment Harvesting & Additives Separation Biomass Losses Recycle Water Conversion Energy Process Areas  The  entire  process  of  algae  production  and  processing  is  described  in  following  table:   Process  Steps   Process  Description   Key  Unit  Operations   Utilization  of  high  CO2  content  (8-­15%  volume)   Stackgas  Pre-­Treatment   stackgas  from  fossil  fuel  power  plants,  biomass  etc.   Water  Recycle   Gas  Treatment   Preparation  of  stackgas  for  photo-­reactors,  including   Gas  Distribution  Network   water  removal,  temperature  control,  compression  and   gas  distribution.   Recovery  of  Module  Off-­Gas   Solar  Collection   Light  Energy   Solar  energy  in  the  form  of  visible  light  absorbs  and   Visible  Light  Filtration  &  Distribution   Supply   converts  CO2  to  produce  algae.   Energy  Recovery/Storage   Preparation  units  for  water  supply,  nutrient  package,   Water  Supply  (fresh,  marine  and/or   alkalinity  control  and  make-­up  algae.   wastewater)   Raw  Material   Alkalinity  Control   Systems   Nutrients,  Nitrogen  and  Phosphorus  are  formulated  via   Nutrient  Preparation  Unit   addition  of  industrial  fertilizers.   Make-­up  Algae  Control  System   Modular  Photo-­ Photosynthesis  bio-­reactor  system  controls  the  overall   Modular  Photo-­Reactors  Algae.Tec  Limited    Arrowhead  BID   16 OTCBB:  ALGXY;;  ASX:  AEB  Due  Diligence  and  Valuation  Report     See  important  disclosures  on  page  25  of  this  report.  
  • 17. Process  Steps   Process  Description   Key  Unit  Operations   Reactors   productivity  and  desired  product  yields  per  species.     Internal  Light  Distribution  Network     Modular  Infrastructure  &  Process  Controls   per  Module  Series   Low  concentration  of  micro-­algae  in  final  output   Combinations  of  Flocculation,  Gas-­Lift   requires  various  algae  separation  measures.   Frothing  &  Paste  Handling   Harvesting   Recovery  methods  for  algal  cell  fracturing  and  direct   Mechanical  Separation  Units   recovery  of  hydrocarbon  products  provide  improved   overall  energy  efficiencies.   Algae  Biomass  Refinement     Algae  biomass  contains  predominantly  lipids  (fats/oils)   and  carbohydrates     Oil  Extraction  Units     Conventional  oil  extraction  technologies  (mechanical   Crude  Algae  Oil  Treatment     Product   expeller  and/or  solvent  extraction)  are  employed  to   Refinement   Fatty  Acid  Co-­Product  Recovery     recover  crude  algae  oil.     Chemical  treatment  and  refinement  is  required  for   Biomass  Product  Refinement     purification  of  the  finished  algae  oil  product.   Biodiesel  &  Glycerine  via  Oil   Transesterification   Algae  oil  acts  as  raw  material  for  biodiesel  (and   Downstream   glycerine).     Biomass  Animal  Food  Products   Products   Biomass  is  a  source  of  animal  feed,  ethanol  and  other   Ethanol  Production     energy  sources.     Middle  Distillates  Production     Power  Generation  via  Biomass  Gasification                Algae.Tec  Limited    Arrowhead  BID   17 OTCBB:  ALGXY;;  ASX:  AEB  Due  Diligence  and  Valuation  Report     See  important  disclosures  on  page  25  of  this  report.  
