It is difficult to circulate these updates without sounding increasingly defeatist but that is born of the acceptance that what was always to be an uphill struggle very much remains thus.

The more recent updates have been leaning towards acceptance that the final outcome will please no-one. Rather than simply revisit old ground it would be better to move that thought process along. What follows are comments made in the last update along with the now expanded thought process behind what we’re doing and where it is leading.

In regard to the assets:

Oct ’19 – “The conundrum remains the same. There is neither the external financial resource available to expand production at this time and nor is there the inclination to do so as if we increase production capacity we increase overheads and to what end? To have more finished product to hold in storage (another cost)? It simply isn’t worthwhile. We have enough raw materials held at the production facility to keep that ticking over until the end of the year at which point the lease runs out on the warehouse and we can look at the merits of relocating. Between now and next year the aim is to deploy financial resource to going out into the world and seeking out supply deals rather than continuing to hope one will come to us. Initial focus for such efforts will be Singapore (middle men / agents) and Dubai (more agents but also end users).”

Feb ‘20 – We have now processed all the agarwood that was stored at the production facility. That has been 12 months of production. We now have another 2kg of Oil in stock on the back of that.

We have one more storage facility containing woodchip which we can now move on to process however, just as above it was pointed out that processing without an exit is simply a cost / overhead that cannot be carried, so it is also the case that this woodchip cannot sit forever as it dries to a point where expected yields fall off. Inconsistent production data makes it nigh on impossible to calculate the crossover point so rather than let our small production facility lie redundant we will now commence processing the last of the assets.

The pace of production is an issue though and so to the difficult decision regarding capital expenditure and increased budgets outlined below.

Oct ’19 – “The issue remains though that we invested in assets and some of those assets still exist. They haven’t vanished. To walk away simply renders them all worthless. It may very well be that in practice, given the historical costs to potentially offset, that the assets are indeed worthless; but somebody somewhere would find value in them if we walked away (assuming we didn’t set fire to things on the way out of the door).”

Feb ‘20 – We are fully aware of what is known as the Sunk Cost Fallacy. It is the continuation of a course of action typically prefaced by this sort of lament:

’But we’ve invested so much money in it. If we stop now, it’ll all have been for nothing.’

It is a very real wrench writing-off time and money and no human does that instinctually. Learning to do so is important in life and in business as life really is fleeting and opportunity cost is very real.

In terms of the assets currently under processing it is absolutely true that the sensible course of business action now would be to walk away and literally just leave it. As per the comment from October, it might seem fitting at that point to set fire to the assets at least to maintain the satisfaction of knowing that the vultures could not pick over the carcass.

The reasons that we have not called time on this just yet are twofold:

Firstly, there are other agarwood assets in play where we are awaiting legal machinations to either grant us a win in the wake of Touchwood Group’s liquidation or bring finality to that piece of the overall jigsaw. These have been mentioned in passing previously. We are expecting an update on that during the next few months. Sadly, not weeks.

Whilst those assets are separate to the assets we are currently processing, the result of that legal situation has a significant affect on our financial position. Since our financial position has been a major contributor to the failure to make significant progress towards completion of processing of assets, disposal of assets and distribution of proceeds among investors this lack of legal finality has left us in a “chicken and egg” scenario. Had that legal process been where it is now two years ago then the landscape might be very different. Of course, we never had and never will have any ability to control the speed of such things and that is why we have to accept that we are where we are, but it is fair to say that if more funding had been available a couple of years ago then we would be better placed in many respects than we are now.

Notwithstanding that ownership of those assets is different though, and that therefore a clinical business decision would be to observe that difference and thus apply the sunk cost principle to one set of assets whilst perhaps hanging on to see if the bankruptcy action yields a “win” for the other set of assets; it seems wrong to be so clinical. Of course, the irony here is that this sort of potentially flawed reasoning is the very essence of the fallacy; but it can be argued that there is a genuinely mitigating circumstance in play.

The second basis on which we are continuing is this:

Whilst it is entirely fair to recognise the imperfect nature of our ability to see things through to the highest of standards, it was always the goal to try everything reasonably within our gift to get it done.