  • 18.  Project  Risk  Profile  Analysis   standing   utilized.   Algae.Tec   will   be   required   to   raise   additional   funds   in   future   and   faces   the  Peer  Risk  Analysis   risk  of  obtaining  it  on  terms  which  are  favorable  We   have   evaluated   the   risk   profile   of   Algae.Tec   to  the  company.  Additionally,  the  funds  may  not  compared  with  other  biofuel  players  in  Australia.   be   sufficient   to   enable   the   company   to   fully   commercialize  the  McConchie Stroud  System.  comparative  ba 1.9 The  funds  raised  through  equity  have  been  used  based   on   the   risk   profile   of   the   major   projects   for   the   establishment   of   a   first   class   research  pursued   by   the   company   as   well   as   its   peers.   and   development   and   commercial   facility.   On  The  important  risk  categories  considered  for  the   24th   Nov,   2011,   Algae.Tec   Limited   announced  study  include:   that   first   photo-­bioreactor   module   has   been   Project  Stage  Risk:  Medium  -­  Near  feasibility   shipped   from   the   Algae   Development   and   Manufacturing   Centre   in   Atlanta,   Georgia   in   the   Intellectual   Property   Risk:   Medium     Yet   to   United   States.   Company   aims   for   biofuel   be  patented   production  at  Shoalhaven  One  in  early  2012.   Financing   Risk:   Medium     Secured   $6MM   financing     On   1st   December   2011,   Algae.Tec   Limited   Operational   Risk:   Medium     dependent   on   announced  that  it  signed  a  collaboration  contract   technology  used   with   Holcim   Lanka   Ltd.   to   develop   its   algae  The   Risk   Profile   has   been   assessed   as   a   biofuel  production  facility  in  Sri  Lanka.  Holcim  is  weighted   blended   score   based   on   the   project   investing   in   the   plant   to   reduce   its   carbon  stage   risk   (30%   weight),   intellectual   property   footprint   by   channeling   waste   carbon   dioxide  risk   (30%),   financing   risk   (20%),   and   into   the   algae   growth   system.   Initially   biofuel  operational  risk  (20%).     production   facility   will   start   off   with   five   photo-­ bioreactor   modules   but   this   could   be   expanded  Peer  Risk  Profile   to   a   much   larger   facility   should   Holcim   decide   Total   Project   Intellectual   the  facility  is  beneficial.   Financing   Operational   Ticker   Risk   Stage   Property   Risk   Risk   On   8th   December   2011,   Algae.Tec   Limited   Score   Risk   Risk   announced   that   San   Francisco-­based   La   Jolla  AEB   1.9   2.0   2.0   1.5   2.0   Cove   Investments   has   provided   the   company  PALG   1.4   1.0   1.0   2.0   2.0   with  $6m  in  convertible  notes  to  be  drawn  down  SZYM   1.2   1.0   1.0   1.0   2.0   over   three   years.   The   additional   funding   will   enable   the   Company   to   fast-­track   a   number   of  Intellectual  Property  Risk  -­  MEDIUM   projects   in   Asia   such   as   the   Holcim   Lanka   biofuels  and  carbon  capture  facility  and  projects  The   company   has   not   obtained   a   patent   in   in   Europe.   In   Jan   2012,   the   company  relation  to  the  McConchie-­Stroud  System  so  far.   comfortably   raised   AU$5m   through   Patersons  There   is   no   surety   that   the   current   patent   Securities  by  issuing  of  12.5m  shares  at  an  issue  application  in  Australia  for  the  McConchie-­Stroud   price  of  40  cents  per  share  to  sophisticated   and  will   be   granted,   or   that   any   other   patent   professional  investors.    applications   that   may   be   lodged   in   relation   to  the  McConchie Stroud  system  will  be  granted.   Any   additional   equity   financing   will   dilute   shareholders   interest,   and   debt   financing,   if  There  is  always  a  risk  of  a  third  party  bringing  a   available,   may   involve   restrictions   on   financing  claim   in   relation   to   any   aspect   of   the   property.   and   operating   activities.   If   the   company   is   not  Any   dispute   will   adversely   affect   the   company.   able   to   obtain   additional   financing,   it   may   be  However,   the   company   has   taken   reasonable   required   to   reduce   its   scope   of   operations   and  steps  to  protect  the  ownership  of  the  intellectual   scale   back   its   expansion   and   development  property   related   to   the   McConchie-­Stroud   and   programs.  believes  that  there  is  no  third-­party  interest.   Success  of  the  McConchie-­Stroud  System  Financing  Risk    MEDIUM   -­  HIGH  The   company   is   in   its   initial   stages   of  development.   It   is   building   a   demonstration   The   company   is   relying   on   the   success   of   its  facility   and   there   is   no   guarantee   that   currently   McConchie-­Stroud   system   and   believes   that   it  available   funds   will   be   sufficient   for   fulfilling  the   will   be   able   to   develop   and   commercialize   the  initial   business   objective,   with   a   major   portion   system   in   the   near   future.   Algae.Tec   recently  Algae.Tec  Limited    Arrowhead  BID   18 OTCBB:  ALGXY;;  ASX:  AEB  Due  Diligence  and  Valuation  Report     See  important  disclosures  on  page  25  of  this  report.  
  • 19. signed   a   collaborative   contract   with   Holcim   Parabel   plans   to   generate   licensing   fees   and  Lanka   Limited   to   develop   its   algae   biofuel   royalties   from   customer   licensees   in   the   global  production  plant  in  Sri  Lanka.  The  Company  has   energy   and   agriculture   markets.   They   would  also  entered  into  a  Joint  Venture  with  Shandong   consider   entering   into   alternative   arrangements  Kerui   Group   for   a   250-­module   algae   biofuels   in   which   license   fees   and   royalties   would   be  facility   in   China.   This   signifies   that   McConchie-­ reduced   in   place   of   a   greater   share   of   the  Stroud  system  is  commercially  viable.   to   capital   requirements.   The   company   has   two  Key  Personnel  -­  MEDIUM   hector  demonstration  facilities  in  Florida,  while  it  The  company  faces  the  risk  of  losing  its  two  key   has   done   testing   of   its   fuel   produce   along   with  directors,   Messrs   McConchie   and   Stroud,   who   Siemens  and  the  University  of  Utah.  developed   the   McConchie-­Stroud   system.   While  these   directors   are   the   major   shareholders   in   Solazyme  Inc.  the  company,  non-­involvement  of  either  of  them   The   San   Francisco-­based,   Solazyme   Inc.,   grows  will   adversely   hamper   the   compa algae   with   sugars   in   closed   fermentation   tanks  plans.     to   create   oils,   which   can   be   used   for   liquid   fuel   and   for   chemicals,   foods,   or   personal   care  Operational  Risks  -­  MEDIUM   products.   Solazyme   proprietary   microalgae   are   heterotrophic,  meaning  they  grow  in  the  dark  (in  plants   proposed   by   the   company   may   be   fermenters)   by   consuming   sugars   derived   from  affected   by   various   factors,   including   failure   to   plants   that   have   already   harnessed   suns  locate   a   suitable   location,   failure   to   achieve   energy.   By   using   standard   industrial  predicted   yields   of   algae   and   algae   products,   fermentation   equipment,   they   are   able   to  operational  and  technical  difficulties  encountered   efficiently   scale   up   and   accelerate   microalgaes  in   scaling   up   the   McConchie Stroud   system   to   natural   oil   production   time   to   just   a   few   days  commercial   production   level.   The   company   also   and  to  commercial  levels.    faces   the   risk   of   unanticipated   bioreactor   The   companys   strategy   has   been   to   make   oils  problems  which  may  affect  the  production  cost.   for  specific  personal  care  and  nutritional  markets  Apart   from   the   above   risks,   the   company   faces   before   taking   on   liquid   fuels   where   there   is  the  risk  of  adverse  weather  conditions,  industrial   margin  pressure  and  brands  play  a  major  role.  It  and   environmental   accidents,   currency   risk   and   has   customers   for   food   and   personal   care   and  industrial  disputes.   was   awarded   a   Department   of   Energy   grant   to   make   fuel   for   use   by   the   Navy,   which  Peer  Profile   successfully   tested   a   50-­50   blend   of   petroleum  Parabel  Inc.   and   algae   oil.   Solazyme   has   development   arrangements   with   airlines   Qantas,   Chevron  Parabel   Inc.   is   a   Melbourne-­based   algae   Technology   Ventures,   and   with   chemical  production   firm   that   has   lemna   as   its   main   company  Dow.  output.  It  is  easier,  at  present,  to  grow,  harvest  and   dewater   lemna   than   the   unicellular   algae   Solazyme   signed   an   agreement   with   Bunge   for  harvested   by   Algae.Tec.   Lemna   shares   with   commercial  renewable  oil  plant  in  Brazil.  This  JV  microalgae,   a   rapid   growing   rate   and   ability   to   planning  to  build  100KT  renewable  oil  production  generate   large   amounts   of   usable   biomass   on   facility   located   at   Bunge   owned   sugar   cane   mill  non-­productive  land.     in   Brazil.   Dynamic   Fuels   LLC   has   subcontracted   the   contract   to   supply   the   U.S.   Navy   with   450K  The  company  is  planning  to  optimize  the  growth   gallons   of   renewable   fuels   to   Solazyme   Inc.   As  of   indigenous   micro-­crops   with   open   tanks   at   per   the   Navy   and   the   USDA   report   this   is   the  commercial   scale   through   the   management   of   single  largest  purchase  of  biofuel  in  government  light   exposure   and   other   elements   of   the   history.   The   fuel   will   be   used   as   part   of   the  environment.   The   technology   monitors   variable  parameters,   including   light,   temperature,   composed   of   vessels   and   ships   powered   by  density   and   nutrition,   to   determine   the   optimal   biofuel.point   in   the   growth   cycle   at   which   the   biomass  should  be  harvested.      Algae.Tec  Limited    Arrowhead  BID   19 OTCBB:  ALGXY;;  ASX:  AEB  Due  Diligence  and  Valuation  Report     See  important  disclosures  on  page  25  of  this  report.  