The efforts are being funded externally by necessity. No sales income means processing needs to be paid for from external sources and there have been practical limits on that funding which has prevented any significant capital expenditure.

It is clear that in order to solve the problem then, the answer is to either adhere to best practice and the sunk cost fallacy and walk away; or conversely to inject further capital in order to break the cycle of simply producing for productions sake and these updates indicating that we are not studying our own history.

More effort must be spent courting international sales. Funding for such a budget is now in place. Whether this turns out to be more suicidal expenditure we cannot say but it is clear that the rather limited ability we have had to date has left us with zero sales and we will never sell on credit the way the local agents seem to require. We need to get behind the agents and find the end customers. This is easier said than done in what we now understand to be quite an arcane and cliquey industry.

Several more trips to hubs such as Singapore will be within the budget and also we have obtained a database of companies involved with agarwood (some ninety or so potential new contacts outside of our existing network) and we will be systematically working through that list contacting them, arranging samples and looking for wholesale sales. Sadly, trips to Singapore in the immediate future will be curtailed until the novel coronavirus is properly understood and / or controlled. A budget will be set aside to attend the Dubai Perfume Expo at the end of May 2020 to access a global audience (and obviously whilst in the Middle East to court local vendors too). We are hoping to share costs with another producer and we should have confirmation within the next couple of weeks on whether we have to go it alone or not.

While the bankruptcy-related efforts remain in play we will continue to pursue the completion of the processing and sale of assets. If we are able to secure any confidence in an ability to sell the produce then assets will be diverted to expand production capacity in order to reduce processing time and also to reduce the impact of salaries on a per unit of production basis. This has to realistically be contingent upon a firm proof of ability to sell the output. If we cannot find a way to make sales then the oil produced to date will need to be sold off at fire-sale prices and we will need to sell off the woodchip. This would be sub-optimal as woodchip represents a poorer price than oil but, of course, there is no point funding oil production at a loss simply to improve the value of the woodchip. The budgets do not allow for that sort of approach to continue.

The final aspect to this final push is to attempt small-scale production and marketing of actual end products. This avenue was always going to be where the greater profitability lay in respect of selling our oil but it also involves layers of complexity and additional risk capital and as such, wholesale sales have always been the aim. We will publish some pictures of our finished products over the coming months but they are being put together now, arguably against better judgement.

Oct ‘19 – “If we manage meaningful forays into the global market with no sign of any improvement in our ability to generate income from this business, then at that point we will have to seriously take a view.

A line has thus to be drawn now at December 31st or whichever date thereafter we complete following up on any enquiries generated from sales efforts.”

Feb ‘20 – The line to be drawn is still moving but it will be the conclusion of the bankruptcy-related issues. If that piece of the jigsaw comes to nought then unless any one or several avenues from:

  • the trade show attendance,
  • other marketing efforts,
  • database mining and
  • marketing of packaged products

yield significant cause to believe that the project can be brought to a conclusion (or perhaps even have a future beyond the immediate concern of satisfaction of investors) then that point will be where this ends for better for for worse. If the bankruptcy-related issues drag on then, notwithstanding that other agarwood assets will still be “in play” a failure to see results from the expenditure of time and manpower on genuine in-house sales and marketing efforts (rather than reliance on agents and networks) within the dates set out below will be where time gets called on all operations.

In other words, unless we get a financial boost from the Touchwood fallout in the near future then the current processing and sales efforts will stand or fall by its own success albeit with a sales and marketing budget and effort now finally in committed to give it a proper, fair chance.

Given that the trade shows are mid-year and that marketing efforts do need time to yield results, this puts the end of days at the end of Q3 2020 with a potential long-stop date of 31st December 2020. We need to be clear here: There will be nothing in 2021 unless it can be made profitable for all concerned.

Above is now the roadmap. It will not be re-visited unless events beyond our control adversely affect our line of funding and so updates going forwards will be specific to aspects of that plan and whether we are seeing any “wins”. We trust that anyone reading this will understand and agree that this constitutes all that can reasonably be expected in the circumstances. To anyone who thinks otherwise, we apologise. We remain open to suggestions and offers of assistance.

Aequus, February 2020