  • 20.  Risk  Parameters    Definition     biofuel   companies.   Debt   is   considered   only   as   a   last   option   to   the   public   issue   due   to   high  Project  Stage  Risk   financing   charges   as   well   as   financial   covenants  Arrowhead   understands   the   different   project   attached.  stages  for  this  business  model  to  be:   We  consider  a  project  to  be  of  lower  risk  profile  if   Laboratory  Research:   Deals  with  research  and   demonstration  plant  is  successfully  completed  and   development  (R&D)  of  the  project.   yields  desired  results  as  the  viability  of  the  project   will  be  proved.   Pilot  Tests:   Initial  tests  of  the  R&D  results  are   carried  out  for  the  technical,  commercial,  and   Intellectual  Property  Risk   economic  feasibility  of  the  project.     The   technology   used   for   the   culture,   and   Demostration   Plant:   The   Plant   will   be   of   a   harvesting  of  algae  and  the  production  are  highly   relatively   higher   capacity   than   of   the   pilot   tests   and   intends   to   prove   the   commercial   technical  capabilities  and  are  mostly  developed  in-­ feasility  of  the  project.   house.   In-­house   developments   generally   involve   Commercial  Plant:  Based  on  market  prospects   huge  R&D   expenditure  which  they  aim  to  recover   the   commercial   plant   with   required   capacity   from  future  revenues.   will  be  developed  for  the  production.   We  consider  a  project  to  be  of  lower  risk  profile  if  We  consider  a  project  to  be  of  a  lower  risk  profile   the  technology  possesses  all  necessary  patents.    if   demonstration   plant   is   successfully   completed  and  yields  desired  results  and  a  commercial  plant   Operational  risk  is   underway   as   the   uncertainty   regarding   the   Depending   on   technology,   the   input   used   for   the  commercialization   of   the   project   reduces   culture   of   algae   would   be   light   or   sugar/starch.  significantly.   The  technology  using  light  as   its   input  for  culture  Project  Financing  Risk   will   need   to   set   up   the   necessary   infrastructure   whereas   when   the   input   is   sugar/starch,   there   is  The   projects   in   this   industry   are   very   capital   an   additional   uncertainty   with   respect   to   the  cost  intensive.   Therefore,   this   business   model,   in   and  availability  of  the  input.    general  suffers  from  financing  risk  as  the  viability  of  the  project  is  known  only  at  a  later  stage,  when   Since   the   culture   of   algae   is   technology   driven,  half  of  the  capital  outlay  is  complete.   we   see   the   risk   emerging   from   system   break-­ down  requiring  technical  expertise.  The   industry   has   most   of   the   initial   projects  financed   by   private   equity   firms   or   venture   We  consider  a  project  to  be  of  lower  risk  profile  if  capitalists.   Other   important   source   could   be   its   input   is   available   at   lesser   cost   than   its   peers  equity   financing   as   resorted   to   by   most   startup   input  and  is  available  in  abundance.    Algae.Tec  Limited    Arrowhead  BID   20 OTCBB:  ALGXY;;  ASX:  AEB  Due  Diligence  and  Valuation  Report     See  important  disclosures  on  page  25  of  this  report.  
  • 21. Market   Enterprise   Project   Financing   Algae.Tec  in  comparison  Company   Ticker   Major  Projects   cap   value   Stage     information   with  peer   (AU$MM)   (AU$MM)   Algae.Tec   is   in   its   initial   stages   when   compared   to   its   peers.     It   is   currently   building   a   demo   plant   IPO  closed  in   whereas   Parabel   has   an   December   operational   demo   plant   and   2010  for     Solazyme   has   a   fully   AU$5m   commercial  plant  in  place.   Accepted  for   listing  on   made   along   with   Manildra,   Frankfurt   the  largest  Ethanol  producer   Stock   in  Australia.   Demo  Plant  with   Exchange  in   Manildra   Algae.Tec   signed   a   Building  a   Feb  2011  Algae.Tec   AEB   Biofuels   98.04   97.3   collaboration   contract   with   demo  plant   In  Apr  2011   Production   Holcim   Lanka   Ltd.   to   build   company   its   first   algae   biofuels   Facility  in  Asia   announced   production  facility  in  Asia.   its  ADR   Recently   set   up   70K   sq.   ft.   Placement  of   Algae   Development   &   shares  worth   Manufacturing   Centre   in   AU$5m   Atlanta.     through   Patersons   Secured   funding   support   Securities   from   San   Francisco   based   La   Jolla   Cove   Investments   with   $6MM   in   convertible   notes   to   be   drawn   down   over  a  three-­year  period.   Algae.Tec   is   in   its   Ministry  of   developing   stages   while   Natural   Parabel   has   a   functional   Currently   Resources  for  the   Active  Demo   managed  by   demo   plant   in   place.  Parabel  Inc.   PALG   Republic  of   676.85   696.0   Algae.Tec   is   currently   Plant  in  US   Private   Suriname   building   a   demo   plant   for   equity  firms   commercialization   of   algae   Biomass  fuel  test   production,   which   will   be   functional  in  early  2012.   Chevron   Technology   Ventures   IPO  in  May   Marine  Diesel  fuel   2011  for  $18   Algae.Tec   is   in   its   infant   for  US  NAVY   Commercial   per  share.   stage   when   compared   to  Solazyme   SZYM   Plant   700.57   459.4   Solazyme,   which   has   a   Renewable   Joint    50:50     between  the   functional   commercial   plant   chemicals   project   supplying  fuel  to  US  Navy.     Nutrition   partners   products   Skincare  Products      Algae.Tec  Limited    Arrowhead  BID   21 OTCBB:  ALGXY;;  ASX:  AEB  Due  Diligence  and  Valuation  Report     See  important  disclosures  on  page  25  of  this  report.  
  • 22. Value  The  Fair  Market  Value  for  Algae.Tec  shares  stands  between  AU$305.3MM  to  AU$714.8MM.  The  Fair  Market  Value  for  one  of  Algae.Tec  publicly  traded  shares  stands  between  AU$1.15  to  AU$2.70.  Algae.Tec  Balance  Sheet  Forecast  CONSOLIDATED   all  figures  in  000  AU$,   Low  bracket  estimates  BALANCE  SHEET   unless  stated  differently                                                                 year  ending  June  30   2012E   2013E   2014E   2015E   2016E   2017E   2018E  Total  Current  Assets   4,753   14,363   23,781   24,891   83,512   105,422   128,041  Total  Non-­Current  Assets   22,615   38,353   36,244   34,250   32,367   30,587   28,904  TOTAL  ASSETS   27,368   52,716   60,025   59,141   115,878   136,008   156,945  Total  Current  Liabilities   -­   2,399   3,670   3,743   3,818   3,895   3,972  Total  Non-­current  Liabilities   29,815   39,815   19,815   0   0   0   0  TOTAL  LIABILITIES   29,815   42,214   23,485   3,743   3,818   3,895   3,972     (2,447)   10,502   36,540   55,398   112,060   132,114   152,972  TOTAL  LIABILITIES  and  EQUITY   27,368   52,716   60,025   59,141   115,878   136,008   156,945    Important  information  on  Arrowhead  methodology  The   principles   of   the   valuation   methodology   employed   by   Arrowhead   BID   are   variable   to   a   certain  extent,   depending   on   the   sub-­sectors   in   which   the   research   is   conducted.   But   all   Arrowhead   valuation  researches   possess   an   underlying   set   of   common   principles   and   a   generally   common   quantitative  process.  With   Arrowhead   commercial   and   technical   due   diligence,   the   company   researches   the   fundamentals,  assets  and  liabilities  of  a  company,  and  builds  estimates  for  revenue  and  expenditure  over  a  coherently  determined  forecast  period.    Elements   of   past   performance   such   as   price/earnings   ratios,   indicated   as   applicable,   are   mainly   for  reference.  Still,  elements  of  real-­world  past  performance  enter  the  valuation  through  their  impact  on  the  commercial  and  technical  due  diligence.  We  have  also  presented  the  comparables  method  based  on  market  capitalization  per  resource  of  gallon  (AU$/gallon)   as   a   secondary   measure   of   fair   value,   which,   though   is   not   central   to   the   methodology  applied  towards  building  the  fair  value  bracket,  is  presented  here  as  additional  information.  Arrowhead  BID  Fair  Market  Value  Bracket  The   Arrowhead   Fair   Market   Value   is   given   as   a   bracket.   This   is   based   on   quantitative   key   variable  analyses   such   as   key   price   analysis   for   revenue   and   cost   drivers   or   analysis   and   discounts   on   revenue  estimates  for  projects,  especially  relevant  to  projects  estimated  to  provide  revenue  near  the  end  of  the  chosen  forecast  period.  Low  and  high  estimates  for  key  variables  are  produced  as  a  valuation  tool.  In   principle,   an   investor   comfortable   with   the   high   brackets   of   our   key   variable   analysis   will   align   with  the   high   bracket   in   the   Arrowhead   Fair   Value   Bracket,   and,   likewise,   in   terms   of   low   estimates.   The  investor   will   also   note   the   company   intangibles   to   analyze   the   strengths   and   weaknesses,   and   other  essential  company  information.  These  intangibles  serve  as  supplementary  decision  factors  for  adding  or    The   bracket   should   be   taken   as   a   tool   by   Arrowhead   BID   for   the   reader   of   this   report   and   the   reader  should   not   solely   rely   on   this   information   to   make   his   decision   on   any   particular   security.   The   reader  must  also  understand  that  while  on  the  one  hand  global  capital  markets  contain  inefficiencies,  especially  in  terms  of  information,   on  the  other,  corporations  and  their  commercial  and  technical  positions  evolve  rapidly.   This   present   edition   of   the   Arrowhead   valuation   is   for   a   short   to   medium-­term   alignment  Algae.Tec  Limited    Arrowhead  BID   22 OTCBB:  ALGXY;;  ASX:  AEB  Due  Diligence  and  Valuation  Report     See  important  disclosures  on  page  25  of  this  report.  
  • 23. analysis   (one   to   twelve   months).   The   reader   should   refer   to   important   disclosures   on   page   25   of   this  report.  Information  on  the  Algae.Tec  valuation  Algae.Tec   Valuation   Methodology:   The   Arrowhead   fair   valuation   for   Algae.Tec   is   based   on   the  discounted   cash   flow   (DCF)   method.   Valuation   is   based   on   for   the   three   products   namely Algae   Oil,  Biomass  and  other  nutrients.  Time   Horizon:  The  Arrowhead  fair  valuation  for  Algae.Tec  is  based  on  a  DCF  method.  The  time  period  chosen   for   the   valuation   is   ~123   months   (2012-­2022).   While   revenue   is   expected   to   ramp   up  significantly   during   the   2013-­16,   the   later   years   are   heavily   discounted   and   have   a   marginal   effect   on  valuation,  which  are  included  primarily  to  present  a  full  project  cycle  situation.  Underlying   Business   Plan:   Algae.Tec   limited   is   establishing   strategic   partnerships   and   alliances   with  investors,   venture   partners,   customers   and   suppliers   (materials,   services,   technologies)   to   accelerate     The  Manildra  Group  for  the  first  Australian  plant   Leighton  Contractors  for  engineering  and  project  management  expertise   Joint  Venture  with  Shandong  Kerui  Group  to  a  250-­module  algae  biofuels  facility  in  China.   After  the  completion  of  250  module  plant,  the  JV  will  look  to  secure  funding  to  develop  new  projects   exceeding  1,000  modules.  They  also  target  to  engage  with  CO2  emitters  in  the  Greater  China  region.  Also,  the  company  has  inked  a  deal  with  Holcim  Lanka  Limited  for  developing  its  algae  biofuel  production  facility  in  Sri  Lanka  for  evaluation  purpose,  which  can  be  expanded  to  much  larger  scale.    The   initial   two   commercial   facilities   will   be   deployed   in   China   and   Australia.   Considering   the   rising  demand  for  biomass  in  India,  the  company  is  equally  inclined  towards  venturing  in  India.  The  company  plans  to  invest  IPO  proceedings  in  building  demonstration  facility.  It  has  inaugurated  Algae  Development  &  Manufacturing  Centre  in  Atlanta,  Georgia  where  the  photo-­bioreactors  will  be  assembled.  On  24th  Nov  2011,   the   company   reported   that   the   first   photo-­bioreactor   module   has   been   shipped   from   the   Algae  Development   and   Manufacturing   Centre   in   Atlanta,   Georgia   in   the   United   States   and   is   headed   for  Australian   shores.   Algae.Tec   has   applied   for   patents   in   relation   to   McConchie-­Stroud   System,   which  would  cement  its  technological  core  competency.  Terminal   Value:  Terminal  Value  is  estimated  to  depend  on  a  terminal  growth  rate  of  0%,  representing  the  maturity,  technology  change  and  prospective  competiveness  in  the  business.  Prudential  Nature   of   Valuation:  This  Arrowhead  Fair  Value  Bracket  estimate  is  a  relatively  prudential  estimate,  as  it  discounts  the  eventuality  of  the  company  acquiring  and  producing  from  any  projects  other  than  Manildra  -­  Algae.Tec  Demo  Plant  before  2025.  Algae.Tec  Limited    Arrowhead  BID   23 OTCBB:  ALGXY;;  ASX:  AEB  Due  Diligence  and  Valuation  Report     See  important  disclosures  on  page  25  of  this  report.  
  • 24. Key  variables  in  Algae.Tec  revenue  estimations  Variable  1    Modules  Constructed  believe   the   company   will   install   the   first   module   and   will   go   operational   from   2013.   Overall,   we   have  remained   conservative   in   estimating   the   number   of   modules   considering   some   level   of   uncertainty   in  future   revenue   generation.   Additionally,   financing   and   technology   risk   could   adversely   impact   the   -­related  strategy.       2013   2014-­2020   2021-­2025   Low   250   375   625   High   300   625   750  Variable  2    Algae  Production  per  Module  Arrowhead   believes   that   the   low   and   high   estimates   of   cultivation   of   algae   from   one   module   are   225T  and  250  Variable  3    Algae  Oil,  Biomass  and  Other  Nutrients  Prices  Arrowhead  has  forecasted  the  following  low  end  and  high  end  price  range  for  the  three  products:-­   Project   Low  end  (AU$/mt)   High  end  (AU$/mt)   Algae  Oil   950   1,080   Biomass   375   425   Fatty  Acid  (Other  nutrients)   600   650    Algae  oil  is  a  substitution  of  soya  and  palm  oil  which  are  used  as  raw  material  for  biodiesel  production.  Currently,  soya  oil  and  palm  oil   are  trading  in  a  range  of  AU$1000/T  to  AU$1200/T.  We  have  assumed  that  algae  oil  would  sell  at  a  discount  of  around  10for  bio  diesel  production.  Biomass   can   be   substituted   by   high   protein   soybeans   and  corn   which   currently   trade   at   AU$280/T   and  AU$500/T,   respectively.   We   have   used   the   average   of   these   two   prices   to   arrive   at   the  selling   price   of  the  biomass  produce.    Currently  fatty  acid  trades  at  around  AU$650/T.  We  believe  algae  fatty  acid  output  would  fetch  a  similar  price.    Algae.Tec  Limited    Arrowhead  BID   24 OTCBB:  ALGXY;;  ASX:  AEB  Due  Diligence  and  Valuation  Report     See  important  disclosures  on  page  25  of  this  report.  
  • 25. Analyst  Certifications  and  Important  Disclosures     objectives   and   financial   situation   utilizing   their  Analyst  Certifications   own   financial   advisors   as   they   deem   necessary.  I,   Vishal   Pasari,   certify   that   all   of   the   views   Investors   are   advised   to   gather   and   consult  expressed   in   this   research   report   accurately   multiple   information   sources   before   making  reflect   my   personal   views   about   the   subject   investment   decisions.   Recipients   of   this   report  security  and  the  subject  company.   are   strongly   advised   to   read   the   information   on   Arrowhead  Methodology  section  of  this  report  to  I,   Rashmi   Shah,   certify   that   all   of   the   views   understand   if   and   how   the   Arrowhead   Due  expressed   in   this   research   report   accurately   Diligence   and   Arrowhead   Fair   Value   Bracket  reflect   my   personal   views   about   the   subject   integrate   alongside   the   rest   of   their   stream   of  security  and  the  subject  company.   information   and   within   their   decision   taking   process.  Important  Disclosures   Past  performance  of  securities  described  directly  Arrowhead   Business   and   Investment   Decisions,   or  indirectly  in  this  report  should  not  be  taken  as  LLC   received   fees   in   2011   and   2012   from   an  indication  or  guarantee  of  future  results.  The  Algae.Tec   Limited   for   researching   and   drafting   price,   value   of,   and   income   from   any   of   the  this   report   and   for   a   series   of   other   services   to   financial   securities   described   in   this   report   may  Algae.Tec   Limited,   including   distribution   of   this   rise   as   well   as   fall,   and   may   be   affected   by  report   and   networking   services.   Certain   simple   and   complex   changes   in   economic,  Arrowhead   BID   partners   and   employees   own   financial  and  political  factors.    long  positions  in  Algae.Tec  Limited  equity.   Should   a   security   described   in   this   report   be  Aside   from   certain   reports   published   on   a   denominated   in   a   currency   other   than   the  periodic   basis,   the   large   majority   of   reports   are    a  change  in  exchange  published   by   Arrowhead   BID   at   irregular   rates  may  adversely  affect  the  price  of,  value  of,   or  income  derived  from  the  security.    judgment.   This   report   is   published   solely   for   information  Any   opinions   expressed   in   this   report   are   purposes,  and  is  not  to  be  considered  as  an  offer  statements  of  our  judgment  to  this  date  and  are   to  buy  any  security,  in  any  state.      subject  to  change  without  notice.   Other   than   disclosures   relating   to   Arrowhead  This   report   was   prepared   for   general   circulation   Business   and   Investment   Decisions,   LLC,   the  and   does   not   provide   investment   information   herein   is   based   on   sources   we  recommendations   specific   to   individual   believe   to   be   reliable   but   is   not   guaranteed   by  investors.   As   such,   any   of   the   financial   or   other   us   and   does   not   purport   to   be   a   complete  money-­management   instruments   linked   to   the   statement  or  summary  of  the  available  data.    company   and   company   valuation   described   in   Arrowhead   Business   and   Investment   Decisions,     LLC   is   not   responsible   for   any   loss,   financial   or   other,   directly   or   indirectly   linked   to   any   price  Investors   must   make   their   own   investment   movement  or  absence  of  price  movement  of  the  decisions   based   upon   their   specific   investment   securities  described  in  this  report.    Algae.Tec  Limited    Arrowhead  BID   25 OTCBB:  ALGXY;;  ASX:  AEB  Due  Diligence  and  Valuation  Report     See  important  disclosures  on  page  25  of  this  report.  
  • 26. Valuation  WACC        Risk-­free  rate   3.96%   xiv     Production/  Module   Algae   Biomass   Other  Beta   0.75   xv      Risk  premium   4.5%   xvi     Max   1.0%   xvii value  Additional  Risk  Premium       Refer  to  Key  Variables  section.  Cost  of  Equity   8.1%   xviii     Min  Terminal  Growth  Rate   0%   xix     value    FCFE  (High)  Time  Period  -­-­>   0.25   1.25   2.25   3.25   4.25   5.25   6.25   7.25   8.25       2012E   2013E   2014E   2015E   2016E   2017E   2018E   2019E   2020E  Net  cash  from  operating  activities   (4,130)   16,914   42,470   58,357   59,253   60,249   61,490   62,331   63,193  Capital  Expenditure   (27,500)   (22,000)   (2,109)   (1,993)   (1,883)   (1,780)   (1,682)   (1,589)   (1,502)  Net  Debt  Addition   29,815   10,000   (20,000)   (19,815)   -­   -­   -­   -­   -­  Free  Cash  Flow  to  Equity   (1,815)   4,914   20,361   36,549   57,369   58,469   59,808   60,741   61,691  Discount  Factor   0.98   0.91   0.84   0.78   0.72   0.66   0.62   0.57   0.53  Present  Value  of  FCF   (1,780)   4,459   17,094   28,388   41,227   38,874   36,790   34,569   32,483  FCFE  (Low)  Time  Period  -­-­>   0.25   1.25   2.25   3.25   4.25   5.25   6.25   7.25   8.25     2012E   2013E   2014E   2015E   2016E   2017E   2018E   2019E   2020E  Net  cash  from  operating  activities   (4,130)   9,195   17,547   22,663   23,070   23,452   24,070   24,277   24,495  Capital  Expenditure   (25,000)   (20,000)   (1,918)   (1,812)   (1,713)   (1,618)   (1,529)   (1,445)   (1,366)  Net  Debt  Addition   29,815   10,000   (20,000)   (19,815)   -­   -­   -­   -­   -­  Free  Cash  Flow  to  Equity   685   (805)   (4,371)   1,036   21,358   21,834   22,541   22,832   23,129  Discount  Factor   0.98   0.91   0.84   0.78   0.72   0.66   0.62   0.57   0.53  Present  Value  of  FCF   672   (730)   (3,669)   805   15,348   14,517   13,866   12,994   12,179        ARROWHEAD  FAIR  VALUE  BRACKET   AU$/share  Contribution  by  Key  Variable  Terminal  Value  (TV)   921,233   460,726    3.00Present  Value  of  TV   415,216   207,657    2.50Present  Value  of  FCF  +  TV   713,962   304,503    2.00+  Cashxx   820   820  Equity  Value  Bracket   714,782   305,323    1.50Shares  Outstanding  (in  000)xxi   264,976   264,976    1.00Fair  Value  Bracket   AUD  2.70   AUD  1.15    0.50Current  Market  Price   AUD  0.37   AUD  0.37    -­‐Current  Market  Capitals   98.0   98.0   Low Algae  Oil Biomass Other High NutrientsTarget  Market  Capital   714.8   305.3          Algae.Tec  Limited    Arrowhead  BID   26 OTCBB:  ALGXY;;  ASX:  AEB  Due  Diligence  and  Valuation  Report     See  important  disclosures  on  page  25  of  this  report.  
  • 27. Notes  and  References    i     Arrowhead  Business  and  Investment  Decisions  Fair  Value  Bracket  -­  AFVBTM.  See  information  on  valuation  on  pages  24-­28  of  this  report  and  important  disclosures     on  page  25  of  this  reportii   Source:  Bloomberg  -­    07  Mar  2012iii   Source:  Bloomberg  -­    07  Mar  2012iv   Source:  Bloomberg  3  month  volume    07  Mar  2012v   Source:  Bloomberg    07  Mar  2012  vi   Source:     Source:­Energy/Biofuels/The-­Growing-­Market-­for-­Biodiesel-­and-­Bio-­Oils.html    viii     Source:  ix     Source:­jet-­fuel-­sooner-­than-­we-­think/  x     Source:­oil&months=120xi     Source:­oil&months=60xii­oil-­price-­history.htm  xiii Source:http://www.emerging-­;;    xiv     Source:  Bloomberg  -­    07  Mar  2012xv     Arrowhead  Estimatesxvi     Arrowhead  Estimatesxvii     Arrowhead  Estimatesxviii    Arrowhead  Estimatesxix        Arrowhead  Estimatesxx       As  on  Dec  31,  2011xxi     Source:  Bloomberg  -­    07  Mar  2012Algae.Tec  Limited    Arrowhead  BID   27 OTCBB:  ALGXY;;  ASX:AEB  Due  Diligence  and  Valuation  Report     See  important  disclosures  on  page  25  of  this  report.